ECONOMICS OF HELICOPTER OPERATIONS IN INDIA

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3 ECONOMICS OF HELICOPTER OPERATIONS IN INDIA 3

4 Presentation by SANJIV BAHL General Manager (F&A) Pawan Hans Helicopters Limited November 1,

5 CONTENTS HAI Survey 2003 Helicopter Industry in India Revenue Structure Operating Cost concerns Measures for development of Helicopter Industry 5

6 HAI Survey

7 HAI Survey: Operating Performance for 2003 Coverage: 189 operators, 1600 Helicopters, 924,000 hours Commercial operators avg. fleet size 12.4, largest 328 Average flight hours / helicopter 573/year; 83% fly less than 600 hours / year. Largest source of flight hours Oil & Gas (68%), EMS/Public service (13%), personal transport / tours (7%) Operating cost concerns Maintenance (24%), Employee cost (24%) & Insurance (16%). Commercial operators with break-even/no profit 31%. Only 21% achieved profit (6% - 10% of revenue) Operator size & fleet utilization has effect on profitability. 7

8 Type of Operations- Flight Hours EMS /Safety 13% Charters 7% Others 4% Industrial Support 8% Oil & Gas 68% Source: HAI Survey

9 Fleet Category of Helicopter All Operators HT 10% PST 6% Flight Hours HT 16% PST 5% LMT 33% LST 49% LMT 32% LST 46% MHS 2% Source : HAI Survey 2003 MHS 1% PST = Piston LST = Light Single Turbine MHS = Medium/Heavy Single LMT = Light / Medium Twin HT = Heavy Twin 9

10 Cost of Operation Intt. /Lease chgs 8% Other expenses Depreciation 12% 6% Maintenance 24% Fuel 10% Insurance 16% Staff cost 24% Source: HAI Survey

11 HAI Survey: Operating Performance for 2003 Factors preventing growth of Helicopter industry : - environmental issues - Regulatory issues - limited financial resources - limited sources of pilots or technical personnel - limited helicopter infrastructure - paying capacity of the users - other factors like insurance cost, public opinion about aviation,etc. 11

12 HELICOPTER INDUSTRY IN INDIA 12

13 HELICOPTER INDUSTRY IN INDIA Non Scheduled Operators (21) - 80 civil registered helicopters (Source : DGCA, April 2004) - 5 operators owning 5 and more helicopters : PHHL (31), Deccan (9), United Helicharters (8), Azal (6) and Mesco(5) - PHHL retains majority market share of commercial operations of helicopters deployed on long term basis Private category (16) and 18 State Govts./ PSUs (29) Helicopter market size civil helicopters in India (RWSI, Sept 2004)- PHHL 25% ; PSU s/state Govts. 24% and remaining 51% with Private agencies. - Growth of helicopters is erratic 57 during 1996 to 2002; 14 in , 5 in 2001, 3 in 2002 and 12 during Share in India : Bell (51), Eurocopter (43), rest HAL, Mil MD and others. 13

14 State of the Helicopter Industry Growth of Private Sector operators has been sporadic and limited to casual charters Factors adversely effecting growth of Helicopter industry: - high acquisition cost of fleet - high taxation on lease cost of helicopters from April, inadequate helicopter infrastructure - low fleet utilization - high maintenance and other operating costs - prevailing low charter rates due to low paying capacity of domestic tourists - high seat mile cost/ hour and low profitability - Delayed settlement of dues by various State Govts. who are customers - restrictions placed by the Regulatory authorities 14

15 State of the Helicopter Industry Operational bottlenecks- Survey by RWSI:- - ATC: complicated and time consuming clearance procedures - AAI: lack of airport facilities: insufficient parking, poor ground handling - Procedures for leasing of helicopters from foreign sources should be simplified Adverse safety track record of Helicopter operations in India - 32 major helicopter accidents (9 fatal) during Significant increase between :17 major (7 fatal) - Majority of accidents due to Pilot error (54%) and improper maintenance(27%) ----RWSI Emerging Scenario - Offshore Oil, Heli-tourism, Intra-city, Law enforcement,ems Indian Helicopter Industry yet to achieve an organised status. Single source for reliable published information regarding flying hours, types of operations, etc. by various Commercial operators 15 is not available.

