Insights

How Soon is Now?

August 16, 2024

This week we are showcasing the average age of the fleets for the top 15 civil rotorcraft operators. We’ve used Cirium data to create a ridgeline plot visualisation, filtered as noted in the image footnote. This follows our Insight of 13 June about the retirement of older oil and gas crew change helicopters.

We commented in that Insight on the pros and cons of using of ‘arbitrary’ age limits for helicopter replacement. We can observe the impact of these limits on offshore-centric operators such as Bristow, CHC and PHI. These operators all have a mean fleet age below the top 15 average of 18.2 years.

However rotorcraft can undergo regular replacement and renewal of many parts, including key dynamic components such as gearboxes, rotor hubs and blades. Frequent maintenance supports their long, useful economic lives across primary, secondary and subsequent roles. This is evident in the fleet age distribution of some law enforcement fleets among the top 15 operators.

Like the fixed wing aviation industry, rotorcraft are increasingly utilising composite parts, which can create recycling problems at the end of their lifecycle – read more.

However, unlike fixed-wing aircraft, most rotorcraft do not have a set lifespan based on cycles or flying hours. With proper maintenance, they can be operational for many decades, somewhat alleviating the burden of recycling.

We hope that this analysis provides valuable insight into some of the factors that influence fleet management strategies and rotorcraft longevity.

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

Helicopter market could further tighten amid turbulence

August 6, 2024

Introduction

Gloomy economic data is pointing towards volatile times ahead.  The affect on the civil helicopter market will depend on whether the stock market sell-off transfers into the real economy, and also whether the helicopter supply/demand imbalance remains as-is on both legs of the equation.  Let us assess some dynamics.

Market Turmoil

Data released by the U.S. Bureau of Labor Statistics (BLS) on 2^nd August, 2024 revealed unexpectedly low employment growth in July, alongside downward revisions to June’s figures. This slowdown in the US labour market, which has now seen unemployment rise in four consecutive months, sent shockwaves around the world’s financial markets and raised concerns about a potential recession.

The ‘Sahm Rule’ has observed, without fail, that the initial phase of a recession has started when the three-month moving average of the U.S. unemployment rate is at least half a percentage point higher than the 12-month low.

This latest data also arrives at a point in time where there is considerable geopolitical flux. Aside from the fact that over half of the world’s population are voting in elections in 2024, there is growing unrest in the Middle East that many fear could escalate into a major multi-national conflict. 

Keep Calm and Carry On

What does this mean for the civil helicopter business? The sad reality is that neither economic turmoil nor major military conflict have been unusual phenomena over the last decade. We, therefore, have an understanding that:

• Mission-critical rotorcraft in roles such as EMS or SAR often operate under long-term contracts by end users (as long as ten years or more), making their demand relatively inelastic to short-term economic fluctuations. 

• The military sector has absorbed a growing share of manufacturing capacity over the last ten years. According to data from Cirium, the proportion of turbine helicopters delivered between 2014-2023 was 37% military and 63% civil. This compares to 30% military and 70% civil over the preceding ten-year period.  

• OEMs face not only heightened demand from the military sector but also persistent supply-chain problems that have been present since the COVID pandemic. These have resulted in lead times for new aircraft stretching out to over two years for some popular models.

• Utilisation of modern, twin-engine rotorcraft in mission-critical sectors is currently high, with many models effectively ‘sold-out’ and no spare capacity available.

• The energy sector, particularly oil, does see cyclical activity linked to macro-economic trends. While recessions typically lower oil prices, conflicts in the Middle East tend to drive them up. This makes the direction of future oil prices uncertain. 

• The civil helicopter labour market is particularly tight at the moment, particularly with regards to pilots, engineers and certification experts.

Missing Units

The civil helicopter market has experienced slower delivery rates for new aircraft since 2019, with delays influenced by several factors including specific conditions in various end-markets. 

• A key factor is that many production facilities are operating at full capacity, with military orders absorbing a substantial portion of available resources and consequently delaying civil orders. 

• If we use 2018 civil helicopter deliveries as a datum (the most recent completely COVID free year), we estimate that 326 helicopters were ‘undelivered’ from 2019 to 2024(f).

• This matches the fixed wing experience (Aercap estimate that ~2,100 narrowbody aircraft have been ‘undelivered’ over the same period and ~1,100 widebodies, from page 9 of their excellent Capital Markets Day presentation).  

