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. 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. 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.
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. 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.
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.  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%.
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. 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. 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.
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%. Deepwater oil production in Africa has more than doubled during that same time period. 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.  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.
59% of PHI’s revenue came from domestic operations in the Gulf of Mexico in 2007.  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.  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. 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.
In the aviation industry, competitive bidding ensures that price is the primary basis of competition.
|'||Small Helicopters||Medium Helicopters||Large Helicopters||Other and Fixed Wing||Flight Hours (For Oil & Segments)||% of Revenues From Domestic Operations||Revenue|
|Seacor Aviation Services||80||44||3||0||74,7661||16%||$215M|
|Rotorcraft Leasing Company LLC||89||5||0||0||NA||100%||$15M|
1. This amount includes air medical operations added in 2007. 2006 flight hours for just Seacor's oil and gas segment was 62,609.