Asian Sky Podcast with Jaspal Jandu
21 February 2022
In this episode of Asian Skycast, Jaspal Jandu, CEO of LCI, discusses the Asia-Pacific market, investor interest, ESG, eVTOLs, and more. Please click here or scroll to the end of this page to listen to the episode. You can read a transcript of the discussion below.
Introduction: [00:00:00] Hi. You're listening to Asian Skycast. The show that brings you the most updated aviation industry insight.
Alud Davies: [00:00:06] Good morning and welcome to another Asian Skycast. My name is Alud Davies. I'm the media and communications director here at Asian Sky Group and Asian Sky Media. I'm delighted today to be joined by Jaspal Jandu, who is the CEO of LCI. Jaspal, thanks very much for joining us. How are you?
Jaspal Jandu: [00:00:23] I'm very well. We find each other in very interesting times, Alud: the run up to Christmas; lots going on in the world politically and economically. So, yes, very well, thank you for asking and a very interesting time.
Alud Davies: [00:00:38] Absolutely. And we were just talking before we started. And obviously, I'm British and you're in the UK as well and a little bit of a worrying situation going on there with unfortunately, COVID.
Jaspal Jandu: [00:00:50] Indeed, this is something ultimately I think long term we're just going to have to live with, so it's really managing the situation rather than arresting it. We'll talk about how it may or may not have impacted our aviation space in just a moment, Alud, but personally, we're all well. We're getting a lot of boosters into people's arms and making the vaccines, masks and certain precautionary measures the best thing for public health. So, let's see how we go there, Alud.
Alud Davies: [00:01:19] Absolutely. We were saying earlier on there are a lot of restrictions in place in various different parts of the world. I was just wondering, turning specifically to sort of towards Asia-Pacific and the leasing market out here, do you think that there are many opportunities in here out this way?
Jaspal Jandu: [00:01:38] Yes, I do, actually. Let’s just take a step back first. I think if you're talking helicopter markets in particular, the markets have been remarkably resilient actually, I would say globally, certainly when compared to other sectors such as fixed wing, regional jets and so on. We've seen growth across the board – Asia more so. There's been a very interesting dynamic in the market across Asia and the rest of the world: which is you had a near-term impact of COVID (so certainly things like signing contracts and getting on aeroplanes were slightly disrupted for a while), but at some point in certain sectors like EMS, for example, utilisation actually increased as we were tried to solve our way around this pandemic. Thereafter, clearly the world and certain sectors like oil and gas, we were trying to find our feet as to where we were going. After that, our utilisation across our fleet, across the board, is up, including offshore, and you've seen that mirroring, to some extent, commodity price increases. So, I’d say right now we're actually using our equipment harder than we were pre-pandemic. So, Alud, the overall trend is actually very positive.
Alud Davies: [00:02:58] And I saw it and sorry to put you on the spot right now, but I saw a statistic, I think, from the early part of last year suggesting that a good proportion, maybe more than half of your fleet, was actually operating in the Asia-Pacific region anyway.
Jaspal Jandu: [00:03:13] That's right. We've tempered that slightly: as a longer-term trend, we've always aimed for at least 20 to 30 percent in Asia, as we have for certain other metrics like young liquid twin engine helicopters. So, we've tempered the 50 percent a little bit, but Asia is still a huge market for us, and it shows huge opportunities across the board and, Alud, we can talk about certain sectors or countries as we carry on talking.
Alud Davies: [00:03:40] Yeah, absolutely. I think specifically talking about sectors, and you touched upon it earlier on, I think the EMS is quite quite a big sector for you anyway, isn't it?