• This all suggests that new-build, civil helicopter supply issues will persist for many years.

Summary

In summary, the demand-side picture for mission-critical rotorcraft remains robust, whilst supply-side issues may persist or intensify, depending on exactly how military demand impacts the OEMs.   

In terms of rates of change going forward, helicopter demand can be relatively elastic in certain sectors, and can be moved by oil prices or by events in the real economy.  Helicopter supply is relatively inelastic and cannot easily be changed.  Furthermore, even small changes will not reverse the magnitude of the undersupply from 2019 to 2024.

Given the likely slew of economic, political and geo-strategic data in the coming year, we will continue to monitor developments and keep you updated. 

It’s time for Action: Key Takeaways from the OEUK Offshore Aviation Conference

May 10, 2024

10 May 2024

At this year’s Offshore Energies UK Aviation Conference, held on 9^th May in Aberdeen, LCI Analytics MD Steve Robertson called for the aviation industry to tackle ever-growing sustainability themes, with a particular focus on CO2 emissions.

Energy Context

In his Pulitzer Prize-winning book ‘The Prize’, Daniel Yergin hailed the UK North Sea hydrocarbon development as “a technological marvel of the highest order” given the advances made there.  However, the present reality is that the oil industry is rarely viewed with the same affection and has a serious image problem. This is exacerbated by its significant contribution of around 15% to global CO2 emissions, according to the IEA (source).

The IEA notes:  “The production, transport and processing of oil and gas resulted in 5.1 billion tonnes (Gt) CO2-eq in 2022. These “scope 1 and 2” emissions from oil and gas activities are responsible for just under 15% of total energy-related greenhouse gas (GHG) emissions. The use of the oil and gas results in another 40% of emissions. 

Fortunately, oil and gas producers have a clear opportunity to address the problem of emissions from their activities through a series of ready-to-implement and cost-effective measures. These include tackling methane emissions, eliminating all non-emergency flaring, electrifying upstream facilities with low-emissions electricity, equipping oil and gas processes with carbon capture, utilisation and storage technologies, and expanding the use of hydrogen from low-emissions electrolysis in refineries.

Upfront investments totalling USD 600 billion would be required to halve the emissions intensity of oil and gas operations globally by 2030. This is only a fraction of the record windfall income that oil and gas producers accrued in 2022 – a year of soaring energy prices amid a global energy crisis.”

Support Services, Logistics, and Aviation

The available data confirm that aviation operations contribute a small percentage of overall O&G logistics emissions, with vessels typically accounting for over 90% of the sub-total. As an overall proportion of offshore oil and gas emissions, aviation accounts for a fraction of a percent of the total. Even so, it is still important for the aviation sector to take CO2 emissions seriously. 

In addition, operational emissions are not the only story here, as we also begin to understand and perhaps quantify the sustainability of helicopter manufacturing and also end-of-life part-out or teardown processes.  Fixed-wing markets have made great progress with the latter (e.g. with the PAMELA initiative in the early 2000s, and the rise of associations such as AFRA), and this is a topic we shall return to in a future post (you can read more in the interim here).

A topic that is not going away

Irrespective of personal views on a highly charged topic, major sustainability and responsibility initiatives are not going away.  (Many currently fall under the umbrella of Environmental, social, and governance [ESG]; a term which this author is not particularly fond of but will work with for now.)

The exodus of helicopter O&G lending banks after the 2015-2019 down, including the particularly damaging Waypoint bankruptcy, is not being helped, let alone reversed, with the rise of increasingly strident ESG policies.  This challenge adds to the others including supply chain problems, underinvestment in new capacity and the short-term contracting behaviour of oil majors via the use of ‘cancellation for convenience’ clauses.

A path forward

Drawing from LCI Analytics’ proprietary models, we explained at the OEUK Offshore Aviation Conference that contracting for ‘lowest cost’ leads to different outcomes than contracting for ‘lowest carbon’. For instance, simply switching aircraft types can help operators achieve an estimated ~20-30% reduction in CO2 emissions, under certain scenarios. 

This matches recent analysis from Airbus Helicopters indicating that fleet and type optimisation could achieve 16% reductions in CO2 emissions based on operations in Aberdeen, and up to 32% CO2 reductions in operations over Brazil’s Jacarepaguá region, near Rio de Janeiro. It also dovetails with Leonardo claims that “[The] AW189 enables up to 35% of CO2 reduction with respect to heavy class helicopters and up to 10% CO2 reduction with respect to direct alternatives in the same class.” Source.

