PHI (PHII)

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Amit Amin

priya shrestha

PHI Inc. (NASDAQ : PHII) operates one of the largest fleets of commercial helicopters in the U.S. PHI suffered a pilots strike in 2006 that left it short of qualified pilots and net profits. Even though it lasted less than a month, the strike has continued to hurt revenues and income because many experienced pilots have quit.^[1] Unable to staff all of its helicopters, PHI has missed out on the boom caused by rising oil prices. A little less than two-thirds of the company's revenue is earned through transporting personnel and equipment to and from offshore rigs in the Gulf of Mexico.^[2] As oil prices rise, investment in new wells and utilization rates of existing ones rise in tandem. With more crews and equipment needing transportation, demand growth for helicopters has been outstripping supply growth, letting revenues for the oil and gas segment increase despite falling flight hours.^[3]

Flight hours have been falling because of more than just a shortage of pilots. PHI has been retreating from foreign markets, where competition is fierce, to focus on its domestic business.^[4] Although short-term prospects in the Gulf of Mexico look well, most basins in the area are approaching maturity. However, both the oil and gas industry and PHI are betting on deepwater reserves, which can be up to 200 miles from land. Traveling to such distant wells requires medium and large helicopters, which have a large fuel capacity. To take advantage of this growing market, PHI has built up its long distance fleet to be one of the two largest in the Gulf.^[5]

Business and Financials

PHI Inc. is midway through a recovery from its 2006 strike, in which 236 out of 597 of its pilots left work for 20 days. ^[6] Net income is no longer negative, at $28.2 million for 2007. Revenue has risen consistently, growing 8% from 2006 to 2007. PHI has a market cap of 615.4M, and an operating margin of 7%.^[7]

Source:^[9]

• Oil and Gas (64% of revenues in 2007): This segment uses 163 aircraft to transport personnel and equipment to and from offshore oil and gas platforms. 7.8% of the segment’s revenue comes from operations in Angola and Congo, with the rest earned in the Gulf of Mexico. From 2006 to 2007, revenues increased 6%. However, flight hours have been consistently falling, from 126,591 hours in 2005 to 107,812 hours in 2007. This means that revenues have only been rising because of an increase in rates, not an increase in volume. Flight hours fell because PHI has been cutting back on its foreign operations and because of the residual effects of the 2006 strike. Until the end of Q1 2008, PHI was unable to replace all 72 pilots that quit. Because of falling flight hours, net income fell over 17% from 2006 to 2007, and over 23% from 2006 to 2005.^{[10] [11][12]}
• Air Medical (34%): Using 68 aircraft, this segment provides air medical transportation for hospitals and emergency service agencies in 12 states. These aircraft are specially fitted to transport emergency patients and medical equipment. Revenues from this segment rose 19% from 2005 to 2006 because of the additional $37.2 million brought in by new operations, and 12% from 2006 to 2007 because of greater utilization of those new operations. Nevertheless, margins remained low, at 2.6% in 2007.^[13][14]Although the segment has recovered from the strike in 2006, hospitals are slow to grab the opportunity to use helicopters for emergency transportation. That's because there is no conclusive evidence that air transportation actually has any benefits, putting into question the commonsense notion that transportation by air is faster than by land.^[15]
• Technical Services (2%): This segment performs maintenance and repair services for Eurocopter, Sikorsky and Bell Helicopters. Increased activity coupled with expense reductions let the segment’s net income rise 33% from 2005 to 2007. Activity has risen as the commercial helicopter industry has thrived (see below). With more helicopters in operation, there are more helicopters needing PHI's technical services.^[16][17]

Trends & Forces

Rising Oil and Gas Prices Boost Demand for PHI’s Services

Like other commercial helicopter operators, PHI passes on rising fuel expenses to its customers in the form of rate increases. Also like other operators, higher oil prices create new opportunities for PHI. 64% of PHI’s revenues come from upstream oil and gas companies. Higher oil prices encourage them to make greater investments in offshore wells. From June of 2003 to June of 2008, oil prices rose more than six-fold.^[18] Jackup and semisubmersible rig utilization rates in the Gulf of Mexico increased by more than 30% in response, where PHI earns 58% of its revenues.^[19][20] As these rigs have dedicated crews needing transportation to and from offshore locations, demand for PHI’s helicopters has increased. The strike in 2006 limited PHI's ability to expand its operations. Nevertheless, from 2005 to 2007, revenues per flight hour rose 35%, and net income per flight hour more than doubled.^[21][22]

Deepwater Facilities Require Big Aircraft

As oil prices continue to rise and shallow water production dries up, deepwater drilling is becoming more common. From 2003 to 2008 deepwater oil production in the Gulf of Mexico increased by almost 50%.^[23] Deepwater oil production in Africa has more than doubled during that same time period.^[24] Deepwater facilities can be up to 200 miles offshore. To travel that distance, medium and large helicopters are needed, as they have greater fuel capacity than small helicopters. ^[25] With 58 medium and 19 large helicopters, PHI’s long distance fleet is comparable only to competitor CHC Helicopter. To maintain that advantage PHI has orders for 6 additional large helicopters, costing $127.4 million.^[26]

