The New Reality
October 18, 2016 By Corey Taylor
The helicopter industry used to be a fun place to work. There was always a new frontier to explore, some new helicopter being rolled out by the OEMs, some curmudgeonly operator claiming the old helicopters were good enough and some oil company saying we need to get aircraft with at least one engine per passenger in order to be safe. The growth in industry has been meteoric, with some operators mistaking a bull market for business acumen, while others think there’s no challenge they can’t handle.
These days hangars are looking like Honest Al’s Used Chopper Lot but, unfortunately, there is precious little flying to be had. At least we’re contributing to the reduction in greenhouse gases and global warming by not burning all that jet fuel – cold comfort, of course..
The broadly disappointing season of 2016, while promising at the start, has many scratching their heads and asking questions. What happened and where do we go from here? Will it recover?
The future’s roots are, as always, in the past. Much of the current malaise was predictable and arguably we’re merely repeating the past, just an order of magnitude higher (or lower) than the last cycle. Any banker worth his salt should look askance at an operator growing at double-digit rates on the back of the commodity boom fuelled by Chinese miracle. A helicopter doesn’t depreciate to a level that it would simply be parked and used for parts, as we see with trucks, cars and even ships (some will say I am wrong but the tiny percentage of helicopters that are relegated to the scrap heap do not penetrate the clear coat, let alone dent the sheet metal of the Canadian fleet). Therefore fleet renewal almost always implies fleet expansion, since replacing a MK2 helicopter with a MK3 rarely sees the end of the MK2.
Older aircraft remain in the fleet or become the starter aircraft for a new player on the scene. In those heady days a few short years ago, it seemed like continuous growth was possible and the banks had no problem financing our dreams. Today, the world has changed and it appears it’s unlikely to return to those halcyon years any time soon. I will go so far as to say that we will never see a period of such unfettered enthusiasm again, at least with regard to helicopters that require the services of that precipitously endangered species, namely pilots.
The reasons the industry is suffering are many, but the single biggest one is that there is simply not enough money being spent on helicopters by the vanishing breed of clients with funded projects. A quick look at the current state of revenue earning potential is sobering to say the least, or might inspire one to engage in scotch consumption if one has any stake in the game at all.
Tariff rates for most operators are calculated based on a targeted number of annual hours (generally somewhere around 300-400 per aircraft) with all the costs calculated, plus the desired margin, producing the hourly rate. Considering that tariff rates aren’t often seen these days, coinciding with the pervasive decline in annual hours, one doesn’t need an accountant to tell us that the producers of red ink are likely to be the only ones making money. Some operators apply ligatures to the bleeding in the winter, by taking on heli-skiing or other off-season work that pay little of the annual fixed costs, but at least cover the costs of operating, and can provide much needed cash flow. In the 2016 world we now occupy, the winter rates are similar to those seen in the middle of August, which might be a bellwether of fundamental change, since rates can plummet quickly but take years to crawl back up.
The lesson in all of this is to strive for sustainable growth, pay down debt, don’t see a boom as the new normal and don’t drop rates to “win” thinking you can get them back up as soon as the recovery happens. Like weight loss (in reverse), it’s easy to go down, very difficult to go up.
Luckily we have many operators that know these truisms better than any and will continue to grow and pioneer new things to do with helicopters. Many new operators will also survive while some new, and old, will fall by the wayside. Such is the business cycle, especially in one of the most capital intensive and narrow margin businesses in the world.
Kudos to all that strive and thrive!
Corey Taylor began his aviation career in 1989 and has flown helicopters in some 20 countries while holding almost every position required by the regulations – and some no one has ever heard of.