Our series of interviews concerning the heavy offshore rotorcraft markets continues this week with Pat Sheedy, CEO of Milestone Aviation. Milestone has the largest fleet of S-92s globally. Pat discusses the current state of play for Milestone as it reaches its 10th anniversary, market volatility, contracting & the risk/reward balance, the recent purchases of S-92 aircraft and what may lie ahead for the industry in the years to come.
Pat – thank you for taking the time to speak with us. How are you positioning Milestone in 2020 in terms of your offering and differentiation to clients? Has this changed in the last six months?
This year, Milestone marks its 10-year anniversary. Over the past decade, the company has been constantly evolving, changing, and refining its product offering. We’ve transitioned from a high growth start-up in 2010 into a mature asset management platform.
We move (transition) around 80 aircraft a year which is about the size of most of our competitors’ fleets, and to do that you have to have a ‘best-in-class’ technical team. We do a lot of analytics, and we have a global footprint with offices positioned around the world in Dubai, Singapore, Hong Kong etc. in addition to our head offices in Ireland and the U.S.
When we go to market our biggest differentiator is the team, and the expertise we have in terms of our ability to execute, ability to deliver and certainty of execution. If you look at the current market you’ve got a lot of volatility and there have been some issues in the past in terms of restructuring at an operator level. This means that customers really value that certainty of execution.
In terms of our offering, we primarily offer operator leasing, but we’ve also added on finance leasing capability and have also done several significant senior debt transactions in the past and we continue to offer senior debt and finance leases. As I mentioned, we’ve really developed from a high-growth operating lease player and expanded the product offering.
If you look at the last six months and beyond at the longer period of volatility that we’ve been through, Milestone’s biggest advantage is that our business model allows us to support customers with flexible solutions and help them navigate their way through this prolonged downturn. Our flexibility allows us to work with our customers and tailor optimal solutions for them. I think customers realise that when they come to us, they’re dealing with people and management teams that have the ability and willingness to help them make the best decisions.
To what extent has financing evaporated for operators (and perhaps other lessors?) looking to acquire offshore helicopters? Does this put Milestone in a pretty unique position of still being able to acquire and finance aircraft (via the parent company GECAS)?
Given the current volatility in the market, we continue to be very selective of where we deploy the capital that is available to us. Having said that, we have done a number of purchase and leasebacks and finance leases this year at attractive returns, across a number of operators and missions, including Oil and Gas.
Both the distress in the industry over the last five years and I think in particular the outcome for the senior lenders and the banks in the Waypoint bankruptcy has certainly damaged the asset class in the eyes of the traditional retail banks - traditional bank debt that the market would have accessed in the past.
As well as the operator and lessor bankruptcies that have happened, I think lenders have seen that there are ongoing structural issues with the underlying contracts. In particular, there has been a lot of talk about the ‘cancellation for convenience’ clause. The issue here is that you are trying to finance an asset that might have a 30-year life and you are financing it for seven, eight, nine years for an operator. That operator is subsequently putting it on a contract that can be cancelled in 60 days, making it very difficult. That risk/reward model just doesn’t make sense and it makes it very tough for a retail bank to underwrite new financing in the space. I think it makes it very difficult for anybody to underwrite it without having access to a dedicated asset manager like Milestone.
Having that platform becomes very important as you have the ability to effectively manage restructurings, to take aircraft back, to move them and re-deploy them. The retail banks realised that when they got assets back, they didn’t have that capability.
For that reason, I think Milestone is in a strong position. We have access to capital to deploy and we have the capability of managing the assets through numerous scenarios. Under the circumstances, I think that’s what gives us the advantage we have in the marketplace.
The offshore oil industry isn’t in great shape just now, I think it’s fair to say. The mobile drilling rig business has scrapped a quarter of the fleet (over 250 rigs) since 2015 yet is still only seeing 67% utilisation. The S-92, looking at it as an asset class in oilfield services is currently at 82% utilisation (% of fleet active). Milestone owns circa a third of the offshore crew transfer fleet. What’s your headline view of the S-92 in terms of its attractiveness as an asset class? How does it compare to other assets in your portfolio?