Jaspal Jandu: [00:03:50] Yes, indeed. So, you've seen a very interesting dynamic with EMS, possibly, again, mirroring the rest of the world, which has gone to this sort of public/private model or even a completely private model altogether. Places like Australia, for example, New Zealand, even parts of China are now developing an EMS network. Of course, the helicopter is part of an overall network of doctors and bases and helipads and regulations, etc., etc., so we are just one part of a large mission-critical infrastructure. But certainly, when you've got things like COVID pandemics, people staying at home, accidents happening, the ability to carry patients on a helicopter, on a specially equipped helicopter to that; for example, you'd have certain floors, stretchers and defibrillators on board and, for the newer equipment, for example, you'd even have telemetry between the helicopter and the hospital to forward notify them of what's going on. Now that is, even in today's world (and I guess we'll touch upon eVTOL later on Alud), is irreplaceable. So, you've actually seen the requirement for EMS provision increase around Asia as a whole.
And then number two, at some point you will get developing economies like India, for example, Malaysia, Singapore, developing their own advanced EMS networks. So, the actual prospects for the market are also very positive in Asia. Yes, so I completely concur – the EMS market has held up very well for us.
Alud Davies: [00:05:31] And another sector that's been particularly gathering headlines over recent years, the oil and gas sector, which I think was suffering for a while. Have you seen much rebound in that market?
Jaspal Jandu: [00:05:44] Yes, we have. There are lots of nuances in offshore and we could probably spend an entire podcast just speaking about that.
Clearly, initially, as I said, we were finding our feet in the space, but thereafter offshore exploration and production has continued to increase as we've seen it in our statistics.
You've also seen a very interesting trend with the deepwater production because, over time, the efficiencies of deepwater have pushed the break-even costs to around $44 US Dollars per barrel. Now, clearly with a rising oil price, it makes it ever more attractive to go and find and explore those wells.
And number three, I think this is a really interesting nuance to bring to your listeners’ attention; namely, there's a difference between oil and gas which is often not noted. Clearly as the world tries to decarbonise, and the bogeyman right now is clearly coal for example, you will find more gas and liquefied natural gas trying to bridge that gap. Now, ultimately, even that is a stopgap, but it's a step in the right direction. So, you have seen trends like LNG production around Australia, for example, which is then shipped up to northern Asia in lieu of coal burning, again which is a step in the right direction.
So, the offshore markets for various nuances, including, by the way, in Malaysia and Thailand, are actually requiring more and more equipment; and the equipment itself is again mirroring what's happening in North America and Europe, which a demand for the latest safest equipment. So, you're seeing certain age restrictions, for example, in certain tenders and in certain countries, you're seeing requests for things like TCASII, for example. So clearly, the safety aspect of moving people out to rigs and back is paramount.
This replacement cycle, added to the organic demand, means that we should see actually a pretty good future for offshore energy services in Asia, Alud, so, yeah, lots of nuances there.
Alud Davies: [00:08:05] Talking about the replacement cycle, I read something earlier you were talking about, I think at the Helicopter Investor event, suggesting that over the course of the next 5 to 10 years, that replacement cycle could kick in quite big.
Jaspal Jandu: [00:08:20] Yeah, it's a great question, Alud. It's very interesting if you look at the Airbus helicopter forecasts from where we are now, over the next 10 years, you're looking at around seven to eight thousand helicopters - that's the total gross demand. And of that, the balance has shifted: it's now actually more 60/40 replacement demand versus organic demand. Whereas if you looked at the forecast or the historic trends from 2000 to present, it's actually been 60/40 the other way; i.e. it’s new demand that's taken precedence.
So, what's happening now, in one respect, it's just a function of mathematics, which is: we've had an oil price move from 2014 onwards, and for many reasons, as you well know, Alud, complex reasons, we delayed various replacement cycles – it was just easier to use your existing equipment and use it longer and harder. But at some point, that bow wave has to break: either a government says, I don't particularly want the old helicopters or the operator or the oil company says, listen, I want the youngest helicopters, or we, as investors and financiers, say we are gravitating towards younger helicopters. So yes, I think it's an absolute case that you may see a renaissance, as I call it, in the replacement cycle over the next two to four years.
Alud Davies: [00:09:45] Absolutely. And so you mentioned investors there. I think it's fair to say that over the course of the last few years, helicopters have become an increasingly attractive asset for investors. Can you tell me, do you have a sense of how that's really happened and kind of what role LCI has played in the evolution?