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18 PHHL: Operating Performance REVENUE HOURS OPERATING REVENUE OPERATING PROFIT R s / C r o r e s R s. / C r o r e s

19 PHHL-Annual flying hours / helicopter : Comparison with International averages ONGC PHHL AVERAGE INTERNATIONAL AVERAGE 0 Source : HAI survey

20 PHHL- ONGC vs Other Customers SEAT CAPACITY DEPLOYED REVENUE Others 48% ONGC 52% Others 39% ONGC 61% 20

21 Helicopters vs Fixed wing Sector Delhi- Agra PHHL Time 1:15 (Per Seat) PHHL Cost (Rs) 12,363 IA Time 0:35 IA Cost (Rs) 2,225 Delhi- Jaipur 1:20 13,187 0:40 2,620 Helicopter operating cost is 5 times that of Fixed wing 21

22 REVENUE STRUCTURE 22

23 REVENUE STRUCTURE A. Charter Rates Fixed Monthly Charge (FMC) plus Flying hourly charge applicable to long term institutional customers Fixed Daily Charge ( FDC) plus Flying hourly charge applicable to shorter duration contracts elections, corporate use, etc. Composite Flying hourly charge casual charters Single Pax ticket air taxi services between two fixed destinations B. Cost Components FMC covers fixed costs like depreciation, interest cost, employee cost, insurance, overheads and profit margin. Flying hourly charge covers variable costs maintenance, fuel, RNFC and profit margin. 23

24 OPERATING COST CONCERNS OF HELICOPTER OPERATORS 24

25 OPERATING COST CONCERNS OF HELICOPTER OPERATORS Financial Profitability can be improved with enhanced revenue through better charter rates, higher fleet utilization and improved serviceability and simultaneously evolving strategy for cost control and cost reduction Cost concerns of Helicopter operators : a. Cost relating to acquisition of helicopters b. Cost relating to helicopter operations 25

26 COST RELATING TO ACQUISITION OF HELICOPTERS 26

27 COST RELATING TO ACQUISITION OF HELICOPTERS Operators have the following options for acquiring a helicopter : a. Operating lease- dry or wet lease b. Outright purchase (new/ used) internal resources or Loan c. Financial lease d. Lease cum Purchase option e. Sale and Lease back f. Fractional ownership 27

28 COST RELATING TO ACQUISITION OF HELICOPTERS Expertise required for operational, technical and financial evaluation for new acquisitions. Negotiation with suppliers for better prices, warranty conditions, discount on future spares, free training of pilots and engineers, free package of spares and a low cost financing package. Acquisition cost of helicopter will cover the landed cost of the machine apart from spares package. Borrowing cost is capitalised till the time of Cof A and thereafter expensed from year to year. Major aircraft modification costs which substantially increase future economic benefits are capitalised. 28

29 COST RELATING TO HELICOPTER OPERATIONS 29

30 COST RELATING TO HELICOPTER OPERATIONS Life Cycle Cost Maintenance Cost Employee Cost Insurance Cost Depreciation Hedging against price fluctuations 30

31 COST RELATING TO HELICOPTER OPERATIONS Life Cycle Cost Analysis is required to determine the effect of ageing on down time and its adverse impact on maintenance cost covering next 15 to 20 years affects investment decision. Down time on inspections and maintenance expenses proportionately increase with passage of time PHHL experience : downtime for inspections increased by 80% over 10 years for Dauphin fleet. Conklin de Decker : ratio of unscheduled to schedule labour at 5 years 1:1 increases to 2.7 times at 25 years. Maintenance expense increase by 35 % at 15 years and 75 % at 25 years compared to a new aircraft 31

32 COST RELATING TO HELICOPTER OPERATIONS Maintenance Cost Constitutes 24% of total operating cost (HAI survey), requires close monitoring PHHL: Engine maintenance at 65% of the maintenance expenditure. No major engine overhaul facilities in India. Manufacturers offer Power-by-Hour program which may be suitable for small operator not holding large inventories. Technical assistance under this program is subject to tax. Flight time for maintenance planning (TBO) can be recorded from lift-off to touch-down in addition to engine start-up and switch-off time. Avg. 15% reduction in maintenance expenses. Good accounting practice creation of maintenance cost reserve on accrual basis in books before arriving at profitability figure. 32

33 COST RELATING TO HELICOPTER OPERATIONS Employee Cost Constitutes 24% of total operating cost (HAI Survey) DGCA regulations could be modified for reduction of technical manpower. In many countries pilots carry out upto second level of inspections AME s available for different trades should be encouraged to obtain additional qualification that could lower the requirement of technical manpower. Pilots emoluments (fixed salary+variable allowances) : at times tendency of over logging flight time to earn addl. Allowances. This results in higher employee cost and earlier TBO of components. Operators can lay down block timings for two regular destinations. 33