A new fleet renewal cycle presents an opportune moment for the industry to rethink aircraft choices and embrace the new generation of efficient rotorcraft as replacements for legacy aircraft. 

Additionally, the work conducted thus far by OEUK and HeliOffshore in developing contracting practices should be embraced by the industry to facilitate sustainable investment going forward.  

Finally, the offshore wind opportunity was highlighted, with the UK poised to maintain its position as a ‘world leader’, presenting a compelling avenue for reducing CO2 emissions while enhancing safety and operational efficiency through rotorcraft solutions in logistics. Time will tell whether this vision translates into reality. 

Gone with the wind! A first look at the GWEC Global Wind Report 2024 

April 19, 2024

19 April 2024

The offshore wind industry has experienced tremendous growth this century but needs to treble again in the next decade to maintain the 1.5C pathways as per COP28 targets.

Some interesting macro and micro themes are contained within the GWEC Global Wind Report published this week (download here). Providing an overall summary of a 166-page report is beyond the scope of a blog post but four interesting themes caught our attention.

(Context before we begin: the Global Wind Energy Council is an industry trade body that combines its own views with those of other regional and country-level trade bodies and exists to further the interests of its members which include developers and OEMs. It publishes several regular reports on various aspects of the wind industry.) 

Observation #1: Humanity can do some really impressive things! 

Amongst all the noise, headlines and hysteria around energy, it is only fair to commend the historic growth of the wind sector, both offshore and onshore.

As GWEC notes: “[We] can see strong progress by the wind industry in commissioning huge volumes of renewable energy. 2023 saw the highest number of new installations in history for onshore wind (over 100 GW) and the second highest for offshore wind (11 GW). We passed the symbolic milestone of 1 TW installed globally and, at the current rate, we expect to hit 2 TW before 2030.”

Observation #1: Wind power generation needs to grow even faster 

As the GWEC continues: “Nonetheless we must acknowledge, firstly, that this rate of growth still leaves us far short of the tripling target and, secondly, that our sector has been tested by the tough macroeconomic environment. Global inflationary pressures, the rising cost of capital and fragility in the supply chain have affected our ability to ramp up in many regions.” 

The report itself does not explicitly state that it is behind target, rather it provides all the pieces of the jigsaw to arrive at that conclusion. COP28, and the stated commitment to “Commit to work together to triple the world’s installed renewable energy generation capacity” is mentioned many times through the report as is the implied need to increase wind energy capacity from 1TW to 3TW by 2030.  

The report provides annual capacity additions and mentions that 2GW will be achieved “before 2030” but does not plot installed capacity to 2028 or 2030. However, the latter can be achieved using the data provided in the report and extrapolating 2029 and 2030 using the compound annual growth rate provided in the GWEC forecast of 9.4%.  

On this basis, the overall installed wind generation capacity (onshore and offshore) can be expected to reach just over 2.2TW by 2030, falling some 800GW short of the tripling of capacity needed to support COP28 commitments. This implies that (a) other renewable sources will have to more than triple installed capacity to make up the difference; or (b) the COP28 commitment is simply unrealistic and undeliverable, ceteris paribus.

Observation #2: A bullish view of the USA 

Despite noting the lowest level of installation activity in 2023 in the USA “since 2014” and that “the USA has installed only 6.4GW of capacity in 2023, less than half the volume it had installed two years earlier”, the report is bullish on the prospects for the USA market. This is based on the expected impact of the Inflation Reduction Act. GWEC expects some 65GW of capacity to be added overall in the US between 2024 and 2028 and that the US Offshore market will be “the largest offshore wind market in the world after China and the UK in terms of new additions” with 10GW of capacity to be added in the next five years.  

The report does however highlight challenges in permitting development delays, cost inflation and supply-side constraints, in addition to the potential prospect of a change in government in this election year.

State-level opposition is also highlighted as an issue for the wind business. When trying to understand why this is the case, a look at pricing is important. It is often stated that an increase in renewables in the energy mix is driving higher electricity prices and whilst that may be true and observable in the data, we have also seen unprecedented global price fluctuation in natural gas in recent years, partially as a result of gas supply challenges faced after the invasion of Ukraine by Russia, which has impacted the US market in turn. Electricity prices are 30% higher than they were in January 2014 but natural gas prices are 37% higher as of March 2024 and natural gas has seen far more variability, at times reaching 74% higher. 

