As a result of our fourth quarter pricing review of The Official Helicopter Blue Book®, resale pricing adjustments were made to the following models.  To view the adjustments made, please log into your account and visit the resale trends page for each model.

Results of January 6, 2015 resale pricing review

Listed below are models that had a pricing adjustment since the review on January 6, 2015.

Sikorsky 330J

Sikorsky S61N

Airbus 332L1

Airbus 332L2

Resale pricing adjustments are based on actual sales transactions and current market conditions such as overall trends in asking prices and increase or decreases in supply, demand, and sales volume. We obtain sales pricing data from owners and operators, lenders and lessors, brokers and equipment manufacturers worldwide.  With the information gathered from many different resources, we review each model covered in The Official Helicopter Blue Book®.  While we do review all models each quarter, frequently traded models are updated as soon as they begin to show variation from the previously published page.  Stay up-to-date on resale pricing changes by subscribing to The Official Helicopter Blue Book® www.helivalues.com.  

As usual, we are interested in any recent sales transactions you would like to report. Every time you buy, sell, lease, finance, or trade a helicopter, and report this information to us, you help update The Official Helicopter Blue Book®. Sales transactions can be reported by emailing [email protected].  All information received is held in the strictest confidence and is only used for our internal review.  The next pricing review is scheduled for April 1, 2015.

To view the most recent changes to the resale pricing for these models, login to your account, choose a model and then the Resale Trends tab. 

General Market Comments

HeliValue$ continues to see an increasing inventory of light single engine helicopters on the world market, especially the AS350 series. With the decline in corporate and VIP markets and the introduction of more efficient light twins, there has been a steady increase of older light twins like the AW109 into the used marketplace. Despite recent panic over declining oil prices, there continues to be strong demand for medium and heavy offshore machines. Due to the low supply of offshore configured machines and the steady decline of the VIP/Corporate market overall, we continue to see discounted prices for the used medium and heavy VIP/Corporate configured aircraft.

There has been an increasing number of inquiries about the oil price decline and its effect on the helicopter industry. Recently one of our appraisers Ben Moore, addressed these concerns in an article emailed to our subscriber and client base on February 17, 2015. If you're interested, you can find a copy of his article here.

Please feel free to email with any questions or comments.

Lindsay Higgins, HeliValue$, Inc.

Expanded regulation and concern over past problems have increased the scrutiny auditors are applying to residual reviews, particularly for banks. Shawn Halladay and Carl Chrappa of The Alta Group discuss the impacts additional scrutiny has, including amplified levels of detailed information and external appraisals that auditors are requiring. The authors say lessors can use this increased scrutiny to create opportunities to better manage portfolios and maximize the value of existing residuals.

The accounting rules require lessors to assess their residuals and operating lease assets for impairment at least annually. Although the impairment review is a regulatory requirement, it also can be used as an opportunity to increase the bottom line. This article will examine the residual review process and how it may be expanded beyond a regulatory exercise into a risk management and marketing tool.

Background

There has been a decline in fair market value (FMV) leasing activity and leasing products have become commoditized, yet equipment values still remain an important component of the industry. These values come in several forms including residual positions, collateral protection and loss given default (LGD) curves.

A critical aspect of residuals from a financial reporting perspective is how the booked residual drives the income from the lease, as it affects not only the amount of income recognized over the life of the deal but also when that income is recognized. Consider, for example, a four-year lease with a market-based payment of $240,000 per year. As can be seen in Table One, the residual that is booked directly impacts the income to be recognized.

This is true whether the lease is classified as operating or direct financing. For this reason, Topics 840 and 360 (Leases and Property, Plant and Equipment, respectively) of the Financial Accounting Standards Board (FASB) Codification require that residuals and operating lease assets be assessed for impairment on an annual basis. This assessment sometimes is referred to as the residual review or, from the asset manager’s perspective, the FASB audit.

The objectives of the residual value review are to verify the future economic benefit of the asset and make any necessary adjustments so that the associated income is reflected in the proper period (upward adjustments are not allowed, however). This residual review, although accounting-driven, is an integrated exercise that directly involves asset management and IT, along with the outside auditors and external asset specialists. Portfolio management, sales and tax, among others, also may become part of the process.

Accounting Role

The accounting department, of course, has the primary responsibility for the annual residual review as it is a key element of the annual audit. At a high level, this process consists of determining the latest end-of-lease market values, comparing those fair market values to the booked residual values, and then making any necessary adjustments to the asset values.