We do own or finance a sizable proportion of the fleet and while S-92 utilization has remained fairly high I think one thing that often gets missed, particularly in comparison with the rig fleet, is that although we have not scrapped 25% of the fleet, as an industry, we did remove almost 120 heavy units out of the market following the tragic accident with the H225. In fact, barely any remain working in oil and gas. The H225’s exiting has really helped to maintained S-92 utilization and its attractiveness in sector.
Also, there have been practically no heavy deliveries in oil & gas over the last three to four years, as well as fairly limited deliveries of super-mediums, many of which didn’t go into traditional oil and gas markets to compete with the S-92. As we look to the future, we don’t really see that dynamic changing that much as lessors and operators don’t have many firm orders for heavies or super-mediums.
Further, the environment, as we discussed, is pretty challenging and the space is not attractive to significant levels of new capital to finance new deliveries. We obviously would like it if the utilization level would climb a little bit more and without the additional challenges of COVID-19 pandemic, I think we would have seen that in 2020. All things considered, this is why the S-92 continues to be the workhorse in offshore for the foreseeable future and I certainly don’t see that changing.
In our own portfolio, if I look at the last five years, we faced some significant challenges in terms the amount of restructuring we had with the big operators, as well as the elongated downturn that we’ve all be in. Even with all those challenges, utilization has remained relatively high and I think for our fleet it’s actually higher than the global average. So, in that regard I think the S-92 has performed, and it has upside going forward given the dynamics we’ve discussed.
Most of the Milestone fleet was built up between when we started in 2010 and 2015 meaning that the majority of the S-92s we own are some of the youngest in the fleet given that only a handful were produced in the last five years. There isn’t really line of sight to any major replacement capacity coming on stream anytime soon, so I think as we look to the future that’s going to be a competitive advantage for us.
Looking from the outside-in, it seems that Milestone has a strategy of opportunistically buying S-92s when the price is favourable, and then either putting them to work quickly (such as MSN 920155 in Canada), extracting value through part-outs or simply lowering the overall average cost of acquisition per aircraft in the fleet. Is this fair/accurate? What else is happening within the S-92 portfolio?
We already have a large S-92 fleet. It’s safe to say that increasing the size of our S-92 fleet isn’t going to be one of our top priorities.
However, every so often we do see opportunities where something is available for a price that’s substantially below the economic value, we believe we can extract from the asset. In those circumstances, we are making opportunistic purchases. It’s about where we see a mismatch between the price of an asset being sold by a distressed seller and what we can extract… and that’s when we deploy capital.
Banks, in particular, had certain amounts of assets they thought were effectively on finance leases and they would never get them back. However, through the various restructuring processes, they ended up holding the assets and as we discussed, they are not natural holders of assets. They don’t particularly have the expertise to reconfigure, maintain, redeploy that aircraft to extract its economic value. That’s when they sell for a price that we think is good value for us and we have the platform and expertise to extract significant value. It’s as simple as that.
The main crew transfer activity for S-92s isn’t going to disappear overnight and many expect the offshore oil business to continue for decades. The fact that we have only seen a relatively modest reduction in S-92 activity vs, for example, fixed wing surely says a lot about the essential work that this aircraft performs. What’s the Milestone perspective on the outlook for oil and gas? Are you looking at potentially finding work for S-92s in secondary markets such as military, crew training, other utility, VIP etc? Are S-92 prices now at price where it makes sense to reconfigure?
Oil and Gas will certainly continue to be the primary mission for the S-92 in the years to come. As you point out, utilization remains relatively high. When those aircraft will transition out of Oil and Gas really depends on vintage. I think we are going to see that as the older aircraft mature out of the primary mission in oil and gas, at that point people will look at what you may do with that aircraft in its secondary mission. I think that will happen naturally and that’s a normal lifecycle for helicopters.
