David Crick needs no introduction… he’s the man you usually bump into at an event who’s just flown in from somewhere exotic and with a good story to tell! He is currently International Vice President on the American Society Of Appraisers (ASA) International Board of Governors and Managing Director of DavAir Group.
Despite having shared many conversations on several different continents in the past, the Covid 19 pandemic was the very first time we had spoken to David when he was at home in Australia. We found him full of positivity about the rotorcraft business. This positivity is not just wilful optimism for the sake of it, it reflects the current data we see at Air & Sea Analytics and is testament to David’s keen finger on the pulse of the industry.
David – thanks for taking the time to speak to us. How are things with you? What’s changed over this Covid crisis?
We’re doing well, thanks. Things have changed and it’s probably best explained with examples. One of the services we provide are inspections for lessors. Often the lessors want to do inspections themselves, they have their own in-house people, but they have been advising staff to “stay in place…. don’t go travelling.” We’re actually finding that we’re a little bit busier in the inspection side because the lessors can’t do it themselves at the moment.
However, where we would normally go far and wide (again as an example my colleague Usman in the UK would normally do inspections in the UK, Norway, Italy, France etc and I would do them in Australia, New Zealand, Singapore, Thailand, Malaysia etc) with the current travel restrictions we are having to reach out to our network to provide the same services… even though we’re completing the paperwork we’re having to reach further and wider into our network and be more diligent in our documentation to provide the same level of service.
We recently did an inspection for a lessor in NW Australia of some heavy, super medium and medium helicopters. Normally the trip would be a two day turnaround. With Covid, it took a week and whilst we were able to deliver the required reporting – it just took longer and was harder to do. Even to go and see the records that were in another part of the facility, the operators have more difficult requirements in order to visit, you have to plan ahead, come on a day when there’s only so many people in the office, wear a mask, etc. There’s a lot of logistics in play that are not normally in play.
Are you using new technology, video, remote inspections, anything like that?
The industry has been talking about that for a lot of years, for a long time discussions have been about virtual inspections, drone inspections, robotic inspections.
A drone still needs to be operated so you still need human interaction. A lot of the time we’re involved because we’re an independent third party… if the object of the inspection is to find something an operator or maintenance provider might have missed or may have been ‘hiding’… it requires having an independent party involved.
It’s not so much that they would hide something it’s that they would miss it because they are so close to it. This is one of the things we’ve found from having our colleagues go in and inspect the assets… its really difficult to say “we need to see this part of the transmission deck where the corrosion is more prevalent on this type”… it’s really difficult to do that with someone that’s not familiar with the type…. you can only get a certain level of detail with a someone on Facetime and a camera. When you are physically there in person and you can see it, feel it, touch it, you get a lot more detail and a lot more of a thorough representation of what you are seeing. If you talk about filament corrosion or surface corrosion on a helicopter its really difficult to see on a white helicopter with a camera…. If you’re there you can touch it with your hand, you can feel the bubbling, you’re actually able to report that more accurately. So I think video evidence / inspection is reasonable to a point but I don’t think it’s ever going to replace a physical inspection.
On the valuation side, how has that worked January vs now… have you been making material adjustments to how you are valuing assets?
There’s a few primary services we get involved with. The first one we talked about was leasing / operator inspections (and that doesn’t have much of a valuation aspect to it). The second we provide is mortgage security / pre-lending valuation reporting – that’s a valuation that can be completed at a desktop or include inspections.
In terms of how the market is going… there are some segments that are actually going ok, seeing some stability. Some segments are seeing a 15-20% downturn in values and that’s driven by demand and expectations. I think it’s relatively universal that we saw some good transaction activity in Q4 2019, we saw some activity in 1Q 2020 in Jan and Feb… but come the end of March and all of Apr and May…. there were crickets (figuratively) there was very little activity and the activity that was happening, was generally based on agreements that had been made prior to March and were just in the finalisation stage. There’s two main areas that Covid has caused transactions to come unstuck. One is pre-purchase inspections and the logistics around pre-purchase inspections. And the other is around ferry pilots and the logistics of delivery. It’s all about logistics. There is finance available. There is the ability for escrow to work. It’s the logistics of pre purchases inspections and delivery that is where the problems are.
Which sectors have seen the biggest impact in values?
