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.
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.
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.