Observation #3: An increased dependence on offshore wind 

GWEC notes that 2023 was a record year for offshore installations with an additional 10.8GW of additional capacity installed, bringing the total installed capacity to 75.2GW. A “perfect storm” of “inflation, increased capital costs and supply chain constraints” caused interruption to prospective projects over the year. GWEC highlight the “rapid innovation curse” which in the offshore wind business has seen a race to build increasingly larger turbines. 

However, this presents a “risk to a sustainable supply chain” where the changes in the wind turbine design impact the rest of the supply chain which “needs to adapt and follow suit.” GWEC rightly suggests that larger turbines are not a goal to be continually chased and that more important to the industry is the standardisation of components and streamlining of supply chains.

GWEC data suggest an increasing reliance on offshore in the future with the rate of installations accelerating and out-pacing onshore, leading to an increase in the share of the installed base that is offshore from 7.3% in 2023 to 11.8% in 2028.  

Given that projects are getting larger and farther from shore, this bodes well for the rotorcraft sector where aviation delivers vastly improved safety, availability and emissions profile when measured against marine logistics.  

Observation #4: We’re going to need more helicopters 

In a previous wind report on the helicopter sector, we noted that: “Offshore wind has become a major global industry with many multi-billion-dollar projects being constructed every year. [Rotorcraft] has become a key part of the supply chain in construction and maintenance.” 

“Having analysed the costs and benefits of transporting crew offshore we believe that rotorcraft are a commercially-attractive proposition to support both the construction and operation of offshore wind farms. Furthermore, we understand that crew transportation by rotorcraft will offer the lowest CO2 per passenger mile of any currently available option and the highest availability to the end user, providing that latest generation aircraft are used.” 

We are in the process of updating our offshore wind model but would note that the previous estimates of ~US$360 million expenditure for both heli-hoisting and crew transfer via rotorcraft, and also the ~US$1 billion for the capex on ~100 extra helicopters over the next 10 years, will likely have to be revised upwards. 

Concluding Thoughts

Exponential scaling is not easy, but we are optimistic that the world is beginning to reach V1 (to use a fixed-wing term) when it comes to renewable energy and wind growth.

We will continue to analyse these trends as 2024 unfolds. Please keep in touch with our Insights on market dynamics for global wind power and the likely benefits for the rotorcraft sector. 

What is the offshore earnings season showing us?

April 11, 2024

11 April 2024

In recent weeks, many companies have been reporting results for year-end 2023, providing a useful opportunity to ‘health-check’ the state of the offshore industry, including mission critical rotorcraft operations.  

There are a myriad of published financial measures and we have chosen to focus on EBITDA (earnings before interest, taxes, depreciation and amortisation) for now.  It’s a useful, high-level measure that allows us to compare profitability over time and between sectors, and it also allows us to exclude fast changing interest costs for the time being. 

The offshore business is cyclical and has differing leads and lags across individual sub-sectors.  Some activities are more exposed to such trends usually because of service contract lengths or equipment lead-times. In periods of high oil prices and major investment in new capacity, oilfield services (OFS) companies generally see greater demand for products and services and can command higher prices if their products are in scarce supply. Conversely, profitability tends to suffer in lower demand periods due to greater market price competition in order to secure work. The last downcycle was unusual in that it also featured a global pandemic.    

Offshore rotorcraft operators typically have a mix of long term (3-10 year) contracts for platform support and short-term/ad-hoc contracts to support activities such as exploration well drilling, offshore construction or maintenance work and decommissioning. They may, in addition, provide services beyond oil and gas crew change including search and rescue (both related to oil and gas and also contracted by government).  Most contracts usually involve payment structures which involve a standing/fixed charge and then also a usage/variable charge, although exceptions exist.

What does the data show us?

We have examined the results of 51 companies which we have grouped into nine sub-categories as shown below. (Note: MMO = Maintenance, Modification and Operation; IRM = Inspection, Maintenance and Repair; EPCI = Engineering, Procurement, Construction & Installation.)

The chart data shows the impact of the initial oil price downturn in 2015/16 followed by, for most sectors, the Covid-19 pandemic in 2019/20. In the immediate aftermath of the oil price fall in 2015, there was pressure from oil companies to adjust pricing on key services and products, often mid-contract. During the pandemic many new construction projects were delayed as restrictions on people movements were a major issue.  However, offshore rotorcraft operators were not as financially impacted by the pandemic as other sectors, as they delivered a fundamental requirement to transport people offshore to existing platforms, and also to medevac ill patients. 

