IBA Helicopter Podcast Transcript - Crispin Maunder

18 November 2020

LCI’s Executive Chairman, Crispin Maunder recently spoke to Phil Seymour, President and Head of Advisory at IBA about the helicopter market and the impact of Covid-19. 

You can listen to the podcast here or read their discussion below.

Phil Seymour

Hello everyone. My name is Phil Seymour company president at IBA and today I'm joined by Crispin Maunder, Executive Chairman of LCI. Welcome, Crispin.

Crispin Maunder

Thank you, Phil, for your introduction. And I'm delighted to join you on this podcast on the helicopter market.

Phil Seymour

Okay. And I mean, I have to start off with, you know, basically telling everybody that between us I think we have almost 100 years of aviation experience, Crispin, I mean, we're not far off. Are we really?

Crispin Maunder

Yeah, if I had stood on your shoulders, I think we could have probably stopped the right fliers from flying, in which case, our history would probably not exist.

Phil Seymour 

I think me on your shoulders might have been a better option. So yeah, welcome to the podcast. I think in terms of you're going back, we probably first met way back when you were with AWAS and I was looking at the leasing sector and with Ambassador Airways, so here we are, I know we've used that word unprecedented an unprecedented amount of times this year, I suppose none of us could have foreseen some of the low cycles that we've been through since the 80s, or even 70s. But, you know, just as a sort of brief overview, it is extraordinary. But do you think we'll look back on this as being a blip? Or are we way beyond that now?

Crispin Maunder

I think this is a major correction in the fixed wing markets, let's say, in the helicopter market, and we'll talk about this in this podcast, but certainly, you know, we have been looking for a correction in this market now for probably about the last five or six years. And I think there are a lot of pundits out there saying it was going to be a fairly benign correction. Well, we were very much of a different view. It's hard to predict, obviously, who knew what was going to happen globally with COVID. But at the same time, history has shown that we will be hit by these black swan events out of left field, we just don't know what nature it could be. It could be a war, it could be some political disturbances or whatever else or it could be natural, which is what we've got today.

Phil Seymour

Yeah, I mean, you mentioned correction, I suppose that the fixed wing market for many years, we've maybe been looking at production rates of new aircraft, from Airbus, and Boeing, particularly the narrow bodies, and perhaps scratching our heads, what impact that's had on pricing and lease rates, but the helicopter sector is that immune to that type of pressure?

Crispin Maunder 

No. I mean, we have been impacted by COVID at the start of this year, but it was primarily driven by two things. One was the inability of the offshore workers, be it oil and gas or wind, in particular, to get to their bases to go across to the rigs or to the turbines, in the case of the wind farms. So that certainly sort of brought the industry to a, not to a halt, as you have in the fixed wing market, but certainly to a slowdown. But the other shows a whammy as such was of course, the collapse of the oil price, which just directly impacted the offshore oil and gas markets. And luckily, from LCIs point of view, we had very little, limited exposure, I would say, to the oil and gas market. But then things started to stabilise, workers managed to get back to their bases. And of course, as far as the offshore wind industry is concerned, these turbines need regular maintenance. So, if you didn't actually have the ability to maintain them during the previous two to three months, then there's a lot of catch up work that's got to be undertaken.

The drop in utilisation in the early part, shall we say, second quarter of this year has now been picked up in the third and fourth quarters. So you know, you've got a slight increase now actually notable increase in utilisation, certainly in wind. So from our point of view, it's slightly slackened what was already a continued improvement. The cycle has already been going for about two years. So whilst the fixed wing market is in, you know, I would call it just complete disarray. We're following a reasonably well defined upcycle at the moment.

Phil Seymour

Yeah, excellent. And I suppose really, I should have started off by talking about some of the things that LCI have been involved with this year. I mean, we've seen your collaboration with Thora and Reeve and then more recently Sumitomo Mitsui finance and leasing. SMFL. So, have those been impacted any way by COVID? You know, were they delayed?