Jaspal Jandu: [00:10:05] Yes, good question. There's multiple parts to that, Alud. Maybe we just take a broader step before we get into helicopters. I don’t know if you’ve seen your charts recently, but the spectre of inflation is possibly back with us, and the modern tool for taming inflation are interest rates, so you may see those move in tandem together. In addition, as Asia, in particular, is a net saver, clearly, there's a demand for overseas hard US dollar assets; again, I speak generally across the board.
In terms of helicopters, there's an even more powerful story; which is if you look at the deals we've been doing; so new, young, as I said, liquid aircraft on lease to good contracts with, for example, full power-by-the-hour coverage provided by the manufacturer, you can actually see a story developing for an Asian investor who says: “listen, I would like to get into hard assets; what is very long lived, what's a good set of cash flows for me, and what has an ultimate residual value story?” So, if you wrap that with all the things that you and I know very well, like unpressurised hulls, continuous support from the manufacturer and so on, you're actually seeing an investor base in Asia in particular, but certainly in parts of Western Europe, too, thinking that, look, if structured correctly, these are actually very, very good, robust deals and we're seeing that across the board.
What's been very interesting is how that’s true across the demographic of capital, across the demographic. So, whether it's pension money, whether it's life assurance money, whether it's private funds, whether it's banks, whether it's private equity, whether it's family offices, I mean, we have many, many relationships and many, many networks across the board on the investment side; and on the commercial funding side, because of course we are in that market, you're actually seeing banks, you're actually seeing some private debt. Very interestingly, you're also seeing things like infrastructure funds coming to the helicopter party, because helicopters are just one part of a much broader chain, a really broad chain, so it's very hard to just look at helicopters as its own vertical.
So, Alud, the investor base, is actually, I'd say, very, very strong right now, particularly in Asia.
Alud Davies: [00:12:35] And then going back to the investor base for just a moment is that what's really driven the partnership with with Sumitomo Mitsui?
Jaspal Jandu: [00:12:47] Yes, indeed. I'll let them speak for themselves on a separate podcast with you, Alud, but we're good friends. I've known people at that group and the broader Sumitomo Group for many, many years.
There are some very, very interesting kind of broad churches here. At one level, they are much more than a financial partners: they are also industrial partners; they are also strategic partners - it's not just providing liquidity to the market that they seek.
And then number two is the JV that we have developed to acquire helicopters together actually is a broad church in itself – so you've actually got a double positive here. We spent a lot of time on this, and I'm very, very proud of our team for spending so much time on it.
So, in a classic operating lease, for example, you would provide a piece of equipment for x years, and then you would have returned conditions and off you go. But in today's world, we're getting a little bit more sophisticated, Alud, with things like finance leasing, or PDP finance, or VAT financing, sister ships, extension options; I mean, today's financial product can be quite sophisticated.
Therefore, it's a really, really nice partnership because we are bringing a very good, robust and well-regarded - I would like to think - platform, people and systems and access to origination on deals, and Sumitomo Mitsui Finance and Leasing are bringing their own certain expertise and USP.
So, Alud it's been a fantastic partnership so far. We started in 2020 with 19 helicopters, just over $200 million USD, and within a year we increased that by 50 percent. And I'm sure the next time we speak, Alud, I will be pleased to announce that we'll do that yet again. So, Alud, past, present and future is actually very good for that joint venture.
Alud Davies: [00:14:49] And does that rosy future include asset management opportunities?
Jaspal Jandu: [00:14:56] It does. If you look at what we've done on our side, we've spent a lot of time and a lot of investment sharpening up our processes in order to manage both, by the way, capital and assets; management is quite a broad term in itself. And I'll give you one or two examples here.
Number one, we have a completely bespoke, internally developed computer system that allows us to manage any number of assets. It's perfectly scalable because we've done the hard work already. Let's say you're ‘Alud Davies Investor I’, for example: you could see your portfolio on your iPad if you wanted to; you could measure its performance; you could see where the helicopters are; you could see where the next inspections are; you could look at pictures of your helicopters. Now that capability is quite unique, and we spend a lot of time on that, and I'd like to think that, yes, we can increase the efficiencies by looking for similar business across Asia. So, Alud, to your direct question: yes, we're very interested in the asset management and investment management space, I agree.