It depends on the segment. In EMS with the Covid situation, the demand dynamics have changed a bit because there are more patient transfers. Hospitals are demanding bigger and better helicopters and a change of equipment in short periods of time which is not really possible due to the underlying short contracts. Overall EMS is quite stable.
Offshore oil & gas – yes there’s been a down turn but like I’ve seen it reported, in some excellent publications I must say, utilisation hasn’t dropped to the same scale. We are also seeing in the same segment that Heavy & Medium helicopters in some regions are actually a little higher in utilisation because clients are demanding social distancing on flights and they want a service where they are comfortable with passenger safety. There is a balance between a lower demand and a higher operation.
With the windfarms – I think the initial focus in the short term was to try to conserve cash and delay projects but there are still many projects with contracts in place and demand for the units hasn’t seen much change.
So despite “being in a global market” it’s really mission and region specific.
Each country has their own approach to social distancing, has their own approach to how rampant the virus is, how essential the service is that they are offering. In Australia for example the mining companies are absolutely paranoid because if one person from their mine site goes down then the whole mine site goes down. So they are absolutely paranoid about people distancing. In the fixed wing segment there are some companies that are actually having to put on double or triple the flights to manage the requirements of the mine sites. The demand and utilisation is up in that instance.
What did you think of Ed Washecka’s view of appraisers?
I have a perception that the figures from some valuation houses have some sort of requirement to satisfy audit for the lessors and operators on the basis that the assets are ‘lease attached assets’. The ones that are transacting in the marketplace are one or two units here and there and being sold to get out of hock… A Milestone or a Macquarie have a portfolio of capital on their books that they have the sole purpose of leasing (as opposed to a bank that might go in and finance something to help out one of their clients). The mindset is different. The lessor mindset is that they are going to hold the asset for a long time so they want to lease it for a long time and their transactions are with a lease attached…
I agree with Ed in terms of his comments on lease rates and have seen evidence of that in the market. With regard to these $5-6 million transactions for heavy helicopters, they are a complete disparity to what the valuers are saying but the values are with a lease in place. For a naked asset transaction… there’s no real demand, and the lack of demand is primarily because all the entities that want to lease using an S-92 are in long term lease arrangements with the lessors. They don’t want to buy one of their own – they want to lease it from a leasing company. If there’s a market for these heavy helicopters, the market is consumed by the lessors, not the operators. So when one or two units appear for sale, the primary market is going to be the lessors, and they will then buy it with a view to leasing it out at say $150-200k a month.
What about the secondary markets?
In the 225 market there were values in a similar range… $10-12m but they were competing with a 332 L1 or L2 which has similar capability but because they were older they were transacting at only a couple of million dollars. And at a couple of million dollars they are an inexpensive outlay to start taking the heavy surplus components out of it and repurposing it. And I think at $3 or 4 million dollars an older S-92 is a phenomenal amount of helicopter at that price.
I can see Ed’s point… we can’t say that there are no transactions or that things are the same. I can see why he would question how can they be valued at $12m and sell for $6m. It’s the difference between a lessor with an asset that has a lease attached vs a standalone asset with no work tied to it. They are two different types of transaction and both are correct and appropriate in their place. The appraisers have a lot to answer for and I can say that because I am one! We have to be transparent with the audit market and the leasing market and say these values are assumed to be with a lease attached if that is the case.
I think that transparency often boils down to definitions and articulating these definitions and assumptions clearly and boldly in our reporting. I think that some of the valuation houses use valuation terms from the commercial airline space and they are not necessarily financial reporting terms. We have to be really clear as valuers that we comply with the international financial reporting standards.
What’s the outlook from here?
Hard to say at this point and as you know… in the overall scheme of things one period is an anomaly and three periods becomes a trend but essentially there are three things we might see in the next 12 months:
1. I think we will see an amount of consolidation
2. A response or even solution to the coronavirus problem in some form
3. Oil price & demand recovery
Sincere thanks to David for his time and insight.
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Footnote: Since interviewing David (in early autumn) we have subsequently seen the announcement of the results of trials of the several vaccines which have proved remarkably effective. This has provided a boost to equity markets and to optimism for an end in sight to the pandemic, albeit we are far from out of the woods in the near-term. In our previous article we lighted some promising leading indicators including trends in flight activity.
David Crick - International Vice President, American Society Of Appraisers International Board of Governors and Managing Director of DavAir Group.
As a reminder, our latest S-92 fleet census is now available. 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:
