Though it has received little notice, last week’s announcement by Bell Helicopter (one of 5 subsidiaries within Textron Inc., NYSE:TXT), that it will layoff 300 workers at its Mirabel, Quebec plant and another 800 will be “downsized” globally.
Seven of these new Bell 412EPI helicopters will be join the Canadian Coast Guard (CCG) starting June, 2016 at 3 month intervals. At $C 155 million its is a very expensive acquisition at $C 22.1 million each, if Public Works and Government Services Canada (PWGSC) opend it up with a bid from Airbus helicopters, Canadian tax payers would have saved lots of money for sure. The Bell 412EPI has integrated glass cockpit, 15% more powerful PW P6T-9 twin pack engines, BLR Strake and FastFin system (airflow and handling optimized tailboom).
Now this announcement came 20 days after the Canadian Coast Guard (CCG) on April 10, 2015 ordered 7 Bell 412EPI (incorporates integrated glass cockpit and 15% more powerful PW PT6T-9 twin pack engines) helicopters in a deal worth $C 155 million ($C 22.1 million per helicopter, for a helicopter that goes for $C 15.4 million for civilian operators), and only 12 months after the Canadian Coast Guard ordered 15 Bell 429 helicopters for $C 172 million ($C 11.5 million per helicopter, for a helicopter a civilian operator can have for $C 8.3 million). The CCG badly needed new twin engine helicopters, and these 22 helicopters are a welcome addition to the future CCG fleet, and a good choice since Canada Air Force has bought more than 100 of the Bell 412’s in the past 20 years, here known as the CH-146 Griffon, and shows the support and confidence Canada has had in Bell Helicopters.
What gets me is that this Federal Government order was awarded on a sole source contract, because Bell Helicopters manufactures these helicopters in Canada, and the Coast Guard order will create more jobs. Well, so much for more jobs and so much for sole source contracts, the Canadian Government has failed to get the assurances that jobs will be created, which is normal under any industrial offset program when Governments order aircraft from any foreign OEM. This $327 million to Bell Helicopters bought us 22 very expensive helicopters, that may have cost a whole lot less if Airbus Helicopters was allowed to compete with its fine line of helicopters.
We do have Airbus Helicopter Canada (formerly Eurocopter) based in Fort Erie with 230+ employees that has been here since 1984 and since 1999 has delivered 50% of the new helicopters in Canada from Fort Erie, Ontario, and today it supports 690+ helicopters and 190 operators in Canada, so once again the Canadian taxpayer and workers are abandoned by the current Conservative government in Canada, which forgets that it works for its citizens, and it must seek to get the best deals for Canadians and to create Canadian jobs in any large international trade deal , in this case it failed and Bell work is heading for Fort Worth and Amarillo in Texas.
This Bell deal was a sad case of a Government NOT going out and getting the best deal for its citizens, as every capitalist knows competition is is good for pricing, yet in Canada we have little competition in banking, cell hone service and airlines, and we pay some of the highest costs for those services in the world because we lack real competition.
I will digress a little here on industrial offset agreements, while in this Bell/CCG case it was not mentioned and probably there was none, in the cas eof the Lockheed Martin F-35 Lightning II fighter, even though Canada has not ordered the aircraft yet and now may not, Lockheed Martin has by September 2014, already placed $C 587 million worth of contracts with 32 Canadian companies, an early start and incentive to getting the Canadian order. In fact a recent study showed the benefits of the offset program would be around $C 9.8B to Canadian companies and not $C 45.8B the government claimed.
These are offset agreements that a government makes when buying from a foreign company something that carries a high price tag. I have been involved in a few of these, like when Czech Republic leasing 12 Saab JAS 39D Gripen single engine fighters and 2 two seat trainers in 2004, for the lease BAe had to agree to an offset program.
Basically when a seller (OEM) is selling high value goods to a foreign government/agency or government owned company the offset agreement will stipulate that the seller agrees to buy a certain value of goods from the buying country or produce a certain value of goods in the buying country be they direct or indirect.
As a purely fictional example, we have country ‘A’ buying 25 Bell 412’s from Bell Helicopters in the USA for $500 million and country ‘A’ has a requirement for 60% offset, that means Bell would be obligated to fulfill $300 million in country ‘A’. It gets more complicated when a country assigns multipliers to high priority industries (eg. building up its helicopter MRO capabilities), so the credit value becomes important not the actual $ value.
There are direct offsets, which are related to the product bought, in this case co-production, buying from local aerospace suppliers and then there are indirect offsets which are not related to the product bought, like export and marketing assistance which I worked on in the Czech JAS39D deal to transfers of some technologies or direct foreign investment in local companies, and each of these would have a multiplier (1 to say 6) based on Government priority, and these multipliers become the credits used to get to the $300m offset in my example.