Alud Davies: [00:16:12] Absolutely. And acquisitions of different companies as well, so I we're in December now, aren’t we? I think right at the beginning of the month, you announced the acquisition of most of the portfolio of Nova Capital. Which was the twin and the fixed wing part of the business as well. How do you see that fitting into LCI’s portfolio?
Jaspal Jandu: [00:16:35] Indeed. I heard it described as a marriage the other day, so I'm not sure whether I should comment on that in particular!
It's very complementary. Olivier Piot has done a fantastic job over the last decade, at least, building an onshore, predominantly EMS portfolio, and now marks a perfectly natural segue way and time for us to look at, for example, the twin engine markets and some light utility markets, and for Olivier to concentrate on single engine and other areas. So, it's an actual perfect match.
In terms of profile, the fleet is predominantly EMS. There is a little bit of search and rescue in there, and we are finding it extremely complementary to our own portfolio.
As you well know, Alud, when the whole leasing - let's call it the ‘next generation leasing cycle’ which I think it was referred to back in 2011/12/13 - when it all started, we kind of zigged to when everybody zagged, and we did that quite deliberately. We went into, for example, EMS, we looked at search and rescue, we slightly shied away from super heavy helicopters and Gulf of Mexico, etc, etc.. (we’ve subsequently broadened our fleet to include many of those types), and so in terms of fit with something like Nova, it has actually paid dividends because we are of a very similar DNA. So it's complementary, Alud on many, many fronts; including people, assets and investment strategy.
Alud Davies: [00:18:17] I was intrigued to see that the fleet includes 14 fixed wing aircraft. Are they are they smaller fixed wing aircraft?
Jaspal Jandu: [00:18:24] Yes, indeed they are. They are King Air's and they're performing EMS missions around Scandinavia. So, you're actually finding this more and more, which is that we think of fixed wing as large commercial aircraft (and by the way, we should definitely touch upon that because we are still very much active in that space), but there is actually a market for smaller aircraft; utility aircraft, EMS aircraft. In fact, you’ll actually find some helicopter operators owning and operating fixed wing aircraft - they're not just the helicopter operators. So yes, it's an interesting market and one that is slightly away from the beaten track of large commercial aircraft. So, yes, very good for us.
Alud Davies: [00:19:12] Mentioning large commercial aircraft. I think it's probably fair to say over the years you've sort of invested in and divested yourself of commercial portfolios, but earlier this year, not so long ago, actually a couple of months ago, you took your first tentative steps back into that market again with the acquisition of an A330-300, I think it was. Do you see that fleet, that portfolio expanding rapidly in the next coming months.
Jaspal Jandu: [00:19:41] Very much so, Alud. I saw it referred to as a ‘return to’, but it's really for us, ‘a continuation of’. Many of us at LCI have been working in fixed wing for more years than we care to remember, Alud, so we do have fixed wing Jet A1 running through our veins!
We started LCI actually back in 2003/4 and have a long-established track record in fixed wing leasing. We've purchased and sold at least $7 billion worth of equipment there, so it really is a part of the DNA and it's part of the shareholder's DNA as well. If your listeners don't know, LCI is a privately owned company of the Libra Group, and fixed wing aviation is certainly on the agenda there.
So Alud, we're in an interesting point in the cycle. As you know, the fixed wing cycle can be quite, well, cyclical! Covid hit us in March last year and it's sort of not really left us as we've had various variants of it ever since. Immediate passenger demand (as you know, you live in Hong Kong, you should tell me how Cathay Pacific fared, for example), fell off quite dramatically; planes got stored, etc., etc., so it was probably a little bit early to go in back then.
But, certainly, we've been tracking that market very, very closely and now is a perfectly opportune time to re-enter the market, as we have done, as you alluded to, three or four times in our history. So yes, we've started with one and we will grow that fleet quite aggressively, Alud, they are the plans.
