CHC: Oil price and Fleet Mix the cause of Capt 11
On March 24, as CHC Group emerged from a 10-month Chapter 11 reorganization process overseen by the U.S. Bankruptcy Court, it turned the page on what has been the most traumatic chapter in the storied history of what was once the world’s largest medium and heavy helicopter fleet operator.
Just over three years ago, under the stewardship of then-CEO and president Bill Amelio, CHC was a very different company that seemed to be riding high in a very different market. As a beaming Amelio rang the opening bell for Wall Street traders on Jan. 21, 2014, celebrating CHC’s listing on the New York Stock Exchange, oil prices were comfortably above $100 a barrel, and the company was servicing the booming industry with a fleet of 238 aircraft operating around the world.
During the 2014 summer, the same year CHC celebrated listing on the New York Stock Exchange, oil prices nosedived, and the high debt burden the company was carrying began to cause the financial stress that ultimately led to it filing for Chapter 11 bankruptcy protection in May 2016.
CHC has exited that process in a very different shape — both on the surface and behind the scenes. Financially, it has secured US$450 million in investment, including US$150 million from Milestone Aviation Group, which will become CHC’s lead lessor for its future fleet. The current fleet has been reduced to 137 aircraft through the rejection of over 80 leased aircraft, and the company is marking its return to “normal” operations with a new brand.
CHC’s president and CEO, Karl Fessenden, who was brought in to replace Amelio in February 2015, told the exit from the Chapter 11 process gives the company a clean balance sheet and a fresh start.
“We have been able to reduce our debt by about US$1 billion, which obviously significantly improves our balance sheet and stability financially,” he said. “We have a right-sized fleet that is highly utilized and adapted to our customer needs".
CHC had 40 H225s in its fleet before it began the Chapter 11 process. Now, it just has two, and neither of them are currently flying.
The primary goal of the Chapter 11 process was to make CHC a profitable company again, by cutting its debt obligations, slashing its helicopter fleet and expenses, and securing new financing.
Tragically, CHC’s journey through Chapter 11 was bracketed by two fatal accidents involving CHC-operated aircraft: The first, on April 29, 2016 — just days before the operator filed for Chapter 11 bankruptcy protection — saw an Airbus H225 crash near Turøy in Norway, killing all 13 people on board. The second, on March 14, 2017, involved the crash of an Irish Coast Guard S-92 off the west coast of Ireland. The investigations into both crashes are ongoing.
The immediate fallout from the Turøy crash saw the European Aviation Safety Agency (EASA) ground the Airbus AS332 L2 and H225 Super Pumas. The grounding was then adopted in other regions of the world, affecting about 57 aircraft (17 AS332 L2s and 40 H225s) operated by CHC in the North Sea, Brazil, Africa, Asia and Australia.
While the impact of the Chapter 11 process was broad, with unsecured investors losing their money, employees laid off, and under-utilized facilities closed, perhaps the most visible impact for the wider industry was in the number of aircraft being returned to the leasing companies. The helicopter leasing industry had grown significantly during the preceding years as deepwater drilling expanded and oil prices climbed, and now CHC helicopter lessors were facing large-scale aircraft returns — including H225s that were unlikely to return to offshore service in the near term.
Industry analyst Brian Foley, president of Brian Foley Associates, said the protection of the bankruptcy courts likely allowed CHC to avoid huge early termination penalties and maintenance requirements mandated when returning the unneeded aircraft. “It’s presumed that CHC has now ‘right sized’ the fleet to match reduced demand in the oil-and-gas sector,” he said. “Filing Chapter 11 literally saved the company.”
Heading into the Chapter 11 process, CHC had a fleet of 230 aircraft, owning 67 and leasing the rest. These included 50 S-76 A++/C+/C++ aircraft, 46 S-92s, 43 AW139s, 40 H225s, 34 AS332L/L1/L2s, seven Bell 412s, seven AS365/H155s, and three H135/H145s.
“Given what happened with the grounding and with the questions surrounding that aircraft type, we rejected the majority of our 225s,”
Emerging from Chapter 11, the new-look CHC has 137 aircraft in its fleet. These include 46 S-92s, 32 AW139s, 29 S-76s, 12 AS332L/L1s, seven Bell 412s, and 11 other aircraft of various types. Some of those aircraft are now on flexible conditions with CHC’s lessors, said Fessenden, which means that CHC only pays when they use the aircraft. Going forward, he said there might be “some slight reductions” in the fleet over the next couple of years as the offshore market continues to stabilize. “We’re probably [going to be] in the ballpark of 125 to 130 aircraft,” he said.
Just two H225s remain in the CHC fleet, and neither of them are currently being flown.
“Given what happened with the grounding and with the questions surrounding that aircraft type, we rejected the majority of our 225s,” said Fessenden. “We’re still considering, once we and the other Helioffshore operators are fully satisfied with the investigation, which is still ongoing, that we may fly that aircraft again, but at this point we only have a couple of those aircraft in our fleet.”
Future acquisitions are likely to be in the super medium spectrum, said Fessenden, adding that the company hoped to make announcements over the next few months regarding deals for the Airbus H175 and Leonardo AW189.
The overall reduction in CHC’s fleet has also served to reduce the proportion that is leased to 55 percent, which Fessenden described as a “better balance.” Ultimately, he said the company would like to get as close to a 50/50 split of owned versus leased as possible.
South America. Fessenden said the region was one of those that presented opportunities to expand its search-and-rescue and EMS work
The vast majority of CHC’s revenue (68 percent) comes from its oil-and-gas business segment, with 15 percent provided by its emergency medical services (EMS) and search-and-rescue work, and 17 percent coming from Heli-One (its maintenance, repair, and overhaul business unit). Despite the offshore industry downturn, Fessenden said he doesn’t anticipate the company’s oil-and-gas focus to change. “It’s a key, core, part of what we do,” he said, “but we would like to grow our search-and-rescue and EMS business, and we’re actively engaged in doing that as we speak, and we’ll continue to support and develop Heli-One’s market and growth potential also as we emerge.”
AW189 SAR for UK
That said, the company’s success going forward will not be dependent on a rebound in the oil and gas market, said Fessenden. “Part of our emergence strategy was all about focusing on thriving and prospering in a low [-priced] oil environment,” he added.
In terms of regional growth, oil-and-gas markets in Latin America, Southeast Asia and Africa offer opportunity, said Fessenden, and there were opportunities to expand CHC’s search-and-rescue and EMS services around the globe. “They’re very large and lumpy opportunities, because they typically tend to be 10-year contracts, so we’re looking at a few of those around the world that we think are really good opportunities based on our experience and capabilities,” he said.
“The new company will need to prove itself again to its customers, investors, employees, vendors and equipment financiers,” said Foley. “[But] regardless of the past, lessors and manufacturers will still compete for CHC business due to a lack of activity in the sector. However, it’s conceivable that the rates and terms will not be as attractive for CHC as they were in the past as lessors seek to reduce their risk.”
That said, he added that some customers may opt to go with a provider that has been more financially stable if there’s a reasonable alternative.
This is my personal extract from an interesting article published by VERTICAL. The full article here.