Growth in Foreign Markets Is Much Greater Than In the Gulf of Mexico

Source: ^[27]

59% of PHI’s revenue came from domestic operations in the Gulf of Mexico in 2007. ^[28] Although deepwater oil production in the Gulf of Mexico increased by about 50% from 2003 to 2008, growth in foreign markets has been much greater. For example, production nearly tripled in Africa during that same time period. ^[29] At risk are PHI’s long term growth prospects. Because the Gulf of Mexico has long since had a boom in production and exploration, new discoveries add only small amounts of new oil reserves. It’s estimated that the next 1000 natural gas discoveries in the Gulf will add just 15% of what the first 1000 discoveries did. The situation with petroleum is similarly dismal. With fewer new rigs needing crews and supplies, PHI’s domestic business will grow slowly.^[30] PHI has been selling off its international fleet in order to finance the purchase of medium and large helicopters for operation in the Gulf of Mexico. Although growth in foreign markets is great, the amount of competition is greater. Bristow Group, Seacor Holdings, and CHC Helicopter all have large international operations. There are also local firms that compete in only one international area. In contrast, in the Gulf of Mexico, PHI has only one large competitor in each of its helicopter classes.^[31]

Competition

In the aviation industry, competitive bidding ensures that price is the primary basis of competition.

• Bristow Group (BRS) – Bristow Group operates the largest commercial helicopter fleet in the world. Although just 23% of its revenues are earned in the U.S., Bristow owns and operates its own flight school, providing preferential access to a commodity in high demand – trained pilots.^[32]
  
• Seacor Holdings (CKH) - Seacor competes with PHII in the Gulf of Mexico and on the mainland U.S. with its air medical services.
• CHC Helicopter – CHC is the second largest commercial helicopter operator in the world, and has more medium and large helicopters than PHI. However, CHC has just 2 small helicopters, leaving shallow water platforms for PHI and its other competitors.
• Rotorcraft Leasing Company LLC – Rotorcraft is the largest privately-held operator in the Gulf of Mexico. Its small helicopter fleet is half the size of PHI's. Rotorcraft has few medium helicopters, and no large helicopters.
  

1. This amount includes air medical operations added in 2007. 2006 flight hours for just Seacor's oil and gas segment was 62,609.^[43]

References

1. ↑ PHI 2007 10-K, Item 7, Page 15
2. ↑ PHI 2007 10-K, Item 1, Page 2
3. ↑ PHI 2007 10-K, Item 7, Page 16
4. ↑ PHI 2007 10-K, Item 7, Page 18
5. ↑ PHI 2006 10-K, Item 1, Page 3
6. ↑ PHI 2006 10-K, Item 1, Page 3
7. ↑ Yahoo! Finance – Key Statistics
8. ↑ PHI 2007 10-K, Item 7, Page 16
9. ↑ PHI 2007 10-K, Item 7, Page 15
10. ↑ PHI 2007 10-K, Item 1, Page 2
11. ↑ PHI 2007 10-K, Item 7, Page 19
12. ↑ PHI 2008 10-Q, Item 7, Page 16
13. ↑ PHI 2007 10-K, Item 1, Page 2
14. ↑ PHI 2007 10-K, Item 7, Page 18
15. ↑ Madison - How often do helicopters save lives?
16. ↑ PHI – Technical Services
17. ↑ PHI 2007 10-K, Item 7, Page 20
18. ↑ Bloomberg: Energy Prices
19. ↑ PHI 2007 10-K, Item 1, Page 2
20. ↑ PHI 2006 424B3, Item 1, Page 5
21. ↑ PHI 2007 10-K, Item 7, Page 16
22. ↑ PHI 2007 10-K, Item 7, Page 15
23. ↑ World Oil – Deepwater activating trends in the Gulf of Mexico
24. ↑ Arabian Business - Deep Water Boom
25. ↑ Oil Online – Flocking to bigger birds
26. ↑ PHI 2007 10-K, Item 7, Page 16
27. ↑ AXPC – Natural Gas Supply and Demand
28. ↑ PHI 2007 10-K, Item 1, Page 2
29. ↑ Arabian Business - Deep Water Boom
30. ↑ AXPC – Natural Gas Supply and Demand
31. ↑ PHI 2006 10-K, Item 1, Page 3
32. ↑ BRS 2007 10-K, Item 1, Page 6
33. ↑ PHI 2007 10-K, Item 1, Page 11
34. ↑ PHI 2007 10-K, Item 1, Page 15
35. ↑ BRS 2007 10-K, Item 1, Page 5
36. ↑ BRS 2007 10-K, Item 4, Page 32
37. ↑ CKH 2007 10-K, Item 1, Page 14
38. ↑ CKH 2007 10-K, Item 7, Page 36
39. ↑ CHC Helicopter – Investor Relations
40. ↑ Yahoo! Finance – FLI Key Statistics
41. ↑ Rotorcraft Leasing Company - Fleet Info
42. ↑ Indeed - Rotorcraft Leasing
43. ↑ CKH 2007 10-K, Item 7, Page 47