Crispin Maunder 

No they've gone relatively to plan. We're particularly thrilled and excited by both SMFL also the earners of SMBC aviation capital, which is one of the I think it's the fifth largest aircraft leasing platform. So we're particularly thrilled to form this joint venture with them. And it's, shall we say, it has been formed during with a backdrop of some of the worst conditions in the fixed wing market. So full marks to Sumitomo in continuing with this, but no, we've now seeded the portfolio with the first 19 helicopters value about 230 million. And now I think this is going to be transformative with regard to the helicopter market as a whole. They have great ambitions, we have great ambitions. And so this is a very exciting development from our point of view.

Phil Seymour

Am I right in thinking that you're looking more at the emergency or the EMS sector and the search and rescue sector there or is oil and gas still a feature?

Crispin Maunder

Oil and gas is there but less so. But that's very much the nature of LCIs approach as well. I mean, about 50% of our portfolio is on EMS. And then we have search and rescue and wind as well. So those are the sorts of sectors that the joint venture will be looking at, but I'm not ruling out oil and gas as well.There's some very good credit plays out there. And certainly, you know, SMFL or not, again, to looking at those as well. But we're certainly not jumping in with both feet into that sector at the moment until we get a little bit more stability, both in the oil price and also the operator landscape as such.

Phil Seymour

Okay, and I mean, yourself, you’ve obviously got Mike Plant in the team as well. And both of you sort of started off in the aircraft leasing sector. I mean, how do you see the differences from a lead source point of view between helicopters and the commercial aircraft sector?

Crispin Maunder

I think, in many respects very similar. I mean, the lease management is very similar, the structure is very similar documentation, the lease documentation and the way that you manage leases very, very similar. The basic lease terms are quite similar. You know, typically, you'll be entering a lease of anything between 5 and 10 years, which is very similar to fixed wing, and the usual contractual provisions are the same. However, there is a lot of differences.

Well, first of all, the technology is very different. First of all, helicopters are unpressurized. Now, that seems to be a rather sort of basic statement, but it leads to quite a few interesting takeaways. First of all, helicopters have a much longer technical and therefore economic lives. Typical helicopter economic life is around about 30 to 30 plus years, rather than maybe less than 20 years in today's market, particularly with regard to widebody aircraft. So you've got a much longer economic life. They're technically more complex. You know, you've got engines which you have on the fixed wing aircraft, you've got a fuselage, but you've got the gearboxes, the transmissions and the rotors and everything else. So technically, you need to know your helicopters, you need to know what you're doing.

Then also, with regard to the deployment of helicopters, you've got a far greater range of opportunities to deploy a helicopter. Whereas on the fixed wing, you basically carry passengers or you carry freight or towards the end of a life if you're lucky, you can convert a passenger aircraft to a freighter aircraft. And that's it. It's a one-way street as such, whereas on helicopters. You're dealing with passengers as well, dealing with we talked about wind, for example, that's both taking employees out to an accommodation barge in a wind farm and also hoisting those operators onto the turbines to carry out maintenance. So very, very specific tasks, then you've got as we talked about emergency medical services, which is a fast-growing sector globally around the world. Everyone now expects a helicopter to arrive at a scene of an emergency or accident. And also, what people don't realise is a lot of hospital to hospital transfers by helicopter, it's far less damaging or interfering with a person's body. If it goes by helicopter rather than an ambulance, constantly changing direction on the roads. Then we have search and rescue. We have public security, we have marine pilot transfers. So all these, they're multi role applications. And these can be accommodated. 

Over a helicopter’s life, you can move between roles. So you've got a lot of different applications. But that's the technology then you go on to the industrial considerations, which is really what fascinated me right at the beginning, there is very little, what I call OEM rivalry, or particularly transatlantic rivalry which you have with Airbus and Boeing on the fixed wing market. It's far more in some respects mature industry, there's far more balanced approach to production, far less exuberance, the far more rational behaviour, and they're far less speculative orders from both the airlines and also the lessors. Furthermore, as we've seen in the downturn that we've just been through, and it was a significant downturn in the helicopter market, the OEMs can reasonably quickly switch to other markets and such as the military or VIP and the like. So they can control production, reduce it quite quickly, and redeploy that production.

