Test your trade savvy against the international investment choices a Canadian company faced in its growth and then check out its decision.
Adapted from a case study by Charlene Zietsma, University of Victoria, commissioned by EDC through its Youth Education Program – helping prepare Canadian students for careers in international trade. In July 2011, the case study won an Award of Excellence from the Administrative Sciences Association of Canada.
VIH Aviation Group, which began in Victoria, B.C. in 1955 with a single helicopter, today has one of the largest privately held helicopter fleets in North America. The group includes several aviation divisions providing services for global resource industries – from forestry to oil and gas – plus related services, including search and rescue and helicopter repair. Exporting since 2000, VIH today has some 600 employees and operates more than 60 helicopters.
In fall 2008, VIH was poised to launch a new stage of international growth. Its management had identified three key opportunities to provide helicopter services to the rapidly growing offshore oil and gas market.
Which one would you recommend to the Board?
To take advantage of any of these options, VIH had access to various EDC loan facilities.
1: Joint Venture in China?
The deepwater oil and gas industry in China had major gaps in helicopter support. In 2008, China had only 130 civilian-use helicopters, compared to 13,000 in the United States. China’s offshore market was served by three firms and only 30 Instrument Flying Rules (IFR) helicopters – those using instruments to check ground conditions – required in difficult weather. (By contrast, VFRs, or visual flying rules, use visual cues to see where the aircraft is going.)
VIH saw a rapidly modernizing China as a high-growth market and analysts anticipated demand for up to 100 IFR aircraft by 2013. VIH was approached by China’s second largest airline about participating in a joint venture. The Chinese firm had a small market share in offshore helicopter services, and VIH had previously done seismic work (geological surveying) under contract in China.
In exchange for a 49 per cent share, VIH was prepared to contribute senior management, replicate its proprietary logistics and operating systems, train local staff, provide working capital and lease aircraft to the venture, while the Chinese partner would provide cultural awareness, political relationships, and other network advantages. VIH anticipated initial funding of some $24 million and had lined up commercial loan agreements, including a loan guarantee from EDC.
Challenges included business practices in the industry, ownership restrictions, possible risks in repatriating profits, and approvals for each flight plan, which could slow down customer responsiveness. In addition, VIH calculated that fees would have to increase by up to 100 per cent to bring these operations to global standards, but was not sure how quickly this would happen.
2: Acquisition or Joint Venture in Australia?
Australia was also undergoing an offshore oil boom. Three firms – two foreign and one local – served the Australian oil and gas market, with more than 50 aircraft.
New demand was estimated at up to 18 heavy helicopters and 18 medium ones. VIH had identified a small helicopter firm in Australia as a potential acquisition. As well, a New Zealand firm with established operations in Australia, HNZ Group, was interested in a joint venture. Both companies had good management, jurisdictional expertise, staff and connections in Australia – to which VIH could add its new-technology heavy helicopters for the offshore oil market.
To take advantage of either option, an EDC loan program – financing or bank loan guarantees for Canadian investments in overseas firms – was available. A currency hedging strategy would also be needed to work abroad.
The country had no foreign ownership restrictions, however, some states and oil companies required that offshore work use twin-engine IFR aircraft. More challenging, the rates charged for helicopter services in Australia were historically low, meaning lower profit margins, but were catching up with prices in the United States. And the country’s geographic distance from Canada could mean higher than usual business travel costs.
3: Expansion in the United States?
Two tiers of helicopter operators served oil and gas companies in the mature Gulf of Mexico market. Unlike Australia, the United States did not require twin-engine (IFR) aircraft for offshore support, creating lower regulatory and financial barriers for competitors. For example, some independent petroleum companies used older VFR aircraft for short service contracts and cost savings. Larger oil companies, however, were more likely to demand global IFR standards, particularly as oil rig platforms moved 200 miles or more offshore.
Overall, VIH expected deepwater platforms in the Gulf to roughly double by 2012, from some 32 in 2008. As such, the company estimated the market would need up to 15 each, of heavy and medium-lift helicopters. VIH Cougar, an affiliate based in the United States, already had a good reputation after three years of experience in the Gulf, and could support expansion.
Among the key concerns: two big competitors, PHI and Bristow, were entrenched in the Gulf, both also offering heavy-lift IFRs; and U.S. protectionism was expected to grow with the economic downturn, especially in sectors deemed important for national and oil security.
Now it’s your turn. Which option(s) would you choose?
What Did VIH Do?
VIH actually chose two options. “We bought 50 per cent of HNZ’s Australian offshore operation, now called HNZ Cougar Helicopters (Pty) Ltd.,” says Charles Hodgins, senior vice-president, Finance and CFO, VIH. “EDC gave us great assistance. They provided a direct loan for this joint venture, which was completed in October 2009.” All this in the midst the global recession, when credit was tight!
In addition, VIH expanded its U.S. operations in the Gulf of Mexico. “We built a huge facility in Galliano (Louisiana) in 2008, for search and rescue operations,” says Hodgins. Again, EDC helped the company access much-needed capital to support this growth.
Just in time, it turned out. VIH was soon called upon to rescue workers from BP’s Deepwater Horizon oil rig, whose explosion and massive oil spill in the Gulf captured world attention in 2010. The oil disaster, and new industry regulations in the U.S., led to a moratorium on offshore activities, which has since been lifted. “That was actually harder for us than the economic downturn in the United States,” says Hodgins. Under these circumstances, the company benefited from its global diversification and growing resource sector opportunities worldwide.
Finally, the China joint venture was shelved. “We were ready to make the investment,” says Hodgins, “but in the end we realized it would take too long to get a proper return and, with limited resources, we redeployed our capital elsewhere.”
Hodgins says the company may again consider investing in China one day. For now they are exploring more immediate opportunities in Brazil, and have sold some helicopters to a company there.