Very few OFS companies were structured to weather an extended downturn and also a pandemic. Of the 51 companies included in the analysis, it is notable that many have undergone financial restructuring and/or strategic moves to consolidate, enabling them to achieve cost savings and improve bargaining power. 

This applies to the rotorcraft sector where all three of the major international players – Bristow, CHC and PHI – have seen Chapter 11 restructuring, and both Bristow and CHC made moves to consolidate their position in the market. Bristow merged with ERA and acquired BHI, while CHC acquired most of the former Babcock offshore helicopter business.  

In 2023, we saw further improvement in EBITDA margins across almost all offshore sectors compared to the previous year, including in offshore rotorcraft operations. However, the rotorcraft sector still has some ‘room for improvement’ in terms of margins recovering to pre-downturn levels. The same applies to offshore contract drilling which saw EBITDA margins peak at just over 53% in 2015, but which last year averaged 22%.

Power gradients still exist

It is important to note that despite ~10-20% average EBITDA margins, offshore oil services companies, including rotorcraft, still lag way behind the absolute profitability of National and International oil and gas companies.  According to recent analysis, the four super-majors alone (Shell, Chevron, ExxonMobil and TotalEnergies) have generated over US$330 billion of Net Income from 2021 to 2023 (link).  Whilst some of these funds will be re-invested back into the industry to fund the energy transition, it is important to note that the absolute scale of the remaining financial resources does affect the bargaining power, negotiations and commercial terms offered to offshore oil services companies.

Concluding thoughts

Notwithstanding the power gradients, rotorcraft operators should be seeing improved margins and terms in 2024 as they absorb excess capacity and as market tightness persists.  They may also update and/or revise pricing in light of recent inflation.  Combined, this would offer welcome relief in light of the future capex and opex requirements of the (much delayed) investment cycle. 

Keep an eye out for further insights on these developments from LCI Analytics as the year progresses. 

Land of the Free, Home of the Brave: USA Offshore Rotorcraft Snapshot

April 4, 2024

04 April 2024

In 1948, Bell Helicopters flew the first flight out to an oil platform. A subsidiary company (Petroleum Bell Helicopters) took a Bell 47 ten miles offshore to a Kerr McGee platform carrying tooling that was needed by the oil company. A year later Petroleum Helicopters Inc (PHI) was formed and this year the company celebrates its 75^th anniversary.

The PHI of today looks very different to the company that started out operating three Bell 47s transporting crews for seismic work. The business now operates worldwide and in addition to the energy sector also has air medical, logistics and MRO activities. 

Context Matters

The general North American market comprises of ~8,000 helicopters, which makes it the single largest operating region in the world; Cirium data showing a consistent ~30% – 40% share of the globally installed fleet.   However, on-shore operations, particularly single- and twin-engine emergency medical services (EMS) missions, account for a large share of this fleet, followed by utility, parapublic and corporate/VIP uses.  The US offshore market itself comprises of ~200 – 300 units, which also makes it the largest single country share in the world.

The USA offshore energy sector has evolved dramatically, with thousands of platforms installed to produce oil and gas and an expectation now that thousands of wind turbines will be located offshore in future to produce low-carbon electricity. In 2023, Heliservice USA LLC operated the first flights to a US offshore wind farm and this sector is expected to grow rapidly (link).

Is the US Offshore Crew Transfer Market in Decline?

Until recently, it would have been difficult to argue against the view that the US offshore crew transfer market was in decline. The US offshore platform population peaked in 2001 at just over 4,000 structures, of which some 500 were permanently manned. Subsequent decommissioning of aging fields and structures has seen a reduction in the overall platform population with just under 1,500 remaining. The decline in manned platforms has been less dramatic with 428 still operating as of April 2024. 

Given that many of these structures were installed years before modern helicopter types were available, it is unsurprising that offshore helicopter operations look a little different to other, less mature, regions of the world. Single engine helicopters are not only still used but they account for half of the fleet – for many platforms the helideck size and weight capacity limits simply cannot support larger types. 

Despite the installation of many deepwater platforms over 100 miles offshore, near-shore operations still account for a significant proportion of the 428 permanently manned platforms, with 179 (42%) being located within 20 nautical miles of shore. 

Signs of Life in the Data?