And further, there's a long technology cycle, which I think is so important to residual values, you know, the helicopter types that are in production to date will remain in production, there is only one helicopter project out there, the Bell 525 is the only thing on the horizon in the next 10 years. So we see a lot of stability as far as the technology is concerned, which of course impacts on the residual  value. And then finally, and this is important on the customer side, typically a customer, a lessee, has a contract to provide services to a third party, and typically that term could be 357, even longer. And it's more analogous to, shall we say, the old, inclusive tour Charter Business that used to have back in the 70s 80s and early 90s, where an airline had a contract with a provider of 

passengers as part of his project, product rather. And so this is much more analogous to that. So we're dealing with an operator who in turn has a contract, generally with an investment grade entity, like a good oil company or a government entity. And then once the helicopter and the operator is embedded into the contract, it just becomes a small cog in a large machine. So there's no immediate competitive threat there. In fact, everyone just wants a quiet life. So, they have an interest in making sure that the helicopter operator is well fed, gets its money and the like, and so doesn't become disruptive within the system.

Furthermore, I always like to look at my customer’s customer. This is so important. So you know, if you look at again, fixed wing aircraft, lessors, their customers customer is us, the passenger, and we are rather fickle, we will go with whichever airline we wish to whether we prefer the cabin service or we prefer the pricing or whatever else. Whereas again, we're looking at stability here. And also the actual construction of a contract that depends depending on what type of what sector you're in. But if you for example, look at publicly available information. Bristow helicopters, for example, flying a fleet of helicopters for the UK Government and search and rescue 85% of that income is actually already guaranteed it's a monthly charge. So 85% of that revenue can be seen coming in month on month or month, it doesn't matter what happens in the world, whereas only 15% is actually on the actual operation of the helicopters, you know, on an hourly basis. Also, I think, again, you know, I like to look at things on a 10 - 15 year cycle. That's the sort of investment that a fixed wing lessor, for example, would be considering.

When you make an investment within an aircraft and committed to an airline, you're banking on the ability of the current management team to execute the business plan, while dealing with the political competition, hub competition, your business models, and that management team may very well not be the management team five years down the line, the competitive landscape may be different, you're just betting on, it should work. And the asset is there, but don't forget, it's an asset that's probably got far less limited life than people think. Whereas with the helicopter market, there is generally a certain amount of stability once the aircraft is delivered to the operator. And indeed, I always remember, Swiss air used to be an airline that everyone wanted to do business with. But it disappeared quickly, when the competition changed, and their business model was broken. And I think the important thing for helicopters is, I think mission critical, which is sort of an epithets given to the helicopter, but it is so important, it is critical. Mission critical says it all.

Phil Seymour

Yeah, that's an interesting point you bring up about, you know, the aircraft lessors, obviously dealing with the airlines. I mean, you know, we we've been doing a lot of work in the last few years, not just doing the opinion on the metal value, but also a pining on, you know, the airline and coming up with a score, not just the financial score, but looking at its organisation, how and where it maintains the aircraft, etc. Am I right in assuming that the work you have to do there on the credit side, is that more difficult? Are you dealing with more private companies than public ones? Or is that, you know, relatively easy to get into?

Crispin Maunder

Well, first of all, we have to have full disclosure of a financial situation, whether they're public or private, but obviously public, it's available matter of record, although, of course, you know, financial accounts, as you know, quite often lagging by over a year. So we will be looking at interim and management accounts and so forth. But, yes, it is a little bit trickier in one respect and yet easier in another because you are almost looking through the operator to the contract, what is their contract, what's their contract with the old company or the emergency, the hospital that they're working with all the state EMS, for example, you know, you have Victoria ambulance, which is a big user of helicopters, 139s, in this case in Australia or the New South Wales ambulance. So these are state government controlled entities, and they're issuing a 10 year contract to the operator. So this gives us great comfort as long as the operator deploys the aircraft properly and as professional then we know that they're going to be paid for the next 10 years, and therefore we're going to get paid for the next 10 years.

So, yes, there is a lot of due diligence to be done. But at the same time, once you've done it, you can get very, very comfortable that what applies today should apply tomorrow, and indeed 10 years down the line. The other thing is that we are slightly different to the fixed wing market. Fixed wing, as far as maintenance reserves are concerned, you either have cash maintenance reserves, which covering the engine overhauls, LLPs, and some airframe checks, or indeed, you know, going slightly further up the risk profile end of lease compensation. And indeed, some airlines are now refusing to pay for LLP replacements on very long cycled parts as well, which is further diminishing the value to the lessor.

