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Plunging oil prices could stop blades from turning

Off-shore oil drilling and production in regions such as the North Sea and Gulf of Mexico have been a key source of demand for helicopter makers including United Technologies' Sikorsky unit, Finmeccanica's AgustaWestland and Airbus Helicopters. Textron's Bell Helicopter could soon become a bigger player with a new helicopter.

The
oil and gas industry now accounts for as much as 40 percent of the
roughly $6 billion (4 billion pound) annual sales of helicopters for
civil use, making it the biggest non-military segment, according to
aerospace research firm Teal Group.

While
manufacturers have not indicated that the plunging price of crude has
led to cancelled orders or reduced production, some warning signs are
emerging.

During United
Technologies' annual outlook meeting last month, Sikorsky president Mick
Maurer said falling oil prices would "put some short-term pressure on
our commercial business." Oil and gas represents two-thirds of
Sikorsky's non-military business, Maurer said last March.

The
oil slide has already taken its toll on shares of helicopter transport
firms, which along with leasing companies are major customers of the
manufacturers. With their own fleets, these companies fly crews and
material to offshore sites for oil companies. Their helicopters are also
used for search-and-rescue missions and other purposes.

Since oil turned south in mid-2014, shares in the big transport firms have followed. CHC Group has dropped 70 percent, Era Group has slumped 29 percent and Bristow Group is down 24 percent. By contrast, the index S&P index has gained about 3 percent over that time.

"It’s
a pretty unsettled time in our industry right now," said CHC spokesman
T.R. Reid, adding that CHC remained optimistic about long-term demand.
"The industry is moving further and further offshore," Reid said.

Bristow,
in an emailed statement, said: "While our growth rate may be impacted
by the current market environment, Bristow is in good position to
weather the downturn in oil prices."

An Era Group spokeswoman declined to comment, citing "quiet period" rules.

While
oil transport firms are more likely to be hit initially if exploration
projects get cancelled, leasing companies could  also suffer.

Leasing
companies include Waypoint Leasing, Macquarie Rotorcraft Leasing and
Milestone Aviation Group, which in October agreed to be bought by General Electric Co (GE.N) for $1.78 billion. All declined to comment.

OIL-RICH MARKET

Sales
of rotorcraft for the oil and gas industry have more than doubled since
2006, outpacing growth in the broader non-military market, according to
the Teal Group. Military helicopter sales are worth about $16 billion a
year.

To be sure,
helicopters are only part of the business for diversified aerospace and
industrial manufacturers, and other product lines, including United
Tech's aerospace parts unit and Textron's Cessna jet business, stand to
benefit from cheaper fuel.

But
the oil industry has been by far the biggest growth market for
non-military helicopter sales and many new products have been developed
for this market, said Richard Aboulafia, an analyst at the Teal Group.
"If (oil) prices stay around $50, there could be some real damage to
these programs," he said.

Brent crude LCOc1 traded at $48.69 a barrel on Wednesday, near six-year lows, despite a rare 4.5 percent spike.

Between
20 to 30 percent of the demand for off-shore helicopter crew transport
is tied to drilling for exploration, while the rest covers traffic to
already-producing facilities, said Amy Groeschel, an analyst at IHS
Energy.

Exploration and
development are more vulnerable to cuts, Groeschel said, because they
are tied to projects that could be cancelled.

Helicopters
that service oil and gas companies are generally larger and more
expensive than those used for search-and-rescue missions or executive
travel because they carry large crews and may need to make long trips
out to sea.

"What we may
see is a pause in new orders being placed," said Chris Seymour, head of
market analysis for consulting firm Ascend Flightglobal.

Newly
developed helicopters expected to serve the oil industry include
Airbus' EC175, and Bell's 525 Relentless, which is due to make its first
flight early this year.

Mike
Suldo, oil and gas market specialist for Bell Helicopter, said in an
email the company was not seeing any slowdown or expecting a marked dent
in its business.

"We do
not anticipate a significant letup, as many energy companies, operators
and national governments are seeking more innovative and modern
helicopters."

But
analysts are more cautious. "Since a component of sales is to the oil
and gas industry, it's unfortunate for the timing of the roll-out," said
Brian Foley, an independent aviation consultant.

A
United Technologies spokesman declined to comment when asked this week
about the impact from low oil prices, citing the "quiet period" close to
an earnings release.

Finmeccanica did not immediately respond to a request for comment.

Airbus,
which says its helicopters represent about a fourth of the estimated
2,300 rotorcraft used today for oil and gas missions, is not seeing any
cancellations as a result of falling oil prices, said Christopher
Grainger, vice president for oil and gas sales at Airbus Helicopters.

 Grainger said in an email that Airbus expected "things to remain
relatively stable" in 2015, but remained in close contact with its
customers and the oil companies. "We all have to adapt accordingly."