Data from the Helicopter Safety Advisory Conference (HSAC) annual ‘Offshore Helicopter Operations and Safety Review’ show how helicopter use has fallen over time as the platform population has declined. However, in 2022 the data showed an uptick in helicopter usage and the 2023 report is due to be published this Spring. 

Detailed review by LCI Analytics of our own collated flight data suggest an increase in the Heavy segment of over 20% YoY for the number of US Gulf of Mexico (GoM) offshore flights, which, if indicative of a wider trend, should see the HSAC 2023 survey reporting another positive year of growth. 

The offshore wind business, meanwhile, has an impressive project pipeline of over 50GW of capacity. Despite some turbulence in the market in 2023 as a result of supply chain issues there remains a tremendous growth story that should ensure we see at least another 75 years of offshore helicopter operations in the USA. This is a topic we will be returning to in more detail in the future. 

In terms of types and segments, there are a number of older technology helicopters in operation in the USA and we would expect the country (as indeed maybe the case in Europe too) to focus on replacement of older generation helicopters, with emerging markets focused on new growth deliveries.  

The relative financial size and strength of the US operators, coupled with local banks (sometimes, very local) and operating lessors should support the financing of many of the new domestic deliveries.  However, we note that such financial pools are not as broad, nor as deep, as those that exist for the commercial fixed wing markets, so there is plenty of work to be done there. 

Concluding Thoughts

The US market is the largest in the world, both in terms of installed fleet and also offshore operations.  It will account for the lion’s share (~30%) of new helicopter deliveries going forward and, as such, any reports of its demise are greatly exaggerated.

As we look back to where it all began, we offer our congratulations to PHI on their anniversary year. We will follow the evolution of the USA offshore energy sector with continuing interest, and particularly so in this election year.  Please keep an eye out for further Insights from LCI Analytics on this critical issue of the evolving US offshore rotorcraft market.

Market Lubrication – Where are Oil Prices Headed?

March 28, 2024

28 March 2024

The oil price is a key macroeconomic metric. This price determines oil industry investment, underpins industrial and consumer goods, and represents the predominant fuel of transportation. Higher oil prices have historically been associated with a greater demand for helicopters and we shall explore the reasons behind this in a future Insight piece. 

This week we explore the current state and direction of oil markets and prices specifically:

1) 2024: The Year of the Soft Landing?

Changes in oil prices are usually explained by changes to the supply and demand balance. Key demand-side considerations include global economic growth and energy mix/usage, whilst key supply side considerations include investment in new production capacity and co-ordinated measures to manage output. 

At the tail-end of 2023, many industry commentators were forecasting that high interest rates, used as a measure to combat post-Covid inflation, would harm economic growth and lead to recession in many countries, with a ‘soft-landing’ being offered as a best-case scenario. 

As we approach the end of Q1 2024 it is looking increasingly likely that many countries will avoid recession, whilst starting to see interest rates ease as the rate of inflation slows; the US economy, in particular, perhaps being the best example.

The headline projections for economic growth from the IMF in January 2024 were perhaps a little underwhelming with global growth rates of 3.1% and 3.2% forecast for 2024 and 2025 respectively, versus 3.1% in 2023.  

However, upon closer inspection, the data shows the continued importance of Emerging and Developing Economies; they are forecast by the IMF to grow at 4.1% in 2024 versus 1.5% for Advanced Economies. The chart alongside shows the IMF forecasts for the G7 and selected other countries. The growth for China and India is particularly significant given that these two countries are home to over a third of the world’s population, and account for one fifth of the world’s oil consumption (link).

Key takeaway: Oil prices are unlikely to come under negative pressure from the effects of recession on oil demand. General energy security and independence goals, coupled with demand from emerging economies is likely to support prices.

2) OPEC & Capital Discipline 

In recent history, oil price crashes have been largely driven by demand shocks such as the Global Financial Crisis (GFC) of 2008 and the Covid pandemic of 2019/20. The 2014 oil price crash was different as it was driven by an excess in supply caused by aggressive shale drilling in the USA which over the last decade saw US oil production increase from 5/mbpd (millions of barrels per day) to over 12/mbpd. The USA has been the world’s largest oil producer for the last six years, overtaking both Russia and Saudi Arabia in 2023 where it set a new production record of an average of 12.9/mbpd – more than any other country has ever achieved. 

It has taken time for the world to adjust, but adjust it has.