Whereas in the helicopter market, as well as just the general replacement or overhaul reserves we have a sort of an hourly rate, which the operators pay either direct to the manufacturer or to the lessor, and that covers all spares over a certain minimum threshold that I can't remember what it is that maybe it's sort of $500 or $1,000. But essentially this means that we can transition a helicopter quickly from one operator to another without the need necessarily of the helicopter equivalent of a seat check or anything like that, because the OEM, assuming that the account has been paid up to date. They will then just look at the new operator, analyse an average cycle, and then just apply the new rate there and negotiate that with that operator, and the contract continues. And so we get a lot of peace of mind that we're not going to have these terrible, you know, unbudgeted for repossession costs that you have in the fixed wing market?

Phil Seymour

Yeah, I mean, it's interesting you say that because one of my projects this week is updating our aircraft transition minefield, we call it because with aircraft you get involved in basically each airline will have its own maintenance schedule, which can be very different from the OEM schedule. I think a lot of the helicopters we've seen, of course, they have to be, let's say, their maintenance programmes have to be specific. But the divergence from the OEM programme appears to be much less than it can be with an aircraft. And then of course, the reconfiguration. I mean, you know, from your aircraft days, the reconfiguration costs. And, you know, I don't think any airline has exactly the same cabin layout as the next one. But can that be an issue with helicopters? Can you actually let's say change from search and rescue into EMS or into, I suppose the high end luxury configurations. Have they ever caused you issues?

Crispin Maunder

Good point. Well, first of all, let's deal with the last point. First, yes, luxury VIP is not really our bag, we are dealing with what we call workhorse helicopters, utility helicopters that provide a commercial purpose. So we're not into corporate helicopters ourselves. And frankly, none of the other lessors are with maybe one or two minor exceptions there. We're looking, as I said, at utility helicopters. Now if you're buying new helicopters, we spent a lot of time on our specification, and indeed, have actually had designed for us certain basic modifications, which allows us to convert from one role to another. And we've been, we're very much a technically orientated, lessor. So yes, for example, if you're just carrying passengers, you do not need a hoist, which you would need for search and rescue or to a certain extent, EMS, or certainly required for offshore wind. But we already have the plumbing for a hoist, so that if we do move across to that particular market, we've already got the basic fittings there. And then we just need to apply the final finishes to the basic fittings together with the heist. It can be done relatively quickly, moving from a search and rescue aircraft to EMS is therefore perfectly feasible. But certainly, if you were extending your point, you know, if you had a VIP aircraft then forget it, you couldn't move it into search and rescue it would be too heavy. And to give you some practical examples, we had some offshore helicopters operating in Asia, and one of them is operating EMS in Europe. It came to the end of its first lease after five years transitioned across and is now flying an EMS services within Europe. That was done pretty smoothly.

Phil Seymour

Yeah, well, I suppose that is that flexibility, one of the attractions then the helicopters are easier to transition, if you have to, I presume.

Crispin Maunder

Absolutely. Absolutely. Because on fixed wing, you are basically looking at it, you know, looking for keeping it in the original role, which is passenger transport, maybe constantly having to throw money at it for internal cabin upgrades or alternatively, discounting your rental and putting the problem onto the airline. Or you go for the freighter conversion, which is expensive, but you've got to obviously then judge that against the enhancement of the economic life of the aircraft. And also then towards the end of the helicopters life, you can go into utility basically take out all the furnishings and everything else and it can go into firefighting, utility logging or whatever. So there is a constant requirement for helicopters in various roles. And we're seeing that today. And if you look at some of the firefighting helicopters and the logging helicopters, I mean, they're 50 years old and still going strong.

Phil Seymour

Bit like, myself.

Crispin Maunder 

And me, yes!

Phil Seymour 

Give or take the odd decade. So where do you see the next 10 years in terms of the helicopter types that are great today and will they just continue? Do you see any others coming on the scene I think you mentioned the Bell is about the only new product development coming along?