Alud Davies: [00:21:20] Would you focus on widebody aircraft?
Jaspal Jandu: [00:21:24] Yes, a good question. We actually went into widebody aircraft in 2008/09/10 when a lot of people were going into narrowbody aircraft, so we are very au fait with that market.
If you look, for example, I'll just pick on the A330-330 but I could choose a range of types here, it's a very mature, proven type and platform. We know what it does, it says it on the tin. But I think rather uniquely for that aircraft and a great selling point are the seat mile economics. So, you will find that it is a tremendously attractive proposition when you put ownership costs into the equation.
So, yes, we're not afraid of widebody traffic. I mean, you're connecting rather large hubs together and in the case of the A330-300, you can actually go from hub to spoke as well, so it can actually do two types of missions.
So, yes, you get a little bit more versatility with the widebodies, and we're not we're not afraid of them. So, Alud, all power to our elbow there.
Alud Davies: [00:22:27] Absolutely. And so switching tracks slightly. I'd like to touch upon something you said earlier on about eVTOL, which I'll come back to in a second if if that's OK. But staying on a similar thing, I think Airbus helicopters have said that it wants us to certify 100% SAF usage before 2030, around that sort of time frame. I was just wondering if as a helicopter lessor does SAF touch upon what you do?
Jaspal Jandu: [00:22:59] It does, and it will do. And if it will do in the future, then it's important to us, I’ll just start there.
Number two, before we go into SAF, let’s look at the bigger picture. Now, the picture we have at the moment for right or wrong is under a banner called ESG (Environmental, Social and Governance), so we are talking about the ‘E’ of ESG here, and we could maybe touch upon the ‘S’ and the ‘G’ later, Alud. But while we're on E, yes, I mean, if you look at some of the dialogue coming out of COP26 and then IATA and ICAO, we are looking to be net zero as an industry by 2050; net zero being a very interesting concept as it doesn't, as of now, include offsets. So, you can't run a helicopter or fixed wing network over here and then go plant some trees over there and suddenly everything's fine. It's net zero.
So, we are looking at around 65% of that betterment from today coming from SAF or SAF-like fuels, the rest being air navigation, aerodynamics, propulsion, etc., etc. So on the SAF part, I mean one has to be quite careful here as it's easy to solve a problem by creating a problem somewhere else: SAF fuel has to be produced, we're not producing it in the quantity that we quite require just yet. So certainly, if you're using the Power-to-Liquid recipe of creating SAF and the power itself, the ‘P’ of Power-to-Liquid, is developed in a renewable way, well, that's a very good and robust way of producing the fuel and off we go. So, I just note an asterix here, which is that SAF comes with its own challenges, number one.
Number two, you'll actually find certain Airbus helicopters are already certified to 50% SAF. So, in order to get the incremental step we need tests - as you've seen in various news articles, certain operators are now flying 100% SAF fuel helicopters as a proof of concept, where we are looking at power requirements, we're looking at wear and tear in the engine, we’re looking at any equipment required or special modifications, and of course, to your direct question, as an investor and a lessor, we are looking at the long-term implications of using SAF fuel and long term residual values.
There is absolutely no doubt that this genie is out of the bottle and we are going to be hearing more of it than less. But just the implementation and the monitoring, I think we just have to keep an eye on that. So, yes, let's work to a more sustainable and renewable future without creating ancillary problems as a result, is my comment.
Alud Davies: [00:25:53] And as a lessor, would you ever get to the stage where you write into a lease agreement that an operator of one of your helicopters absolutely must use SAF?
Jaspal Jandu: [00:26:06] I think it's just far too early to say that right now, Alud.
