SLEEP-WALKING INTO CRISIS: Offshore Crew-Change Challenges Ahead
Original article by Steve Robertson and retrieved from Air & Sea Analytics
As we prepare to publish our latest ‘Heavy & Super-Medium Fleet Census’ the summary of the data is clear. Demand for aircraft is up substantially and only a small handful of un-contracted aircraft remain. Supply chains are stretched and long lead-times are being quoted on critical parts.
The ability of the industry to keep enough serviceable aircraft active to meet demand is now in question.
This scenario has been developing over a period of years and it will take years to resolve. It will benefit some parts of the industry enormously and it will place huge strain on others. Significant price inflation is expected, some of which we have seen already.
This is a ‘silent crisis’ because, like a duck swimming upriver, all appears calm on the surface. OEMs boast of increased flying hours and a potential new order cycle, operators speak of increased enquiry flow and improved pricing and lessors point to full or near full utilisation.
So what’s the problem?
The challenge is that whilst we have seen a dramatic increase in the number of contracted aircraft in the Heavy & Super-Medium segment, this is not translating yet into a comparable increase in aircraft flying. In fact, behind closed doors, operators are hugely frustrated that they cannot return aircraft to service due to supply chain issues. Dynamic components such as main gearboxes and rotorheads are in short supply and lead-times of as long as four years are being quoted for some parts. At the present time the industry is returning aircraft to the line only slightly quicker than they are coming off it.
Until now, we have had an over-supply of airworthy helicopters during the downturn and an end-customer (oil companies) able to dictate terms. The extreme over-capacity was a benefit to end users because if their aircraft became unserviceable there was a good chance there was an aircraft nearby that could be used as a backup, even if the oil company had not contracted a backup. The situation today is that these ‘free backup’ aircraft are not available, either because they have been contracted elsewhere to another customer or because they have been grounded due to lack of parts.
We fully expect that in the next 12 months there will be end users that see lower availability of their service and interruptions to their crew change activity.
How did we get here?
Seven years of market downturn saw oil & gas orderbooks dry up in the heavy segment and reduce to very low levels in the super-medium category. OEMs, previously quite dependent on the O&G sector found that they needed to seek business elsewhere and subsequently are no longer dependent on it as in recent years they have successfully filled the orderbook with rotorcraft for military, EMS, law enforcement and other mission types.
Parts inventories for key O&G aircraft were kept low during the downturn years (holding a lot of stock is expensive) and the Covid-19 crisis weakened parts of the supply chain. The upturn in demand in 2022 was not anticipated by OEMs and the production line for one of the ‘workhorse’ O&G models, the S-92A, was closed completely in 2021. As the market has recovered the industry is both consuming parts faster (with the current active fleet flying more flying hours) and sourcing parts to return aircraft to service (‘RTS’).
What can be done about it?
The replacement cycle needs to get underway. Barriers to this previously have been the availability of off-hire aircraft at very low rates (these no longer exist) and the contractual terms imposed by oil companies, which often insist on ‘cancellation for convenience’ clauses (that, in effect, reduce a 7-year contract to a 90-day contract.)
Financing remains an issue and whilst lessors report lease rates are up significantly they have thus far not been placing orders for heavy rotorcraft. The problem over the 2015-2021 period has been fourfold:
- The market had been over-supplied until 2022 and new aircraft were not required
- Lease rates were too low for lessors to achieve an economic return on newbuild aircraft.
- End users were typically not willing to enter into genuine long-term contracts
- The broad range of willing financiers that existed in the market previously are not present. Many are not willing to finance oil & gas deals and/or have fresh memories of the multiple bankruptcies we saw in the last cycle.
At this point in 2023 it is clear that problems 1 and 2 are no longer an issue. 3 and 4 remain a challenge.
We have seen some interest from lessors in the super-medium segment, both in terms of sale and leaseback deals on existing aircraft and also in terms of newbuild aircraft. Airbus announced an order in July 2022 with LCI for up to six H175s (two firm orders, four options) and during the HAI 2023 show in March announced a deal with French investment firm Rive Private Investment for up to 8 H175s in O&G / SAR configurations.
The S-92 fleet is now bifurcated. There were 165 aircraft active as of the end of Q4 2022 - a number of these have since become unavailable. There were 32 inactive aircraft at the same time of which 19 are contracted and are either in maintenance, in transit/en-route to the next contract, or are in MRO shops being returned to service. On the other hand there are a group of aircraft in storage that have not been parted out but need a lot of work to return to service and in many cases have been raided for parts and are unlikely to fly again anytime soon and most likely not for years.