Crispin Maunder 

Yes. Well, I mean, it's very much more of the same, I'm afraid. I'm delighted about that, frankly, you know, we have had a very tough five to six years due to the oil price collapse, which has affected most of the operators globally and that we had the grounding of the 225 after the horrible accident in Norway. And that's akin to the sort of what I call the 737 max issue. Then we have the bankruptcy of the largest operator in the market at the time CHC, followed, in fact, by reorganisation, shall we say kindly, of Bristow PHR and others. And then we had the largest independent lessor Waypoint also go into chapter 11. But now we've moved into certain sort of consolidation, we've got the operators consolidating Bristow in era, less or consolidation waypoint with Macquarie.

And, you know, we've learned some very hard lessons, but those lessons have been learned well, and now we're into the upcycle. We're looking at the replacement of the older technology helicopter, such as 76, and the bell 412s, the dough fans and the like, by modern generation helicopters, such as the Leonardo family, the 139 169 189, which is a sort of family akin to maybe the 320 737 family, or comparable aircraft with Airbus Helicopters, the 135 145 175. And now the 160, just about to enter service or in fact, the first deliveries just happened. Very little out of Sikorsky, the S 92. And the 76 is still under limited production, but it's really not having an impact on the market. And then just one on the development of Bell 525, which is a fly by wire helicopter. It was a very imaginative move by Bell, but I'm not quite sure yet if the market is ready for it.

Whilst we're talking about the replacement of old technology, which was sort of 70s and 80s. And technology by the current technology, what is important to remember is a quite a lot of that has actually been replaced by the installed fleet of the new generation of helicopters. So people aren't immediately just going to get a new build new generation helicopter to replace an old one, they're actually recycling what's already there as well. That's very important. That gives us a good residual value play as well. I can't remember your question, but I think it was something like where the future is. But the future, I think, is, obviously, we're looking at a very uncertain world as a whole. You know, I don't even know whether I'm going up for dinner on Saturday or not. But that that being said, we have at least in the helicopter industry, a defined path, we can actually see, you know, the cycle continuing to build. And so we can see a strategy ahead.

Whereas, I'm sorry for our fixed wing compatriots, but, I don't think anyone has any real views to watch even 2021 holds for. So I should say that obviously, we as LCI. We've been in business now for 16 years we established in 2004. We've seen three cycles now. And we've invested and then divested over those three cycles, we actually had four portfolios because we also had a fleet of 747 freighters as well as factory-built freighters. But I'm pleased to say that we actually divested ourselves of our last fixed wing investment in March of this year. So we are now a helicopter play.

Phil Seymour

Okay, that's this interesting. I mean, in terms of maybe you want to ask me this question, but, you know, in terms of values and lease rates, as a very high level statement, is it fair to say that most of those helicopters in the EMS and SAS sector have been less impacted by COVID compared to you know, the popular fixed wing types?

Crispin Maunder

Oh, Lord, yes. I mean, there hasn't been any real impact. I mean, search and rescue helicopters, and EMS. They're really hasn't been any impact at all. And why should they these are, as I said, critical mission critical helicopters. So they're there for a purpose, which is to deal with emergencies, and the like. So it's not a commercial proposition, it's a national proposition. So it's part of the infrastructure. That's why some banks actually look at helicopters more as infrastructure, and a yellow goods almost, rather than aviation itself. Yes, it certainly had an impact on some of the older equipment, which were being phased out already. So all that's happened is it's accelerated. So, interestingly enough, I mean, you know, our portfolio, with the exception of a few managed aircraft, is essentially it was all what I call modern technology, current production, helicopters. So, you know, the we take lease rate factors, for example, those are increasing now, or improving is the right word I suppose, because, you know, there's more demand from the used aircraft to replace the very old 76s Bell 412s and the like, the all companies in particular, requiring, you know, far higher equipment standard with regard to avionics with regard to survivability and the like, so the older generation, which were workhorse, and they've done their work well, and now no longer really relevant to a modern offshore oil operator. So, you know, if I hear some of these deals that have been done by the fixed wing market, which I'm sure are credible, and people can justify them, but when I see these low lease rate factors, I do scratch my head, because we're working, a new helicopter, typically, depending on supply and demand and the type but we're looking around, these rate factors are about 0.85, 0.9, something of that order for a new one. And then obviously, over time, and midlife would be about 1.2. And that's against a backdrop of an economic life, which is talking about 30 years. That is an interesting investment proposition.

