New capacity analysis in the heavy and super-medium segments by LCI Analytics paints a very interesting picture around supply and demand, with age out assumptions driving large parts of the narrative. 

Background

We’ve been crunching the numbers for the future evolution of the heavy and super medium offshore fleets. This follows animated discussion at last week’s Helicopter Investor conference about the size, firmness and delivery profile of the super-medium orderbooks and the potential impact on the market going forward. 

It was unsurprising to hear the industry not wanting to repeat the mistakes of the past decade, whereby the over-exuberance of 2010-2014 led to an almighty hangover between 2015-2020 (in a classic precept from game theory: parties can achieve short-term gain by deviating from a stable, market clearing consensus, as long as they feel that everyone else will stick to the consensus. This, however, almost always leads to long-term pain…).

To be clear, the exuberance of 2010-2014 was also fuelled by plenty of available capital in a low interest rate environment, and a new financing environment may well temper matters over the next few years. However, the fact remains that small changes in (inelastic) supply and (elastic) demand can quickly destabilise a small industry.

The Capacity Equation

The traditional capacity equation in real asset industries is:

• Surplus/Deficit = (Demand) – (Net Supply)

Without wanting to create a 1:1 scale map of the industry, let us simplify matters and assume that:

• Demand = Current in-service aircraft on contract

(Unfortunately, we don’t have industry-wide load factors available to us in the helicopter industry unlike the excellent statistics from ICAO and IATA in the fixed wing market, so this demand definition will have to do for now.)

On the supply-side, we assume that:

• Net Supply = (New Aircraft Deliveries) – (Retirements)

(Again, a simplification as we exclude total losses, other types moving into the market, etc.)

We will also require some further assumptions to round out the analysis:

• Steady-state demand at the current level. (Interestingly, there was little debate at all around demand growth during the conference, perhaps as a result of the PTSD over the past decade! Let’s simply, therefore, use an ex-growth model, but be cognisant that large, new energy discoveries around the world could materially change the analysis).
• All of the public statements around heavy and super-medium orders are real and that they will all be financed and delivered, including both firm and options (i.e. full tilt model).
• Fleet analysis is for the crew transfer fleet only. 
• We define retirement or age out as: moving on from primary crew change mission, either to a secondary/tertiary mission or part-out. 
• We have excluded all orders that are obviously not destined for energy sector markets.
• We exclude up- and down-gauging, for example, into the medium helicopter sector, particularly the AW139 market. The analysis, therefore, has a perimeter around the heavy and super-medium market only.
• The analysis is in aircraft units and not available and revenue seat miles/kilometres.

The Numbers: Part 1

Let’s start with the current fleet industry-wide intentions, all compiled in-house by LCI Analytics:

Our analysis shows that the current contracted fleet of heavy and super-medium helicopters is 289 units, from a total in-service fleet of 301. As discussed at the conference, the S-92 makes up the majority share with both AW189 and H175 fairly equal thereafter (strictly speaking, the AW139 is the most popular offshore type, but that is a separate size category analysis for now).

In terms of statements and intentions, we track exactly 100 super-medium units on order or option. We could do a probability assessment of each individual announcement but let us assume all get delivered for now. Interestingly several end-users have made commitments for helicopters directly.

The Numbers: Part 2

Let us then add a time dynamic to this picture:

The bulk of the 100 ‘orders’ (we will use that in the broadest sense of the term for now), are scheduled to be delivered between 2026 and 2028; perhaps unsurprising given that supply-chain and slot availability would limit the near-term, and that a lack of market visibility would perhaps limit the long-term.

We then can produce a fleet dynamic using:

• Fleet at time T = (Current Fleet at T = 0) + (New Committed Deliveries) – (Aircraft Reaching 25 Years Old) 

The chart on the right shows the evolution of the fleet based on all the parameters and assumptions listed above.  If the retirement assumption is 25 years, the fleet would grow to a peak of 383 helicopters in 2029 and contracted utilisation could fall to 75% relative to today’s demand.

The Numbers: Part 3

Let’s now look at some sensitivity analysis:

Again, under the 25-year retirement assumption, the super-medium and heavy helicopter fleets achieve a cross over in ~2032. However, it’s perhaps more interesting to look at the outer edges of this analysis…

Under the 20-year retirement scenario, the size of the super-medium fleet would exceed the heavy fleet by 2029 and contracted utilisation would range between 89%-95% over the period to 2030. Beyond that, there would be a material deficit of aircraft available to meet demand, assuming no further ordering. 

Under a retirement assumption of 30 years, there would not be a fleet crossover based on the current order profile as the heavy helicopters would continue to ply their trade, and contracted utilisation would range between 75% and 94% over the period to 2030. 

Edges of the Envelope

Our modelling shows the sensitivity of the supply/demand balance to new deliveries and retirements. Let’s illustrate the outer edges of the capacity envelope:

• Persistent over-supply: Little/no new demand growth; all super-medium announcements get delivered, both firm and option; longer retirement assumption on existing equipment; etc.
• Balanced market: Demand grows; measured introduction of super-medium fleet; 25-year retirement assumption, etc.
• Under-supplied market: Demand continues to grow very strongly; new deliveries are limited; shorter retirement assumptions, etc.

Type retirement decisions will ultimately be driven by end user preferences and there will be a range of views on what is likely to happen. One national oil company recently extended the age of aircraft that they will accept out to 30 years. Other oil companies impose a 10-year limit at the start of the contract. The reality will land somewhere between these extremes and preferences will change depending on how desperate the end user is for capacity.

These limits can be arbitrary because helicopters see regular renewal/replacement of many key components throughout their lives, so much so that the concept of their ‘age’ starts to become murky. For instance, the S-92A has a 30,000 hours limit on the airframe, but today very few aircraft are above 20,000 hours and the majority of the fleet has not made it past 15,000 hours and will be able to fly for many more years. 

On this point, it should be noted that there is a difference between the leasing age, the economic age, and the technical age of a helicopter and that ‘retirement’ in the sense we are using it is not synonymous with the fixed wing understanding of the term; helicopters can move into tertiary or utility roles well beyond 30 years of age. 

Wrapping Up

Again, borrowing from game theory: there is a fundamental trade-off in dynamic games between short-term gain and long-term pain. The trade-off is a function of a ‘delayed gratification’ factor, also known as discipline to the rest of us!

Our analysis indicates that there is a need for discipline in the super-medium market. If the existing fleet is slow to be moved onto secondary markets, and if all firm orders and options are delivered, we could see over-capacity in the market potentially as far out as the next decade. 

Remaining positive, we shall return to this analysis and look at the upside implications given significant new demand growth, again a subject that didn’t feature so heavily at the Helicopter Investor conference.

If you would like access to bespoke analysis around the topics above, then please do contact us at the earliest opportunity.