In the case of the H225, for reasons we are all aware of, it essentially became unacceptable in its primary mission. As a big owner of 225s as well, we’ve been at the front of transitioning those aircraft and while there is still stock to work through and be absorbed, activity is accelerating. However, this may still take some time, so until we have cleared through the H225 inventory, we won’t start thinking about what we might do with some of the older S-92s.
Age and vintage will continue to drive that transition rather than some perceived issue with valuation. That obviously happened out of the natural cycle with the H225, For the younger S-92s, our view is that the earning capacity in oil and gas is still superior to other markets.
We have seen a number of high-profile failures of operators (in fact, all of the three main global players in S-92s) and one lessor in this downturn. Is there a level playing field amongst lessors in this market?
There are a number of different players in the market with assets in various situations, depending on when they bought them, who they bought them from and what condition they are in. It’s all part of the environment we operate in and I don’t think that’s going to change significantly over time.
The book basis for one of our competitor’s assets, a bank’s assets or one of our assets really doesn’t make a huge difference. We think there’s an economic base rent for that machine of that vintage in that condition and that’s what we should get and that’s what the market will bear regardless of who’s bought it for what price.
Given that the work offshore helicopters perform offshore is mission critical, what does this market need to do to restore pricing power for the owners of the assets? If the work is (as it seems) essential – how does everyone in the value chain get a fair margin?
I think this has been the topic of conversation at every conference for the last four or five years! If you looked at it in the early years of the downturn you had operators with significant levels of idle aircraft on their books at that time. That dynamic then encouraged a price competition just so that those assets were not sitting idle and that you could extract some cash from them. After the various Chapter 11s there weren’t really as many idle aircraft [S-92s] with the operators. Most of the capacity with the operators were putting up regular flight hours.
What we’ve seen in recent times is that operators and lessors are pricing almost against phantom supply, the supply you think is out there but that may not actually be configured right or capable of being returned to service etc. There will always be a couple of marginal units. To get pricing power back to operators and owners, the industry collectively has to let some of that irrational supply clear, regardless of who owns them, and then it’s up to everybody to maintain discipline on a go-forward basis. If you keep pricing against them, you keep chasing them around the world.
Discipline is tough when there’s over-supply. There’s always a balance between utilizing assets and getting yield on the assets. Our view for a long time has been that we are happy to hold assets and ultimately receive an appropriate return on them rather than lease at sub-optimal economics just to drive utilization .
What does the next cycle of fleet renewal look like? I realise it’s a strange thing to talk about following straight on from a discussion about over-capacity but at some point the current fleet will either be replaced with existing technology (S-92B, super-mediums, etc) or indeed even new aircraft that haven’t been designed yet. Do you think you lessors will be instrumental in facilitating the move in the long-term to bringing in hybrid (and other designs) of rotorcraft? How long will that take - is that a decade away??
We’ve talked about it in terms of what it would need to look like in order for us (or indeed any lessor) to be willing to enter the space.
The fundamentals for any lessor is that the product needs to have a certain number of key attributes before you can consider financing it.
The big one is residual value. You want to have some view of how that’s going to play out, particularly after the first lease if you’re going to an operating lease model. You’ve got to have portability and transferability across customers, so you need broad adoption of the product. Once that happens with some of these newer technologies, that’s when you’ll see capital enter the space.
Sincere thanks to Pat for his time and insight.
Pat Sheedy - CEO of Milestone Aviation
As a reminder, our latest S-92 fleet census was released earlier this month. Providing unit-by-unit detail on current status and location for the offshore crew transfer fleet the report is ideal for stakeholders in the S-92 business and likewise for those that work with competing aircraft. We use state-of-the-art data analytics techniques combined with good old-fashioned primary research to establish who is operating the aircraft, where, and how that has changed. For more detail see here:
