Business aviation surges and helicopter market stabilizes
Syed Zaidi, principal aviation analyst, and Sara Dhariwal, valuations manager at Ascend by Cirium.
Business aviation had a remarkable 2021, putting behind it any mid-2020 pandemic induced weakness, and going from strength to strength. The pandemic continues to subdue commercial aviation but the appeal for business aviation as a hassle free and safe way to travel has remained strong. The helicopter market has also proved resilient, despite ongoing challenges in some markets like oil and gas support.
After some large magnitude increases in Market Values over the course of 2021, we expect 2022 to bring some stability. If values continue to increase beyond logical understanding (once factoring in a continued supply/demand dynamic), we may be entering what is termed “bubble territory”. We are already seeing some aircraft values “level out”. We do note that a wider range of institutional investors are eyeing up this sector and Ascend by Cirium is helping those with our advisory offerings including the Value Time Series product, enabling an assessment of historical values back to the pre-global financial crisis period. Importantly, financiers continue to be disciplined and are reluctant to finance premiums paid above market pricing, in stark contrast to the previous downturn.
Secondary market activity was very strong through 2021, but is unlikely to grow further this year. This may largely be due to limited supply of aircraft, rather than any notable demand slowdown.
Shared-use fleets in charter and fractional roles continue to grow to meet increasing demand for business jet travel. As the pandemic starts to become more manageable, we may start to see some demand from corporate operators return as well, in line with expectations. There is also potential for demand returning in markets outside North America, which have remained subdued through the pandemic. We expect that brokers will have to get even more creative than they have been in the past year to source inventory.
Business jet utilization is seeing activity not observed since before the global financial crisis. With only limited growth in the size of the fleet, this points to increased utilization of individual aircraft which is being attributed to the rise in charter demand. We do feel, however, that that individual aircraft still remain under-utilized, with departures still averaging around 17 per month per aircraft, below peaks of over 20 per aircraft per month before the financial crisis. This increased demand may also lead to some charter rate improvements, but the rate increases will have to remain manageable as many new customers are coming from flying commercial airlines and may be more price sensitive.
For the manufacturers, book-to-bill ratios are likely to return closer to 1 by year end, helped by ramp-ups in deliveries for existing types as well as new types entering service. However, with overall utilisation across the global fleet up and young preowned supply minimal, demand may trickle down to new orders as older high-time aircraft may start to show their age and require major maintenance, prompting new aircraft purchases. Global supply chain shortages continue to hinder significant production rate hikes, therefore constraining supply and giving manufacturers more control on new pricing. Discounts from list prices are already starting to be curtailed, with some newly delivered aircraft being sold at prices higher than manufacturer list pricing due to immediate availability.
Despite COVID-19 having put several other sectors in damage control mode, participants across business aviation remain cognizant of improving the overall carbon footprint using synthetic aviation jet fuel (SAF) and offsets. Furthermore, manufacturers remain committed to certifying the use of 100% SAF in current production aircraft, improving engine efficiency as well as running flight test programmes for aircraft in development on SAF. Industry organisations will continue to push for more SAF production to improve accessibility to the fuel type.
The recent Airbus Helicopters 2021 results announcement showed that the helicopter industry is recovering well from the slowdown experienced during the COVID-hit 2020. Airbus saw increases in both orders and deliveries, including its first H160 being handed over.
Overall, the helicopter industry has remained relatively stable throughout the pandemic as the sectors in which it operates are diverse and have different demand drivers to that of commercial fixed wing markets. Yet challenges remain, with some countries still being heavily impacted by COVID-19 restrictions.
In 2021, we observed some operator and lessor consolidation and M&A, with CHC acquiring Babcock Offshore, AerCap absorbing GECAS and LCI acquiring Nova Aviation Capital Ireland. Some consolidation is likely to continue during 2022 and will benefit the market in terms of stability of operations. We are likely to see some further interesting partnerships forming.
In 2021, overall transactions in the industry were only 10% behind the number observed in 2019. Unsurprisingly, it is the strong corporate/ VIP sector which is seeing the largest share of all transactions with Leonardo’s AW109, Airbus Helicopters H125/AS350 and Robinson R66 at the forefront.
In terms of other markets, the parapublic sector is expected to continue its steady growth with new deliveries driven by the Airbus five-bladed H145 in the EMS sector.
The industry is also waiting in anticipation for the allocation of some major SAR contracts, such as the UK Coast Guard and the Irish Coast Guard and possibly some replacement decisions of the fleet of some major government operated fleets elsewhere. Bristow has already won the Dutch SAR contract.
Significantly more influential on the market for the medium to heavy sectors, is the continuing uncertainty in the oil and gas market, partly infused by the pandemic, including the sector’s challenge to recover six years after the downturn.
The market has worked very hard to churn through the excess that resulted from the downturn with the better machines still working, some repurposed and/or parted out, while others were soaked up by the corporate and utility sectors. As these avenues have been explored and used where appropriate, it has to some extent been saturated.
The fleet that was delivered at the height of the upturn is aging and coming off current contracts with a very limited market to be deployed to. While assets can be repurposed and deployed for alternative missions, the opportunity is relatively type specific. While some types like the Bell 412 have made an easy transition, other types are struggling. It generally true that the larger the helicopter, the more expensive and time-consuming repurposing it will be. It is challenging to ascertain a real return on investment, as any returns are likely to be long-term.
Storage rates have been stubbornly hovering around 20% across the offshore configured helicopter fleet, compared with 5% at the same time in 2014 and such ratios highlight the supply/demand imbalance. It seems high time to start making some decisions with regards to the excess that exists. The best case scenario would be that demand increases, allowing the fleet returning to service, versus reducing excess supply through retirements. However, the increasing environmental pressure on the fossil-fuel industry adds to the uncertainty.
In 2022, we are likely to see accelerated progress towards a more sustainable helicopter market through alternative fuel solutions, as well as alternative technology. Several OEMs made their first helicopter flights with SAF during 2021 and Airbus for example is conducting testing with the aim to eventually allow using 100% SAF. There is increasing focus on Advanced Air Mobility and the eVTOL programmes, which add a new dimension to the rotary-winged space, with more involvement from the major OEMs.
To access the full Q1 Viewpoint report, contact Ascend by Cirium.