In the past, many companies identified potential impairments by asset group, such as forklifts, trucks, or office equipment. They would look for indicators of asset impairment such as a significant decrease in market value, a dramatic change in asset use, an adverse change in legal or regulatory factors, or costs in excess of original expectations. The Alta Group’s experience, however, indicates that this practice is shifting towards a more granular approach, which will require better documentation, rationale, systems and stronger asset management resources (either internal or external).

If there is any “other than temporary” decline in residual value prior to lease end, an impairment must be recognized. As a case in point, after a new generation of disk drives entered the market, the transactional data showed a large decline in the value of the older drives. Several third-party asset managers, without the daily transactional pressures of internal asset managers, correctly predicted that the decline was only temporary as the manufacturing capacity was insufficient to meet demand, which not only drove prices back up on the older drives, but eliminated the need for an accounting write-down.

Asset Management Role

While it is the accountants who collect the data, perform the comparisons and book any adjustments, the most critical aspect of this process involves establishing the fair values of the equipment so these values can be evaluated against the booked residuals and operating lease assets. Strong internal or external asset management resources, therefore, are a necessity in residual reviews.

Given the important role they have in the residual review process, what essential skills must asset managers bring to the residual value review? The answer will depend on whether residual values are being evaluated internally, by an outside party, or a combination of the two. An outside asset manager, for example, should have broad experience with the equipment types, proper appraisal industry credentials, independence, and a large data base of asset value performance.

The choice of using an internal or external resource is up to the individual lessor, although it is the internal asset managers who primarily will interface with the auditors. Trends in the equipment leasing industry, regulatory requirements, and audit practices, however, point to an increasing role for third-party asset management support. This increasing role is based on several factors, one of which is headcount, as some lessors are outsourcing their asset management function. Other factors include auditor and regulator behavior, and the resources available to obtain data.

Opportunities

Residual value reviews are not just an accounting exercise and, hence, a cost. They also are a valuable management tool, so savvy lessors are using these reviews to also create economic benefit. The key is to recognize what these benefits are and tweak the processes so that both the audit requirement and economic goals may be met.

Some lessors derive so much benefit from doing so that they conduct residual reviews on a quarterly basis. While this exercise relieves some of the audit pressure at year-end, the real purpose is to identify market opportunities and threats. Whether conducted annually or on a more frequent basis, the residual review allows management to identify factors affecting asset values that might not have been on the horizon at the time the residual was set.

By forcing asset managers to look ahead at business trends and potential regulatory changes, the residual review can identify opportunities to introduce programs that either accelerate returns or incentivize lessees to extend their leases. These actions can be taken to enhance residual profits or mitigate portfolio risk, depending on how the identified factors affect residual values.

Residual reviews also can be used to map out projected collateral protection, manage capital allocation, or calculate LGD factors. Alta recently completed a comprehensive residual review for a major bank lessor that went well beyond FMV lease residuals to cover almost its entire portfolio. In this engagement, we addressed all the client’s leasing products, including full payout and TRAC leases (both full and split). This bank lessor used the required residual review process to complement its asset management efforts, gain supplementary, outside opinions on their internal views of asset values, and identify collateral gaps.

Conclusion

Expanded regulation and concern over past problems have increased the scrutiny auditors are applying to residual reviews, particularly for banks. This additional scrutiny has amplified the level of detailed information and external appraisals/opinions that auditors are requiring. On the positive side, lessors can use this increased scrutiny to create opportunities to better manage the portfolio and maximize the value of their existing residuals.

Shawn Halladay ([email protected]) brings 30 years of experience as a lessor, trainer, consultant and auditor to his position as managing director and leader of The Alta Group’s Professional Development practice.

Carl Chrappa ([email protected]) brings 30 years of expertise in equipment management and appraisals to his role as senior managing director and leader of The Alta Group’s Asset Management Services practice. For more information visit www.thealtagroup.com.

Your company is being audited. You’re purchasing a company and need to allocate the purchase price across the assets. You’re getting divorced, or married, or your spouse passed away. You bought a helicopter. You sold a helicopter. You donated a helicopter to a museum.

Whatever the reason, you have a transaction that needs to be reported to the IRS.

The IRS has defined criteria for a qualified appraisal and a qualified appraiser. A “qualified appraisal” is one performed by a “qualified appraiser” in accordance with generally accepted appraisal standards.