A case can be made that the OEM could acquire these aircraft (we have identified 13 candidates) and ease some of the supply chain pressure by parting them out, certifying the parts as usable and redistributing back into the fleet to keep aircraft flying. This idea has been mooted before and it is not clear that Sikorsky would entertain it. There are obvious risks that need to be managed. However, it should be remembered that there are good numbers of S-92s performing mission critical roles that are government funded (e.g. Irish SAR, UK SAR, Saudi MOI, various VVIP aircraft) and interruptions to these services through unavailable aircraft would reflect poorly on Lockheed Martin at a time when all OEMs are bidding on a variety of substantial military contracts (e.g. UK NMH.)
Who stands to benefit / suffer from the current market position?
The lessors are benefiting already. They have seen double-digit lease rate increases in 2022 and 2023, nearly all the idle aircraft back to work and opportunities to deploy new capital if they wish.
End users (mostly oil companies) will be hard hit as they see a double-whammy of substantial price increases and lower availability of aircraft. They have themselves to blame as they created the conditions to preclude investment in this mission-critical industry. Oil companies may cry “discipline”, but discipline isn’t just about money. Discipline is making sure your people are safe. Discipline is making sure your people can rely on an aircraft being there for a ride to work and for a ride home. Offshore rotorcraft services account for circa 2% of upstream oilfield services spending. Aircraft meeting the latest IOGP R690 safety standards currently account for the minority (44%) of the offshore fleet. Safety advisors have been warning since the beginning of the downturn of the dangers of treating offshore aviation as a commodity.
For the helicopter operators everything depends on whether they can keep their fleets flying and if they can successfully pass higher costs onto the end customer. Some operators have acquired aircraft in the past year that have never flown under their ownership and there is enormous pent-up frustration.
For the OEMs the situation is interesting. There will clearly be some demand for replacement aircraft in this cycle but there are effectively four OEMs chasing orders in what is a small part of the market - heavy and super-medium rotorcraft account for just over 20% of the offshore fleet.
Leonardo have seen steady demand for their ubiquitous AW139 medium type (which, now at 7,000kg MTOW could almost be described as a super-medium), with an ongoing flow of deliveries even during the downturn (Saudi Aramco being a key client during this time) and their super-medium AW189 design has achieved success in the SAR market, displacing both older medium types (such as the Dauphin) and heavy aircraft such as the S-92. Leonardo have struggled to crack the key North Sea market with the AW189, despite being the only super-medium that has a certified Full Icing Protection System (FIPS). The fact that they (a) have a production line open and (b) have today a fully certified aircraft with FIPS does lend the AW189 some near-term competitive advantage.
Airbus, as noted above, are booking new orders already and are in bullish mood. Not only is the H175 backlog building, but they have successfully rolled out a new MGB for the H225 that doubles the time between overhaul and may yet see the type make a come-back in some additional oil and gas markets (probably not the North Sea but never say never….)
The introduction of the H175 has not been without problems but the type is now maturing after eight years of service with 38 aircraft in the O&G fleet and over 175,000 hours flown to-date. A FIPS is being tested/certified and is expected to be ready by 2025.
Bell has continued to work hard on certification of the 525. This aircraft has attracted its fair share of rumour and doom-mongering but it does appear to be coming to market, with certification in 2023 a possibility. Bell have been prominent at industry events, even if they are not displaying aircraft or giving presentations we have seen the sales team working the crowd in many parts of the world in the last 12 months. The first four aircraft on the line are oil & gas configured and what Bell desperately needs is its first customer. Given the considerable distress in the market and lack of aircraft, it may be that the 525 enters the market at the precise point where there are end-users that have little choice other than to take a chance on a new aircraft type. At HAI there was speculation that two separate operators, both with three letter acronyms, were considering the 525 for the GoM and Norwegian market respectively. The challenge for the 525 will be the price tag that the larger, highly sophisticated aircraft carries. There is likely to be at least a 50% price premium vs other super-medium types.
Sikorsky now face a key point in the history of their civil products. The S-92 enjoys a superb reputation in the industry as a robust and safe aircraft, and for some missions (those far from shore) it is the only tool that can do the job. The accrued hours to date (over 2 million) vastly exceed any other type in the heavy and super-medium type - it is a well-proven, mature aircraft.
Sikorsky seem open to the possibility of re-opening a production line for the S-92 and at HAI 2023 proudly displayed one front and centre on its stand. The B model seems to have been shelved and the A+ model will be the one offered as a new build but pricing again is likely to be a challenge and a new offshore S-92A+ could attract a price tag north of $40m.
We wish all of the participants in this fascinating industry the best of luck and will follow developments with continuing interest.