A low oil price environment hurt key oil exporting nations including the members of OPEC (and now OPEC+ with the addition of selected other countries) and since 2014 they have been much more pro-active in curtailing output in an effort to support oil prices. The days of members engaging in ‘quota cheating’ (producing in excess of agreed quotas) are long gone and we now see the opposite behaviour in the market, with Saudi Arabia voluntarily announcing a production cut of 1/mbpd earlier this month.  

Oil companies have also been far more restrained in committing to new projects with overall global upstream capex in 2024 projected by Evercore to reach $500bn, a long way shy of the 2014 peak which saw capex exceed $700bn. Oil majors have profited well from managing costs and being cautious with commitments to new capacity.  

Whilst the average motorist might bemoan the impact of ‘high’ oil prices as they fill their cars, the reality is that current oil prices are not ‘high’ in the context of the last two decades. Neither does there appear to be much of a ‘geo-political premium’ with current oil prices slightly lower than they were before the invasion of Ukraine. Even relative to the last ten years, oil prices are only slightly higher than the inflation adjusted average of $72/bbl.

Key takeaway: For now, at least, it appears oil producers have collectively learnt and understood that “drill, baby, drill!” does not lead to good outcomes overall for oil producers. ‘Capital discipline’ is helping to keep oil supply under control and to support prices at a level where they are high enough to ensure good returns for producers but not so high that they tip consumers into recession.

3) What is the market expecting?

Structural analysis from the US Energy Information Administration shows a tightening gap between supply and demand through 2024 and into 2025, which according to Bloomberg and MUFG Research will offer support for oil price levels of at least $80/bbl. 

As they note: “We believe that [global oil markets] will remain supported in 2024, led by tight micro fundamentals (moderate deficits), OPEC+ driven carry and effective hedging value against negative geopolitical supply shocks. While higher non-OPEC+ supply or lower GDP are downside risks to prices, we estimate that Brent would remain close to USD80/b unless OPEC+ became less assertive.”

The collective expectation at the start of 2023 from the EIA and a basket of investment banks we have selected and shown below was for Brent oil prices to average $94/bbl. The outcome for 2023 was an average of $84/bbl – 11% lower than expected. 

The collective expectation at the start of 2024 for the year from the same institutions is $84/bbl – a little softer than expectations last year but this would still represent a decent outcome for the offshore business generally. At these oil price levels new multi-billion-dollar investments offshore can pay back in as little as 3-5 years.

Key takeaway: Oil demand is expected to outstrip supply through 2024. Whilst there may be some price softening in early 2024 relative to the strong 2023, even at current prices of ~$80/bbl, we should still see robust levels of commitments to new offshore projects.

LCI Analytics will come back to this topic soon and will assess how these oil market trends will impact on the demand for helicopters. In addition, we shall explore growing ESG and sustainability dynamics and how they are beginning to affect the sentiment of this globally influential marketplace.

Please keep in touch with our Insight series to see the key analytics that we can offer.

Four Ears On – HAI is Back in Anaheim 

February 23, 2024

23 February 2024

Mickey and Minnie Mouse will once again welcome the helicopter industry to Anaheim this year and the streets in the immediate vicinity of Disneyland will be populated by a curious juxtaposition of fun-seeking families sporting clip-on ears, and anorak-wearing helicopter professionals from around the world.

The HAI of Anaheim 2020 narrowly preceded the truly world altering Covid-19 pandemic, and so it’s worth recapping some of the lessons and observations since then:  

1. It’s easier to fly a helicopter on Mars than it is to certify one on Earth

At HAI 2020, NASA presented a preview of the Mars Helicopter Scout mission that was scheduled for 2021.  The ambitious plan would involve the helicopter hitching a lift underneath the Perseverance rover before conducting solo missions in the thin, Martian atmosphere (this necessitating the blades to achieve ~2500 RPMs, or about 10 times faster than what is needed on Earth). It was a tremendous success and ultimately flew a total of 72 flights until eventually being grounded in January 2024. 

At the same HAI event, Kopter announced new orders for the SH09 along with an expectation of “joint EASA / FAA certification by the end of the year”, Sikorsky announced an S-92A+ upgrade kit to be “ready for 2023”, Bell displayed a 525 on its stand and stated the programme was in the “final stages of testing” and Airbus stated that the H160 would be certified “in the next few weeks” with Shell expected to be one of the first operators. 

