Financing fleet renewal for air ambulance operators
For fixed-wing air ambulance companies in the private sector, balancing the pros and cons of leasing or outright purchase is key, say operators. But for smaller outfits in different regions, raising finance can be a challenge. Robin Gauldie looks into the issue
“Purchasing versus leasing is the biggest question an air ambulance operator has to ask themself when thinking about a new addition to the fleet or just starting in the air ambulance business,” said Patrick Schomaker, Director of Sales and Marketing for Luxembourg-based European Air Ambulance, which added a sixth Learjet 45XR to its fleet in September 2019. The balance has to be weighed: “Owning the aircraft gives you more control over the fleet. The monthly payments of the loan can be seen as investment as the aircraft will eventually be paid off and can then be flown at lower costs, or can be sold and the remaining value of the aircraft will still bring in some cash. In the long run and if the right aircraft has been chosen, it’s cheaper than leasing.”
Owning the aircraft gives you more control over the fleet
There are benefits to both models, and what’s right for one company may not be the answer for another. “Purchasing aircraft is a sign of long-term commitment to your clients,” Schomaker notes. “Some clients make it a requirement that the company owns the aircraft they use.” Conversely, leasing offers companies the ability to quickly start a new business or extend their fleet.
Leasing is less of a long-term risk than purchasing an aircraft, and if you are less knowledgeable about aircraft management, it ‘might be a better option’, added Schomaker. “However, monthly payments have to be made whether the aircraft flies or not and these payments can be a heavy financial burden in low season or when there is a downturn in the market. You have less control over the aircraft, and some potential clients see it as a negative point if the company is not able to buy their own aircraft.”
Siegfried Axtmann, Chairman and Founder, FAI Aviation Group, told ITIJ that outright purchase of aircraft is his preferred option. “Operator leasing of air ambulance aircraft, as opposed to financial leasing, is ultimately very expensive, because air ambulance aircraft normally utilise an abnormal number of hours,” he explained. “In general, for aircraft financing, the buyer has to bring in a certain amount of equity, at least 25 per cent of the purchase price, to receive affordable financing conditions from European banks.”
Operator leasing of air ambulance aircraft, as opposed to financial leasing, is ultimately very expensive, because air ambulance aircraft normally utilise an abnormal number of hours
Financing a purchase or a lease can prove more challenging in other regions of the world. “Aircraft financing is a specialised field and therefore not readily available from the traditional financial institutions,” said Stephen Gitau, Chief Finance and Administration Officer for AMREF Flying Doctors in Kenya. He went on to explain: “Banks [in Kenya] require security / collateral – usually land and buildings or a cash equivalent – to secure the aircraft loan, other than the aircraft itself. This requirement makes it hard for operators to use banks as some of them may not have the collateral in place. The preferred option for operators is to use the aircraft as the security and depending on the purchase process, this may not be acceptable to banks. We have opted to use specialised lenders outside the country. These lenders accept the aircraft financed as the security and offer competitive interest rates. We prefer finance leases that allow us to pay for the aircraft over time and eventually own the aircraft. The only disadvantage here is interest cost. Outright purchase is great, but we don’t have the ability to do it – this way you save on interest cost.”
Rotary operations face different challenges
Meanwhile, helicopter emergency medical service (HEMS) providers, whether in the private sector or operated by national or regional authorities, must consider a variety of factors when planning to expand their fleets and replace or modernise ageing rotorcraft. What are the challenges when it comes to financing fleet replacement?
“In the emergency medical services (EMS) sector and air ambulance in particular, financiers and lessors are generally interested and ready to provide contract-based financing or operating leases,” said Nadav Kessler, Sales and Business Development Director at Asian Sky Group. “Traditionally, in the rotary space, most of the helicopter financing and leasing institutions were targeting the offshore oil and gas sectors. However, with the downturn in oil prices and the effect it had on the offshore helicopter industry, financiers began looking for the next mission which could require and justify leasing. EMS then took a larger role. In Asia especially, as offshore operations became relatively stagnant, EMS presented more of an opportunity, given its infancy in the region.”
The main considerations are long-term and short-term risk
Lease or purchase?