In the US, Canada, Australia, Japan, and several other countries, those “accepted standards” are the Uniform Standards of Professional Appraisal Practice (USPAP). In most other countries they are the International Valuation Standards (IVS) or the RICS Red Book. This is your first checkpoint – if your appraiser doesn’t comply with the standards, look for another appraiser.

Your second checkpoint is discovering whether your appraiser is qualified.

A “qualified appraiser” has either earned an appraisal designation from a recognized professional organization, or has similar education and experience, in the type of property subject to the appraisal. S/he must “regularly” perform appraisals for hire. And s/he may not have been prohibited from practicing over the past 3 years.

A helicopter is defined as a piece of personal property in the specialty of “machinery and equipment.” There are very few recognized professional appraiser organizations covering machinery and equipment: American Society of Appraisers (ASA), Association of Machinery and Equipment Appraisers (AMEA), and Royal Institution of Chartered Surveyors (RICS) come to mind.

Of these organizations, two have at least one helicopter appraiser: ASA and RICS. Both meet the minimum education and experience requirements of the IRS. Appraisers accredited by either organization have passed multiple courses in appraisal principles, the accepted standards of their organization, ethics examinations, peer reviews of their appraisal reports or case studies, and have at least five years of appraisal experience. Both organizations have mandatory Continuing Professional Education requirements. The ASA further has a specialty designation just for aircraft (yet another test to be passed before accreditation.)

The appraisers and analysts at HeliValue$, Inc., are all either accredited by the ASA or are in training for their accreditation. We have two Accredited Senior Appraisers, one Accredited Member (who is very near advancement to Senior status), and two Analysts still in coursework.

Sharon Desfor, ASA, MRICS, is president of HeliValue$, Inc., the world’s most trusted helicopter appraisal firm, and publisher of The Official Helicopter Blue Book®, the accepted standard for helicopter resale pricing information. Sharon is an Accredited Senior Appraiser of the American Society of Appraisers (ASA) and a Member of the Royal Institution of Chartered Surveyors. She currently serves on the ASA’s Board of Governors. Sharon is past Chair both of the Helicopter Foundation International and of the Finance & Leasing Committee of the HAI. You can find her profile at www.linkedin.com/in/sharondesfor.

In Part 1 we defined micro elements are those which are inherent in the helicopter itself. Let's then define macro elements as those which are external to the helicopter and are imposed by the general economy: supply and demand, industry growth or contraction, client growth or contraction, availability of capital, and force majeure.

Macro Elements of Value

Supply and demand

This is an easy concept that we all use every day. In spite of the P/Q/E Marshall graphs you studied in Economics 101, most of us think in simplified terms that work well enough for this topic: More demand and less supply = higher prices; less demand and more supply = lower prices.

From 2004-2008, the helicopter industry enjoyed its own value bubble. With the advent of abundant capital, helicopter operators were able to finally begin fleet replenishment – replacing 10-20 year old machines with newer, more modern aircraft. The ability to get easy financing let to a sort of hysteria in the market, with orders for new helicopters doubling and then tripling in the space of just a few years. This in turn led to speculators placing orders, and then selling their "positions" or serial numbers, at or before their scheduled delivery date. When no positions were available and manufacturer backlogs for popular models exceeded two years, operators began paying increasingly higher prices for used helicopters of the same model. By mid-2008, the extremely popular Bell 407, for instance, cost US $2.4MM from the factory, with a 3-year delivery wait – or $2.7MM off the street with fully half of its component hours used, but available for delivery immediately.

In the last half of 2008, the price of crude oil fell from $130 bbl to nearly $30 bbl. Oil companies reduced their production, which reduced the number of helicopters needed to fly to the rigs. The flow of helicopters entering the resale market increased almost daily, and where once an operator had to knock on doors with cash in hand to find a viable Bell 407 to fulfill a contract, today there are more than 60 of them available with asking prices starting at $1.5MM and with average marketing periods of up to a year.

The economic principle of supply and demand differs from, but is closely related to, the economic principle of substitution which states that a prudent buyer will pay no more for an asset than it would cost to replace it with an equivalent property. So if you need a Bell 407 today, and one is available on the market for $2MM, you would not pay $2.5MM for an equivalent 407 (one with the same component status and equipment).

Industry and client growth and contraction

Popular uses for helicopters include offshore oil support, emergency medical transport, Electronic News Gathering, firefighting, construction, logging, aerial patrol, executive transport, mining, seismic survey and support, sightseeing, fish spotting, ranching, and agricultural spraying. These markets all play a role in determining marketability and therefore value as well.