At the time of writing, nearly all of these types are still yet to be certified (with the exception of the H160 which was certified by the FAA in June 2023 – albeit not yet flying passengers for Shell), only going to highlight the challenges that OEMs face when introducing new aircraft. Perhaps there are some lessons here for the nascent advanced air mobility market?

Anyway, despite headwinds faced universally by OEMs with new aircraft programmes, there have also been some outstanding successes. 

Airbus’ H145 model has seen over 200 deliveries since HAI was last at Anaheim according to data from Cirium (see chart above), and the latest D3 model launched in 2019 has proved popular, particularly in EMS markets and in the emerging offshore wind business. The H175 super-medium model has in the last four years seen a meaningful improvement in availability as a result of an ongoing maturity programme and the type has seen double-digit deliveries over this period including into new territories such as Brazil and Malaysia. 

The over-hang of un-utilised Sikorsky S-92As, which stood at 34 uncontracted aircraft in 2020 has now been absorbed, with just two uncontracted aircraft at the time of writing, which is good news not only for owners of S-92s but also for the super-medium OEMs which were struggling to compete with surplus S-92s being offered into the market at lower-than-usual rates. 

The ubiquitous AW139 programme goes from strength to strength, having been in production for over 20 years now and with over 1,000 units now in civilian service and on order as part of a global fleet of over 1,200 units with more than 3 million flight hours flown. The modern variants have remained in-demand throughout the years since 2020.

The Leonardo AW189 has proven to be a robust design with several of the fleet leaders reaching TBO dates on key components such as main gearboxes – which have run for over 5,000 hours without issue. The type has been exceptionally successful in new SAR tenders, being selected since 2020 for the Irish Coastguard, the second-generation UK SAR programme, the Dutch Antilles SAR service and the Netherlands Coastguard, as well as in the oil and gas markets.

2. When the going gets tough, the mission critical rotorcraft get going

In contrast to the commercial fixed-wing market, Covid-19 highlighted not only the ability of rotorcraft to perform secondary HEMS missions, but also the ability of the entire rotorcraft supply chain to react and adapt. This ranged from deploying PPE for staff and passengers, the re-arrangement of terminals and flight timings, modifications to aircraft including barriers between crew and passengers and even dedicated ‘Corona-copters’ for the transfer of unwell offshore workers from platform to shore. This ensured that critical services such as providing energy and power to the population could continue uninterrupted. 

Furthermore, the incidence of major climate events such as flooding and wildfires has shown the value of rotorcraft in saving lives and limiting environmental destruction. A paper by the UN Environment programme in 2023 forecast that the incidence of extreme fires would increase 14% by 2030 and go up 30% by 2050. The helicopter market continues to innovate and to bring forward new solutions including cost-effective retrofit techniques such as those used in the Helitak system. If you are visiting LCI at HAI 2024 the Helitak stand is adjacent to it and well worth a look. In early 2023 oil and gas operators including PHI and CHC rescued hundreds of stranded people and delivered much needed aid in Kimberly, Western Australia following floods described as the “worst flooding Western Australia has ever seen”.

3. Despite everything, the long-term optimism was justified

A positive market outlook amongst the lessors was a feature of HAI 2020 with Crispin Maunder of LCI noting that “our view of this market is that it’s coming off the bottom—certainly, the trend is positive” and Milestone CEO Pat Sheedy remarking on a “positive demand outlook” despite “structural issues” with how aircraft are contracted, such as 60-day ‘cancellation for convenience’ clauses, a major challenge to long-term investments in new aircraft. 

Despite the interruption to the industry during the Covid outbreak, this positivity proved justified and the lessors that were impacted by the severe industry downturn are now facing supply shortages themselves. Data from LCI Analytics indicates that the number of contracted S-92 aircraft has increased from 168 to 187 since 2020, and that S-92 lease rates are up by 48% over the same period (albeit we note that interest rates have also risen over the period too).

These developments mean that we can approach HAI 2024 with a sense of optimism. Demand drivers in the mission critical rotorcraft sectors are positive with the underlying levels of fleet renewal in recent years having been low. The gradual implementation of latest safety standards offshore and the ongoing modernisation of the rotary fleet should present opportunities for the sector in the years to come.  Of course, the industry must address supply-side, supply-chain and also financing challenges, and it must also endeavour to achieve growth in a disciplined and pragmatic manner if the market is to be balanced and sustainable in the future. Notwithstanding such challenges, perhaps the hardworking helicopter executives will find a moment to wave back at Mickey and Minnie!

Warmest regards,

Steve