Clearly a lease document is a complex, complex document, and there are more than one ways to skin a cat; there are other mechanisms one can use if we get to the point of promoting greener technology, you could do it commercially, for example. So, it's very hard to say Alud where we may be in terms of lease agreements in the next 5 to 10 years, and you may find the operators are doing it naturally anyway, because they probably don't need a lease agreement to align themselves to a greener future because they have one hundred and one other incentives to do so. They've probably got creditors themselves; they probably got a Board; they've probably got shareholders who are pushing in a certain direction. So, you may find an operator comes to you and says, “please, we'd like to use one hundred percent SAF are we allowed to do so?” rather than us dictating it in a lease agreement. So, let's see how we go is my answer to that question, Alud.
Alud Davies: [00:27:12] Absolutely. And so coming on to the big question about eVTOLs, I think we're probably not only quite a long way away from actually seeing them flying, certainly seeing them flying autonomously. But I think we're probably quite a long way from seeing the likes of LCI and other lessors leasing those assets. But do you do you have a long term view? Does LCI have a long term view on eVTOLs?
Jaspal Jandu: [00:27:38] Yes, it's a great question, and this one definitely deserves a secondary podcast because there are so many aspects to this!
So, yes, look, clearly we are on the start of a J curve here and it's very exciting - we're talking trillions of dollars of market cap if it all comes to pass, number one.
Number two is, as I said before, I think we should expand our view beyond just the vehicle. We’ll certainly talk about the vehicle in a moment, Alud, but an eVTOL, or SVTOL, or UAM, or AAM, I mean it really is acronym soup right now, is part of a network, and that network is very broad. You're talking about vertiports, you are talking about noise, you're talking about regulation, you’re talking about charging, you're talking about performance in inclement weather, you're talking about safety, etc., etc.. So, the entire water line has to rise, for us to be even thinking about a vast network of eVTOLs.
Number three is, yes, it's something I think many companies are exploring.
I think there has been tremendous strides in battery technology, for example, but we still have a way to go. There was a very interesting analysis from Airbus Helicopters, which looked at the hover performance of a datum helicopter. Now, as you know, a helicopter in hover has tremendous power requirements. So, for a 30-minute hover, you would typically require about 200 kilos of traditional fuel, of Jet A1. And the same would be true for SAF fuel. You'd probably need the equivalent of about seventy-two kilos of hydrogen, for example, a longer kid on the block. (Hydrogen comes with its own problems because, yes, you may need that mass, but in volume terms, it's a lot more because of the particularities of hydrogen.) But you'd need around an eight and a half tonne battery to do the same thing! So, I can't imagine many people saying, yes, let's put an eight and a half tonne battery in to hover for 30 minutes; so the battery technology is still a way to go.
Having said that, I just want to make very clear that it's an exciting space and there are nuances even within this market: so, one could talk about Air Taxi or Air Metro as its very own, unique, distinct segment. You're based in Hong Kong, I'm currently in London, we have our friends in Tokyo, Japan, and in these big metropolis you will find lots of very wealthy people who are time poor and surrounded by congested traffic. Yes, I mean, there are huge requirements for traffic there.
But I think what is even more interesting is then the move into last mile and middle mile logistics, small packages, freight, non-combat military use. I mean, once you start getting into something like one to three hundred kilos useful load and let's say, one hundred to one hundred and fifty nautical miles, that actually is very interesting. I mean, you can transfer equipment and packages to rigs or wind turbines. And so naturally, that means we would be looking at exploring that space.
So, Alud it is a very broad topic you raise there. And yes, we're monitoring it, but I just say think ‘network’ as opposed to ‘vehicle’.
Alud Davies: [00:31:14] Absolutely. I think that's probably the perfect moment to end things on, if that's okay with you. So I'd like to thank you very much for your time. It was really interesting. Appreciate it.
Jaspal Jandu: [00:31:24] Thank you very much. Can I just wrap saying, Alud, we enjoy your work tremendously and the reports you put out. So, I just want to thank you and show our appreciation for the stuff you do for us and everyone else. So, Alud, thank you very much; you've raised a number of topics which we can explore in the future so let's do this again.
End: [00:31:46] Thanks for joining us this week on Asian Skycast. Make sure to visit our website, Asian Sky Media, or you can subscribe to the show on your phone or via RSS so you'll never miss a show.