Phil Seymour

Okay. Yeah. I mean, it's obviously a sector that we at IBA are heavily involved with that, I think, yeah, you are one of our customers. But that isn't necessarily... We do know there are other appraisal firms in the market. But obviously, that is less crowded, I think. I mean, we, you know, in terms of aircraft, appraisal firms, there's probably a dozen, only maybe a few really, really good ones. But obviously, the helicopter does need a certain amount of specialist knowledge that you pointed out earlier, Crispin. One thing, I suppose I, when we're talking to a lot of new funds, who want to yet still want to invest in the aviation space, we can't get away from the ESG factors, in particular the E in ESG, the environmental factors, but are helicopters somewhat immune because of the sectors they're working in, and then there's no they're not their co2 emissions. Although they may be, you know, I wouldn't say they're significantly less compared to, you know, before engine inter-continental wide body.

Crispin Maunder

Well, yeah, I mean, first of all, again, I hate keeping on about this mission critical nature. But you know, when a helicopter flies, it's there for a purpose. It's there, either to save somebody at sea or transporting an engineer to wind turbine or to an oil rig or whatever else, that they're not used for leisure. Well, there are a couple of schedule service operations around the world, but very small, very few. So essentially, it's part of an industrial system or a safety system. Number one.

Number two, Boris Johnson just announced yesterday, all our homes in the UK apparently are going to be powered by wind by 2030. Jolly good, I say because, you know, wind is very much a growing market and you need helicopters for wind, both transporting the workers to the accommodation barges in the wind parks. But secondly, and this is far more important, is flying, you know, typically three engineers, they generally fly in groups of three, and then are hoisted down onto the wind turbines to maintain them and check them over and everything else and that's a constant requirement for helicopters. So there are specific helicopter types that are particularly appropriate for that. Luckily, they're all ones that we're focusing on. So when there's going to be a growing market, and of course, that is very much the E of ESG. Oil and Gas, one could argue maybe yes, we don't have much of an environmental footprint or a helicopter, but in the sector itself is looked at as very small E there. But search and rescue EMS, very much so part of the social fabric of our nation nowadays.

Phil Seymour

And well, I think Crispin, people listening to this podcast, will now be rushing towards either investing in helicopters or competing with you. I hope it's the former. But anything else you want to finish off with Crispin?

Crispin Maunder

Actually, I will take you up on that particular point. I think it's an important message to investors and finances: come and have a look at the sector. I know that a lot of people just say, aviation is bad news, I don't want to be there or some people are saying maybe, you know, it's a good play in the fixed wing market. If everything goes wrong, maybe I can make some money and then I can get up on the upside. Well, good luck and be brave, but come and have a look at the helicopter market because you know, it's there. We're in an up cycle. We've been through absolute sheer hell over the last five to six years. But we're now set fair. You know, we're seeing continuing strong improvement in the metrics. We've got a clear picture of our future. And I think they're great investment and finance opportunities. We at LCI are happy to work with investors. We've done that now with three or four investors and setting up joint venture platforms and sidecars as we have just done with Sumitomo Mitsui, to help them into this sector of the market, they've already got big exposures on the fixed wing, then I also have exposures in the engine leasing market as well. Now they're moving to helicopters who come on board, it's have a look, we're very happy to talk to you about it. And if in fact, you want to set up and be a competitor, that's also what we're happy with. I mean, we this is part of a growing business. And the next thing is to get more competition in the market and to have inter-lessor trading as well, which is something which you see every day on the fixed wing market. So we're not frightened of competition. We welcome it as well.

Phil Seymour

Yeah, and I think, you know, at IBA we obviously take the sector very seriously. It's an increasing revenue line for us, both on the straightforward appraisals and valuations as well as the advisory side because some of these investors, you know, do want somebody independent, perhaps to say, you know, what we're hearing from LCI, is it right? Well, I can definitely say the last 45 minutes have been spot on Crispin. So thanks, Crispin, executive chairman of LCI for joining me in this podcast.

Crispin Maunder 

Thank you. Thank you, Phil. I've really enjoyed this and and you know, our relationship with IBA goes back many, many, many years, as you say yours and mine and Ambassador airways back up in Newcastle days. So it's good to see you, Well, to talk to you at least, so thank you again. Thank you.

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