If building up its helicopter MRO capabilities was a major priority for country ‘A’ and they give it a multiplier of say 6, then a $50m investment in a local helicopter MRO would bring the offset, in this case an indirect one to the $300m (eg. $50m investment x 6 multiplier), off course there are sometimes many direct and indirect offset programs with various values and multipliers to get to the credit value, like Canada’s $C 9.8B to $C 45.8B offset program for the Lockheed Martin F-35 Lightning II fighter.
Anyway, I do believe Canada should have received some offsets and some guarantees of more work from Bell Helicopters in Canada, lots of money was left on the table for Bell Helicopters, not sure why.
The new Bell single engine light helicopter, the $1.2 million Bell 505 JetRangerX, nice and will be very successful, sadly it won’t be built in Canada as Bell Helicopter has decided to build it in Lafayette, Louisiana, even though JetRangers have been built in Mirabel, Quebec for 29 years. Louisiana put up $34.3 million to convince Bell to build it in its state, and Canada bought 22 helicopters for $C 327 million ($US 264 million today), where Bell probably walked away with a +/-35% margin ($US 92m+/-) and Canada got burned as we got nothing from Bell, other than 22 excellent helicopters, you would think the Canadian Government would leverage this deal to make sure Mirabel got the Bell 505 JetRanger X production or some more Bell 525 Relentless work. You have to wonder what the PWGSC does that creates value for Canadian taxpayers.
Note: Canadaian Air Force has bought over 100 CH-146 Griffon (aka Bell 412’s) from Bell in the past 20 years.
On cue Bell Helicopter also announced that the new $1.2m Bell 505 JetRanger X will be assembled in Lafayette, Louisiana again a slap in the face for Canada as the Mirabel, Quebec plant was where the Bell 206 JetRanger (7,400 built) was built since it was transferred there from Texas in 1986. Louisiana is spending $26.3 million to build the hangar, $4.0 million for lease support, $3.8 million for infrastructure and $205,000 to move Bell employees to Lafayette.
Obviously Bell has walked away with a high margin contract with the Canadian Coast Guard, misled the Canadians in its public relations campaign to get the Coast Guard order and now laying off Canadian workers and depriving Canada of continuing to build the new Bell 505 JetRanger X, which would have created many jobs at Mirabel, where sadly Bombardier continues to lay off workers as it struggles with certification of its Series and Global 7000/8000 business jets.
Now Bell says “across the industry, global commercial orders and deliveries in the medium market continue to be significantly below forecasts”, so I needed to check this out. Globally the helicopter market is down, in 2014 total western helicopter deliveries (that is global minus Russian and Chinese OEM’s) at 1,008 units (230 piston -31% vs 20013 and 778 turbine -23% on 2013), for a total delivery value of $5.3B -2.8% on 2013 numbers.
Currently Bell Helicopter produces 5 models, 3 light single engine models (prices in $US ), ($2.5m Bell 206-L, $3.1m Bell 407, $3.3, Bell 407GX) then 2 twin engine medium models ($10.8m to $12.8m Bell 412EP/EPI, $6.9m Bell 429).
So a quick look at commercial deliveries in the past 5 years show a record high 213 units delivered in 2013 and down to 178 in 2014, the average for the past 5 years is 167.2 per year (836 delivered between 2010 and 2014), so 2014 was really not that bad, with deliveries 6.4% higher than the 5 year average and coming off the best year ever in 2013, I am puzzled by Bell’s claim.
In 2014, Bell delivered:
13 x Bell 206L-4, 86 x Bell 407, 26 x Bell 412, 53 x Bell 429
In fact, compared to 2012 (188 deliveries), the only decline is the Bell 412 by 13 (39 vs 26), otherwise the other models were all up. So it seems yes, the Bell 412 is not doing as well though the 2012 delivery of 39 is the highest for the type since 2000 the earliest year I have for production of helicopters.
What does not add up for me is that Bell Helicopter had $ 4.245 Billion in revenue in 2014 (31% of Textron’s $13.878 Billion in revenue), and claims $ 1.614 Billion in revenue for commercial helicopters but the above 178 deliveries in 2014 add up to $ +/-927.6m by my estimate.
My shortfall of $687m (42.5% of Bell’s commercial revenue) may be post-sale support and service for the 13,000 Bell helicopters in service today, at $52,846 per helicopter that could be the difference, as aftermarket revenue is big business, at Textron Aviation (Cessna and now ex-Beechcraft) revenue was $4.568B in 2014 but aftermarket revenue was 30.4% of that ($1.386B) in 2014, a huge business today, and it is why I do not understand why UTC is thinking of divesting itself in Sikorsky (a future Blog article is coming on that).
