The WHO has declared the spread of Coronavirus (Covid-19) a global pandemic and we are all bearing the brunt of an information overload from multiple sources via the media advising us how to live, work and travel. BA today announced it will cancel 75% of its flights with Easyjet grounding 100 of its 344 aircraft across Europe. Scheduled and charter fixed wing passenger flights the world over cannot operate.
Against this dramatic background, it is right to question whether and how Covid-19 and the economic turbulence it has created will affect the commercial helicopter industry. The good news is that any reaction is not usually immediate; future operator investment decisions when fleet expansion or ageing asset renewal are considered may though be influenced. Helicopters are specialist, role specific and private. Other than utility categories such as passenger transfer or sightseeing, the helicopter market will not be hit as dramatically as the fixed wing aviation market by current restrictions on tourist travel.
Commercial helicopter utilisation and value is primarily measured against the high end, larger heavy helicopter class that supports the offshore oil and gas industry. Here, interest is gauged by the number of offshore operational platforms in use at the time plus the price per barrel of oil. The original drivers, oil and gas, are today joined by wind turbines, coastguard and search and rescue services: together they allow us to calculate the number of helicopters needed at any one time. Although super medium category helicopters, only 3 or 4 years old as a class, are beginning to nibble away at some roles formerly fulfilled by offshore-configured heavy helicopters and reduce operating costs, they have a hefty price tag.
The price per barrel of oil heavily dictates demand for commercial helicopters. When oil prices are high, such as the $100 per barrel seen in 2014, approximately 20-25% of all support helicopter utilisation is directed towards prospecting for new sources of oil and gas. During oil slumps when prices can sink as low as $25 - $30, exploration for new supplies is deemed unnecessary and helicopter fleets are closely scrutinised for pruning opportunities as demand shrinks. Lower prices for used helicopters results.
Currently, the Saudi Arabia V Russia oil production price war is affecting OPEC's stability. With neither nation being prepared to cut production, an oversupply due to falling demand from China has sent prices plummeting. March 15th saw the biggest one-day crash since 1991's Gulf War and Goldman Sachs predicts oil prices could slump to $20 a barrel.
Short term therefore, Covid-19 will adversely affect heli-tourism and private, VIP helicopter use but the pandemic's impact will be less severe than that felt by short- and long-haul fixed wing carriers. The heavy and super medium helicopter asset classes will however be significantly hit by the recent plunging oil value. Offshore equipped and configured support helicopters will suffer most from GDP contraction; reduced investment in prospecting for new oil and gas resources will cut utilisation by 20-25% and stalled growth will result.
IBA has no immediate plans to adjust asset values in answer to a presumed contraction in GDP growth however. A potential decline in asset numbers and values will be balanced long term by market demand and the ability to meet the costs of production.
An online IBA Helicopters webinar is proposed for late spring 2020 to discuss the effects felt across the rotary wing sector of the aviation industry. For more information about our Helicopter valuations and advisory services, contact [email protected]
IBA's Alastair Fallon, Helicopter Aviation Analyst, joined the Helicopter Investor Town Hall Forum on Tuesday 9th June. Within the 60-minute session, the panel of industry experts assessed the health of the helicopter market and discussed how Covid-19 is affecting the different heli markets worldwide.