34 COST RELATING TO HELICOPTER OPERATIONS Insurance Cost Constitutes 16% of total operating cost(hai). This cost while falling outside the operators area of expertise need to be managed. Insurers carry out assessment of the insurable risk of an operator prior to quoting the premium rates. Good practice if presentation is made to the Insurance companies covering factors such as fleet size and age, operations profile, annual utilisation, maintenance practices followed, age and experience of pilots, safety track record and claim ratio of last five years, security measures taken and fleet expansion program. Reassessment of replacement value of helicopters and different insurance product should be explored. Quantum of deductibles, lay-up refund, PCOR have an impact on premium rates. 34

35 COST RELATING TO HELICOPTER OPERATIONS Depreciation The Companies Act,1956 stipulates depreciation rate of 5.60% for aircrafts and aero-engines on straight line basis This is the minimum depreciation which needs to be charged by the owner. The statute rate is based on useful life of 17 years with residual value of 5%. In case the useful life of an aircraft (like Mi-172) is lower than 17 years, the owner is permitted to charge a higher rate derived by dividing 95% cost over the manufacturers specified life. Many countries permit charge of a flexible rate of depreciation based on the useful life and market residual value of the aircraft which can be reviewed from time 35to time.

36 COST RELATING TO HELICOPTER OPERATIONS Hedging against price fluctuations Operators having long term contracts with customers need to hedge against foreign exchange fluctuations related to purchase of spares/repairs and overhaul charges, variation in ATF pricing and custom duty. Suitable formulae may be incorporated in the customer contracts. For casual charter rates, the costs should necessarily be reassessed regularly to cater for the aforesaid fluctuations. 36

37 Cost of Operation: Dep. 8% Interest 2% Lease chgs 2% Indian Airlines Other exp. 17% Maint.& Mat. 14% Lndg/Prk 6% Staff cost 25% Fuel 22% Insur. 4% Dep. 10% PHHL Other exp. 11% Staff cost 28% Fuel Maint.& 9% Mat. 36% Lndg/Prk 2% Insur. 4% 37

38 MEASURES FOR DEVELOPMENT OF HELICOPTER INDUSTRY IN INDIA 38

39 A. Economic Regulations Sales tax rate charged by States at average 25% on ATF need to be reduced in line with the concessional rate of 4% for Turbo Prop Aircrafts since fuel cost constitutes 9% of Helicopter Operating Cost Abolition of Passenger service fee of Rs. 200 per head charged by AAI Standard exchange scheme for repairs / overhaul of components as now permitted by Customs deptt. with approval of DGCA should be utilised for faster turn around time. Government has decided to remove from exemption u/s 10(15 A) of Income Tax Act in respect of lease charges(dry lease) for helicopters and engines brought on rental from overseas. 42% of lease cost to be borne 39 by operator. This need be reconsidered

40 B. Regulatory measures Air Traffic procedures for Fixed Wing Aircrafts be modified to suit Helicopter Operations Procedures may be laid down to facilitate new areas of Operations viz. Intra-city transportation, EMS, Law enforcement, Aerial Photography, News Gathering, Fire Fighting, etc. Heli-ports within International Airports Construction of Roof Top Helipads DGCA data base for helicopters may be updated regularly 40

41 C. Aviation Policy Integrated Policy to take into account the short and long term needs of the Helicopter Industry Formation of a Helicopter Advisory Board in MCA Urgent need to improve the state of the aviation infrastructure at most airports Import of Helicopters on wet lease may be liberalised Age for Helicopters to be imported be fixed Tax benefits could be considered for operators who provide Helicopter Services in backward areas, 41 promotion of Tourism, Hilly terrains, etc.

42 D. Other Matters Need for an Institutional approach for finding solutions to common problems being faced by the Industry Encourage investors to set up a Maintenance Centre in India to cover overhaul of engine and other major components for various types of Helicopters Need to improve the safety track record of Helicopter operations in India through stringent training and proficiency monitoring of Pilots Lower accident rate will improve insurance rates and instill customer confidence ASI / RWSI may collate database of overseas sources for lease options of Helicopters and standard terms and conditions for the benefit of its members in India. Survey of Operating Performance like HAI may be 42 conducted for Indian operators

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44 THANK YOU 44

A Review by IHST (INDIA) Prepared by Air Vice Marshal K Sridharan VM (G) President, Rotary Wing Society of India Regional Lead

Presents A Review by IHST (INDIA) Prepared by Air Vice Marshal K Sridharan VM (G) President, Rotary Wing Society of India Regional Lead ACCIDENT RATE TO CIVIL HELICOPTERS 2005 :< 3.3 per 100,000 hrs of