The Military side of Bell’s business is mainly the V-22 tilt-rotor aircraft with $1.771B in 2014 (41.7% of Bell helicopter revenue) and ‘other’ military revenue (mostly H-1 Huey) with $860m (20.2% of Bell’s revenue), in total military revenue is $2.631B or 62.0% of Bell’s Helicopter revenue, and here lies Bell’s real problem !
Textron has 28% of its revenue with the US Government, or $3.885B in 2014, which means that Textron Inc. has $1.254B in Government/Military revenue (excluding Bell), or only 9.0% of revenue vs Bell’s 62.0%, so with only 31% of Textron’s revenue, Bell has 67.7% of Textron’s Government/Military revenue, ouch !
The problem at Bell Helicopter is not the commercial side, 2014 (178 deliveries) was a good year when compared to previous years, and came on the back of the best year for commercial sales (213 deliveries).
The REAL problem is that Bell Helicopter is too dependent on the military market, with 62% of revenue too high given US Dept. of Defense cut backs, so it is NOT as stated by Bell a problem with “global commercial orders in the medium market”, nice try. This is the same for UTC as it has hinted at divesting itself of Sikorsky for the very same reason, too focused on military sales and cut backs make growth and profit margin targets outside of what UTC considers satisfactory, I will write a blog shortly on the UTC/Sikorsky question.
The US DOD (Dept. of Defense) is making big cut backs in its budget and we are seeing that many of the aircraft/helicopter OEM’s struggle with that, seems that the “military industrial complex” is alive, which is a relationship between the arms industry, DOD, legislators and lobbyists to keep the arms industry growing, basically through ‘wars’ so they can sell their wares. Now the US military has no wars to fight since 2001 and now Bell Helicopters and Sikorsky and others are hurting ? they need wars to make money. Without wars, we get cutbacks and disposals of business units that cannot make money in times of peace-sad world we live in !
The new Bell 525 Relentless, a $ 25+/- million 21 seat helicopter that will take Bell Helicopter into the BIG commercial league where margins are real good, presently dominated by Airbus Helicopters, Sikorsky and AgustaWestland. The market is the offshore oil and gas exploration, NOT now but it was when the Bell 525 was launched in 2012, now low oil prices are starting to hurt this segment, which was forecast to be 50% of the Bell 525’s sales, and right now the big offshore operators like PHI, Bristow and CHC have to be worried about the near term future, and the OEM’s are surely worried the most as oil will stay under $65 a barrel for sometime as China has slowed down, and Iran is coming back to the market, Russia’s economy is shrinking and OPEC is not going to budge on production cuts.
To its credit, Bell Helicopter is changing, it has the new light single $1.2m Bell 505 JetRanger X coming to market soon to take on the light market and FINALLY Bell is going to produce a large all weather helicopter for the off shore oil and gas exploration and transportation, VIP, SAR and government use, the 20 seat Bell 525 Relentless will be priced at around $22-$26m and will compete with the 19 passenger $28m Airbus Helicopter EC225 Super Puma, $32m Sikorsky S-92 and the $32m AgustaWestland AW189 for mainly offshore oil and gas operations.
On that point I need to throw some cold water on that segment as oil is half the price it was last year and many oil and exploration projects have been stopped and the future of all high cost oil production facilities/companies is questionable as demand for oil has decreased in China and production has increased and will increase once Iran comes back to the market. As an investor, I would not touch offshore operators like PHI, Bristow or CHC these days, they will feel the pain, it’s a matter of when NOT if.
The Bell 525 Relentless when launched assumed that 50% of its market was going to be oil & gas, 25% military, 10% utility, 10% corporate and 5% HEMS, today military and oil gas is down across the globe, that is 75% of the market the Bell 525 was designed for, but Bell needed to move up to higher margin markets, timing could not have been worst.
Quickly, a look at Textron Inc., it has 5 divisions (Bell Helicopters, Textron Aviation, Textron Systems, Industrial and Finance), and on its $13.878B in revenue it produced a total segment profit of $1.214B (8.7%).
Revenue breakdown is $4.3B at Bell Helicopter (31% of total), $1.6B at Textron Systems (12% of total), $4.6B at Textron Aviation (33% of total), $3.3B at Industrial (23% of total) and $0.1B at Textron Finance (0.7% of total).
Backlogs are big at Textron, Bell Helicopter has $5.52B, Textron Aviation has $1.365B and Textron Systems $2.79B for a total of $9.679B, and while Textron Aviation struggles with its light and medium segments, it is also coming out with new models, the Latitude and Longitude and things are looking up for them, but the light end has seen little recovery since 2008 and the entry of HondaJet will just make that segment tougher for all to compete in.
I will cover the business jet market and the entry of Japan back into the aircraft production scene in a up and coming article.
Thank you for reading this blog, till next time-good bye.