There is a common perception among investors that companies engaged in transportation services such as aviation are cyclical and tend to do badly in a recession. However, this is not true for all companies. The business models of helicopter services companies Bristow (BRS), Air Methods (AIRM), and Erickson Air-Crane (NASDAQ: EAC) share certain common characteristics that have allowed them to weather weak economic environments.
Attractive contract terms with downside protection
Bristow owns more than 400 aircraft in 20 countries, which are deployed largely to fly the staff of oil and gas companies between different facilities and installations. Its two-tiered contract structure with a large fixed revenue component results in predictable and recurring revenues. About 65% of its contractual revenues are contributed by fixed monthly standing charges that clients pay to reserve Bristow's helicopter capacity. The remaining 35% revenue comprises of variable fees where Bristow is compensated based on hours flown. In other words, Bristow is at least guaranteed at least 65% of total contract value, even if its helicopters are not utilized.
Air Methods, the largest air medical transportation services provider in the U.S, also boasts of a high fixed-revenue component. It generates its revenues from two service delivery models: air medical services contracts and patient transport. For the former which accounts for about a quarter of its top line, Air Methods enters into exclusive long term aviation services with hospitals.
Under air medical services contracts, 80% of contractual revenues are derived from fixed monthly fees, which are paid to Air Methods irrespective of actual usage or medical patient reimbursements. In addition, the variable hourly flight fee increments are pegged to changes in the consumer price indices and other input costs, so that Air Methods' margins are not affected. In contrast, its patient transport revenues are non-contractual and ad hoc in nature.
For Erickson Air-Crane, an aviation services provider serving a mix of commercial and government clients, multi-year contracts help it to nurture strong relationships with its customers over time. Sixty-five percent of Erickson Air-Crane's customers have engaged its services for more than five years, while every two in five clients have worked with the company for more than a decade. An average 94%-95% of Erickson Air-Crane's customers have renewed their contracts when their existing contracts expired.
Stable demand drivers
Despite earning the bulk of its profits from oil and gas clients, Bristow is affected by volatility in commodity prices to a limited extent. This is because 60% of its revenues are generated from operating expenditures linked with oil and gas production activities. These operating expenditures are not affected by any exploration project deferral. In comparison, Bristow derives 10% and 20% of its sales from oil and gas exploration and development activities respectively. Even for such discretionary capital expenditures, Bristow claimed that its clients are budgeting based on their long term expectations of commodity price, and not spot prices.
For Erickson Air-Crane, its diversity across both end markets and geographies ensures a certain degree of demand stability. Its customers operate in industries as diverse as firefighting, oil and gas, and timber harvesting, with no single segment making up more than a third of sales. In terms of geographical exposure, only 40% of its sales are generated domestically, with the remaining revenue derived from South America, Europe, and the Middle East.
While Air Methods is not as diversified as Erickson Air-Crane, the non-cyclical nature of health care (there will always be people getting sick) lends support to the relatively stable demand for its medical transportation services. Air Methods passed the millionth patient mark in 2011 and went to transport a further 114,000 patients in 2012.
Air Methods is also likely to see upside from two key revenue growth drivers: price increases and hospital expansion. Firstly, patients and health care clients are less price sensitive, giving Air Methods pricing power. Air Methods increased its net revenue per transport by 11% and 15% in 2011 and 2012 respectively. Secondly, as its hospital clients expand their service coverage, Air Methods' revenue potential increases. For example, Air Methods added six new operation bases, as a result of four of its hospital clients expanding.
Solid financial numbers
Both Bristow and Air Methods have increased their revenues in every single year for the past decade, notwithstanding the 2008-2009 global financial crisis. In addition, they have been profitable over the same period.
Listed in April 2012, Erickson Air-Crane had grown its top line for three consecutive years leading up to that date. For the past five years (2008-2012), it only saw a drop in sales in 2010, in the amount of 21%. However, that was largely attributed to a 65% fall in 2010 manufacturing and maintenance, repair, and overhaul revenues and not in its core helicopter services business.
Conclusion
These three helicopter services providers are not your typical asset-heavy companies operating in cyclical industries with volatile revenues. Instead, they boast of recession-resistant revenue streams protected by attractive contractual terms and favorable demand drivers.
