Lease or buy - renewing air medical fleets
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, raising finance can be a challenge. By Robin Gauldie
International air ambulance jets
“Purchasing versus leasing is the biggest question an air ambulance operator has to ask himself 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 sixth Learjet 45XR to its fleet in September 2019. “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.”
David Fox, President of Fox Flight Air Ambulance in Canada, spoke recently about the company’s decision to invest in another aircraft: “We bought our first two Learjet 40XRs in October 2018, both at the same time. Then we bought the third one this past October (2019). We fly about 2,400 hours a year, so we bought the third 40XR as a reserve plane in case of maintenance issues so that we always have a plane available.” The decision to choose the Learjet 40XR came from a lengthy process that considered all the options in order to find the right aircraft for the company’s operational parameters. Fox continued: “Our old aircraft – two Learjet 35s and one Learjet 36 – were approaching 40 years old, so we obviously wanted to look at something newer. The cost of maintaining older planes, in terms of both time and money, is much higher because the parts are harder to get.”
Increasing capacity and service flexibility are key reasons why fleets need to be increased and by buying rather than leasing such capacity, it shows confidence in your operations as well. “Purchasing aircraft is a sign of long-term commitment to your clients,” Schomaker noted. “Some clients make it a requirement that the company owns the aircraft they use.” Conversely, Schomaker said, leasing offers companies the ability to quickly start a new business or extend their fleet.
When new EMS operations are established, the need for new aircraft is very much driven by safety, technology and performance capabilities
“There is less long-term risk than purchasing an aircraft, and if you are less knowledgeable about aircraft management, it might be a better option.” There is always a downside to any option, though, as he pointed out: “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.”
Chairman and Founder of FAI Aviation Group Siegfried Axtmann said that outright purchase is his preferred option. “Operator leasing of air ambulance aircraft, as opposed to financial leasing, is very expensive in the end, because air ambulance aircraft normally utilize an abnormal number of hours.” Equity can be an issue for some as well. “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.”
There are vast differences in air ambulance mission parameters across the world and, in certain countries, there are also key differences in financial regulations that govern how air ambulance operators can manage their fleet purchases. “Aircraft financing is a specialized field and therefore not readily available from the traditional financial institutions,” says Stephen Gitau, Chief Finance and Administration officer for AMREF Flying Doctors in Nairobi, 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 specialized 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.”
Of course, new air ambulance aircraft costs don’t stop at the airframe – then you need to kit it out. And this is not a cheap job. While some of the more popular airframes utilized by air medical operators now come with ‘off-the-shelf’ solutions for stretchers and storage units for medical equipment, this was not the case for Fox Flight. David Fox said: “We do a lot of long-haul repatriations, so we like to have duel oxygen tanks on our stretcher systems just as a fail-safe. When we were calling around to get quotes on a duel-tank stretcher system for our 40s, we found that none of the big companies who do that had ever installed any kind of stretcher system in a Learjet 40. It ended up taking six months to get those made.”
He added: “We had to design and install our own cabinet system in the 40s for medical supplies that had to be slightly smaller. The factory cabinets that were in the 40s originally would not let you get the stretcher in the door. We also had to add a couple of power outlets for additional slide the stretcher on and off the plane; the attachment that comes with the stretcher is designed to work with a Learjet 45, but we found that it didn’t quite fit for the 40. So we did have to overcome a few issues to adapt the 40 for our purposes.”
Ongoing costs for maintenance, repair and overhaul all need to be considered by operators who are investing in new or used aircraft. Older aircraft can be cheaper up front, but if you’ve got to spend more and more to try and source increasingly hard-to-find parts, then it’s a false economy. David Fox said: “We started to see, over the course of several years, the cost of parts for our old planes going up and up, and the reliability of those parts going down at the same time. We would purchase starters and generators that were supposed to go 1,000 hours and we’d only get 400 or 500 hours out of them. That is just because the parts are so old and they have been rebuilt over and over again.” He continued: “The new planes are bigger, so there is more room for the maintenance technicians to work and the parts and components go together much easier. The new planes also have better diagnostic tools that make troubleshooting easier. A lot of maintenance functions and testing in the new planes can be carried out by simply plugging a laptop into the onboard computer.”
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 EMS and air ambulance sectors 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.”
Lease or purchase?
“The main considerations are long-term and short-term risk,” Kessler said. “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. 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.”
Aircraft financing is a specialized field and therefore not readily available from the traditional financial institutions
For the original equipment manufacturers, getting your aircraft into a new region can present a valuable opportunity, as Kessler pointed out: “Manufacturers are aware of the value of bringing 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.”
“Fleet renewal is not very frequent,” Kessler said. “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.”