By far the largest driver of the helicopter market is offshore oil support. While not on a par with jets or business aircraft, the offshore operators fly far more than any other helicopter operators. For example, in the Gulf of Mexico, in an area only 125,000 square miles, there are almost 500 helicopters, supporting over 5000 platforms, and making 2572 trips per day. This comprises almost a million flights per year, carrying 2.33 million passengers per year in 334,000 flight hours. The North Sea, Brazil, and several other oil fields require even more helicopter operations. The typical offshore helicopter flies 1200 hours per year. When you consider that each helicopter requires from 1 to more than 5 hours of maintenance for each hour of flight time, that's an extraordinary effort.

The oil industry is stretching farther and farther, to big rigs 150 miles offshore. To make these trips, helicopter operators are buying ever-larger helicopters with long-range fuel reserves, sophisticated electronic cockpits, and large payloads. These operators are moving away from short-range machines costing one to five million dollars that can carry 6-10 people, and into heavy twins that cost up to twenty-five million dollars and can carry up to 20 passengers. In spite of the viability of this market and the upward trend in oil prices, contracts for crew transport have not been increasing as quickly as hoped, leading to the placement of yet more helicopters into the resale market.

Another significant market is Emergency Medical Services. The EMS sector alone uses over a thousand helicopters ranging from million dollar single-turbine machines that barely fit a single stretcher up to sixteen-million-dollar medium twins that can carry several patients at a time, or can instead be fit with a flying emergency room. This end of the market is undergoing constant mergers and acquisitions, leading to consolidation in the hands of very few operators.

A new, rapidly growing segment is Search and Rescue. SAR contracts are typically for ten- to thirty-million-dollar medium- to heavy twins with enough power to lift a great deal of sophisticated mission equipment including glass cockpits, icing conditions equipment, life rafts, Doppler auto-hover, rescue hoists and winches, emergency flotation gear, rappelling devices, and crews of 5 or more. "Rapidly-growing", however, refers to dozens, not hundreds or thousands, of SAR helicopters in the world at this time.

Availability of capital

In 2008 the liquidity crisis first hit aircraft financiers. Changing bank and government regulations, risk level definitions, and capitalization requirements decreased the available money supply, borrower delinquencies, defaults, and bankruptcies increased dramatically in the two years leading up to the liquidity crisis. Helicopter industry consolidation led to lenders' and lessors' portfolios becoming increasingly concentrated, leading to loan refusals simply because the customers had exceeded their allowable portfolio credit limits. Equipment finance company consolidations have led to a vanishingly small number of financiers who fund helicopters. On the bright side, private equity and investment funds have entered the helicopter finance market, allowing transactions to proceed while the finance industry resets itself into new configurations for the new economic and regulatory realities.

Force majeur

The impact of force majeur on helicopter operations, and therefore helicopter values, cannot be predicted, but can be considerable. As an example, look at the Gulf of Mexico's Deepwater Horizon explosion in April 2010. By the end of May there was a U.S. moratorium on deepwater oil drilling. Gulf-area helicopter operators claimed a loss of contracts due to the moratorium, although Bristow Group was the only offshore helicopter operator to publicly release hard data. By June 11, nine of their helicopters had been affected by the ban, seven of which were released by their customers for the duration of the moratorium. These seven helicopters had been generating $3.8 million per month for Bristow. It is reasonable to believe that the other major Gulf operators saw a similar impact.

Conclusion

A helicopter is a fascinating, quirky asset. Although it bears much commonality with airplanes, it has several different properties. The more utilitarian viewpoint of its buyers makes it less vulnerable to wear-and-tear deductions from the value. The vast number of components, each with a separate maintenance schedule, makes careful, line-by-line component analysis a requirement. The different market sectors, utilizing their individual requirements to determine their "ideal" helicopter, combine with the pressure-cooker of today's low demand and high supply to create a complex web of betterments and detriments to a helicopter's value. And the maze of federal codes and agencies, regulations and treaties, insists upon a deeper-than-skin-layer analysis of consequences of potential acquisitions and potential uses in a variety of different countries and cultures.
Understanding the helicopter and its resale market, its function in the world and the needs of its operators, and the needs and requirements of the lenders and lessors who bring life to this small industry, are all critical aspects to a viable determination of this terrific little machine's value.