“The main considerations are long-term and short-term risk,” Kessler says. “If a certain operation is backed by a three-to-five year lucrative contract, after which the aircraft may not be needed again (due to various possible reasons), the operator may not want to take the residual risk of owning the aircraft beyond the contract period. In such a case, leasing could be a suitable solution as the lessor would be taking the future residual risk. However, if the contract is much longer, then a purchase may become more attractive since the overall amount paid throughout the lease period may be similar to that of purchasing the asset.
Other operators may be willing to take the residual risk on certain asset types. Kessler said: “This of course also depends on what kind of lease rates they could get from the lessor. Another consideration is normally related to capital availability or allocation – this is mostly a function of how new the operation is, how large the fleet is and who is backing the business financially.” For original equipment manufacturers, getting your aircraft into a new region can present a valuable opportunity, as Kessler pointed out, and they will make an effort to find the right solution: “Manufacturers are aware of the value of bringing in new aircraft into the region and will work with the operators and the lessors in finding suitable solutions. This is the case mostly for new aircraft, but for used ones as well. Some brokers – if not focused on sales only – will assist their clients in finding the right operational solutions, which often include sourcing financing or leasing solutions.”
As Kessler points out, fleet renewal is not very frequent. “As long as the aircraft is under seven to 10 years old, it is likely to remain in operation. However, new operations will most likely opt for new aircraft as opposed to used ones, but this too is of course a function of cost as well. When new EMS operations are established, the need for new aircraft is very much driven by safety, technology and performance capabilities.”
HEMS operators in the private sector say aircraft builders and brokers are generally helpful in facilitating finance for purchasers, and Airbus Helicopters, the world’s largest rotorcraft maker, lures buyers by offering finance through Airbus Bank, which it set up in 2015. The bank offers asset-based financing for fixed-wing aircraft, helicopters and engines and is active in new and used aircraft transactions, focusing primarily on providing finance for small and medium-sized enterprises in Germany, France and the rest of the European Union.
Donations from the communities they serve are key sources of finance for many EMS operators, but charity financing proves difficult for some. Bryn Elliott, Editor of Police Aviation News, contrasts the issues facing two Canadian HEMS operators that depend heavily for finance on donations from the communities they serve. HALO Air Ambulance, which serves Southern Alberta, ‘is in dire need of funding and elected officials are calling on the provincial government for help to resuscitate the charity-funded air ambulance’, Elliott explained.
Elliott contrasted HALO’s predicament with the challenge facing the Shock Trauma Air Rescue Service (STARS). Like HALO, STARS is a non-profit operation. Serving northern Alberta and headquartered in Grande Prairie, it is supported by a mix of individual and corporate donors, service groups, and government contributions. STARS is seeking support to renew its fleet of nine Airbus BK117 helicopters and one AW139 with Airbus H145 helicopters by 2022 at a total cost of around Ca$127 million. Financing will combine the proceeds of selling the old fleet, a $65-million contribution from Canada’s federal government, and private sector giving.
“Grande Prairie has similar population demographics to Medicine Hat, the HALO base, but the area has the bonus of the backing of an oil and gas industry,” Elliott pointed out. “Shell Canada has already donated $3.5 million towards the operator’s $4-million appeal for funding.”
Swiss Air Rescue Rega operates on a patronage system, which is a different funding model again. The organisation explained: “We are a non-profit organisation that is funded by its patrons. Our services are primarily geared towards the needs of the Swiss population. We are financed by means of private funding. This enables us to operate independently in the service of our patients.
In the interest of the patient, we take an active stand against the commercialisation of air rescue
In the interest of the patient, we take an active stand against the commercialisation of air rescue. Emergency missions and other operations carried out on behalf of the general public are not conditional upon whether or not the ensuing costs are covered. Our rescue activities are based on the Fundamental Principles of the Red Cross.”
Provided that the required free capacity is available, the organisation also puts the resources of its jet operation (aircraft, operations centre and crew) at the disposal of external customers for the transport of patients: The three fully dedicated, long-range Challenger 650 ambulance jets are fitted out as intensive-care units for medical evacuations and medically escorted repatriations from any country in the world.
International air ambulance operators have got to decide what works for them – the factors of regional obstacles to funding, as well as the perception that insurance clients have from whether or not a fleet is owned or leased, must be taken into consideration. There’s a wealth of options available to suit each operator’s specific set of requirements, and with assistance from the aircraft manufacturers, and leasing organisations, there’s sure to be an answer to the problem of financing fleet renewal. ■