When the UK’s Great North Air Ambulance Service (GNAAS) knew that the life of its current aircraft was coming to an end, the charity was in for a challenge to come up with the necessary cash to renew it. The charity currently owns three Dauphin N2 aircraft, each of which is nearly 30 years old. A deposit has already been paid on a next-generation Dauphin which, being second-hand, has ‘only’ cost £5 million. Jay Steward, chief pilot at GNAAS, said: “This is an [operational] area of contrasts, and we need an aircraft that can handle the demands of flying from coast to coast, to the tops of fells and to city centres. Our current aircraft have done an incredible job, but the new model will take us to the next level.” He added: “The N3+ would cost upwards of £9 million new. This particular aircraft is only four years old and has flown just 306 hours, so we are delighted with the deal and can’t wait to get her flying in our green and white colours.” Meanwhile, two of the charity’s current fleet have now been made available for sale, proceeds from which will help pay off the new aircraft and also potentially secure a second upgraded helicopter.
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 (www.policeaviationnews.com), contrasts the issues facing two Canadian HEMS operators that depend heavily for finance on donations from the communities they serve. In Canada, 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 said.
HALO’s problems came to a head in 2018 when, as part of a one-time Ca$1-million grant from Alberta Health Services (AHS), it agreed to upgrade its single BELL 206L LongRanger to a more capable 1988 MBB (Eurocopter) BK117B2 C-GRLH. Previously, HALO had provided AHS with medevac flights on a fee-for-service basis.
“The higher costs associated with the replacement twin-engine aircraft exceeded the projections the HALO officials had allowed for. That agreement expired on 1 October and HALO expects to be C$750,000 in the red with no money in sight until the next batch of funding becomes available in March 2020 when the next helicopter medevac programme review takes place,” Elliott said. Despite the generosity of local communities, the operation has never secured stable funding, he added.
HALO was established in 2007 by the Southern Alberta MedicAir Society and provides the only dedicated medical rescue helicopter for the area. It operates from the city of Medicine Hat, but serves a much wider region, Elliott noted.
He contrasts HALO’s predicament with the challenge facing the Shock Trauma Air Rescue Service (STARS). Like HALO, STARS is a non-profit operation in Canada. 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 Ca$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 Ca$3.5 million towards the operator’s Ca$4-million appeal for funding,” Elliott noted.
Other recent Airbus buyers include HEMS New Zealand, which provides air ambulance services across the whole of the South Island. HEMS NZ, which is supported by communities and charities across the region, took delivery in August 2019 of two new Airbus H145 as part of a 10-year modernisation program of the country’s air ambulance services announced by the country’s health ministry in 2017. Demand for HEMS in New Zealand is expected to continue to rise, while the country’s current air ambulance helicopter fleet has an average age of 29 years.
Older aircraft can be cheaper up front, but if you’ve got to spend more and more to try and source increasingly hard-to-find parts, then it’s a false economy
In the UK, meanwhile, Yorkshire Air Ambulance (YAA) added a second H145 rotorcraft to its operation in 2017. A major factor in YAA’s decision to bring forward purchase of a second H145 to replace its elderly MD902 Explorers had been record spending on maintenance and issues sourcing spare parts, according to YAA Chairman Peter Sunderland.
Like most British HEMS operators – including Cornwall Air Ambulance, which will soon take delivery of a new £7.5-million Leonardo AW169 – YAA depends on charitable giving. However, as Bryn Elliott pointed out, that is a less difficult task in the UK than in regions like southern Alberta, where HALO serves a huge and thinly populated area. “HALO relies on public and private donations to sustain its activities but is only able to fundraise locally among a population of some 60,000 in the vicinity of Medicine Hat, but the wider area it serves is vast and remote with a population of just 272,000,” Elliott pointed out. “In Wiltshire, one of the smallest counties in England – one twentieth the size of southern Alberta – the air ambulance can draw upon charitable giving from a local population of some 400,000.”
In May 2020, CEO of HALO Paul Carolan warned that without operational funding from the provincial government, the organisation might have to scale back its service, or even stop flying altogether. The service reduction could occur in June, and it could cease flying by July unless more funding is found. He explained: “The issue now is between Covid-19 and the lack of provincial investment, we just don’t have the reserves to weather this particular crisis.”
Capacity, capability and flexibility
The need for fleet expansion and upgrades to existing air ambulance aircraft will always exist, and providers, whether private sector or charitable, will always face pretty uncomfortable choices. Put a huge amount of cash out upfront and risk the plane or helicopter not being sufficiently utilised to pay for itself, or lease and have the weight of debt around your neck for years to come. There is no easy answer, but for the patients benefiting from the investment – however it comes – you can be sure that you did the right thing as an operator by having the right aircraft, in the right place, at the right time.