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Executives

Sylvain Allard – President, Chief Executive Officer

Frederick (Rick) Davis – Senior Vice-President, Chief Financial Officer

Analysts

Michael Mills – Beacon Securities

Greg McLeish – Griffiths McBurney & Partners

Chris Buncic – Cormark Securities

Chris Blake – Scotia Capital Markets

Cameron Doerksen – Versant Partners

CHC Helicopter Corporation (FLI) F2Q08 Earnings Call December 12, 2007 10:30 AM ET

Operator

All participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to theCHC Helicopter second quarter results conference call. I would now like to turn the meeting over to Mr. Sylvain Allard, President and Chief Executive Officer, as well as Mr. Rick Davis, Senior Vice-President and Chief Financial Officer. Please go ahead, Mr. Allard.

Sylvain Allard

Thank you, Joe. Good morning, everyone, and thank you for joining this conference call. As per the safe harbour clause, we are going to discuss certain subjects that may contain forward-looking information. The company cautions you that actual results could defer materially from those that may be projected in those discussions. Additional detailed information concerning a number of factors that could cause results to defer materially from the information that will be given is readily available in the company’s Form 20-F annual information form and in other filings with U.S. and Canadian security authorities. The company disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events, or otherwise.

So, as you read in our press release, the fact that the Canadian dollar reached a record high against most currency in the second quarter, we reported a strong quarter with a 17% increase in revenue, a 15% increase in segment EBITDARR, and a 21% increase in operating income versus the same period last year. Our revenue climbed by $51 million to $318 million in spite of a $6 million FX headwind.

Our global operations segment continues to bethe major driver in our revenue growth with an increase in revenue of 34% to $126 million and an increase in segment EBITDAR of 16% to $37 million. European operations picked up during the second quarter with a 14% increase in revenue to $150 million and segment EBITDAR of $27 million.

Heli-One also had a good second quarter with a slight increase in external revenue and a strong increase in segment EBITDAR of 18% to $77 million. During the second quarter we added a total of eight new aircraft and we expect to add an additional 24 aircraft before the end of fiscal year.

Consistent with previous quarters, we’ve expenses $2.5 billion in aircraft introduction costs during the quarter primarily relating to the training and pre-deployment lease and interest costs.

Net earnings for the second quarter were $11.4 million or $0.25 per diluted share; a 20% increase from the same period last year. Several factors impacted net earnings in the quarter compared to last year. In addition to the $2.5 billion spent on aircraft introduction costs, aircraft availability and late delivery issues continued to have negative impact during the second quarter and affected our result by $2.2 million for combined impact of more than $0.08 per share.

Another major item affecting our quarter was the $7.8 million of foreign exchange losses, including our financing charges. It had a one-time negative impact of $0.13 per share. Rick will discuss these effects losses later on the call.

From the positive side, the anticipated exit of our PBH maintenance programs has reduced our maintenance costs by $3.2 million or $0.05 per share and improved trade receivable collections allowed us to release a $2.6 million provision or $0.04 per share. When you factor out these costs of aircraft introduction and aircraft availability, as well as the non-recurring costs, add back the PBH impact and provisional reversal, I estimate that our adjusted earnings for the quarter were approximately $0.40 per share.

And now I would like to elaborate on each of the segments. First, global operations is continuing on its record breaking pace with a 34% revenue increase to $126 million and an EBITDAR increase of 16% to $37 million excluding FX. The revenue increase was from new aircraft addition, rate increases on a number of existing contracts, and the consolidation of BHSin Brazil.

Flying hours increased 15% compared to last year, exceeding the 24,000-hour mark for the year.

Segment EBITDAR for the quarter was $37.3 million; an increase of $4.7 million over the same period last year. The margins have decreased to 29.7% compared to last year, not for operational reasons, but simply because last year’s figures included a $3.4 million increase in trade receivables provision reversal. We anticipate that the revenue in EBITDAR on global ops will continue to climb in future periods as our focus continues on new opportunities in promising regions like Kazakhstan and South East Asia, and as the new aircraft in Brazil are deployed in the second half of the year. Global ops is also successful in renegotiating existing contracts at better rates.

Now moving on to Europe. As I mentioned earlier, European revenue increased 14% to $150 million, but segment EBITDAR remained fairly flat at $27 million compared to the same period last year. Rate increases on certain new and renewed contracts helped revenue, but several new aircraft were delivered late, which negatively affected our revenue and expenses. Flight hours in Europe increased by 2,150 hours or 9% in spite of these delays.

The segment EBITDAR impact of the late deliveries was approximately $2.2 million in the second quarter, primarily related to customer penalties and estimated reduced revenue offset by settlement received during the second quarter from OEM as a compensation for service ability and late delivery issues earlier this year. Segment EBITDAR was also negatively impacted during the second quarter by a significant increase in crew costs and crew training as we added eight new aircraft compared to last year, including four new Sikorsky S-92 aircraft. The aircraft introduction cost $1.3 million during the quarter.

European serviceability is improving gradually and steadily as we take delivery of the new aircraft. In fact, all the new aircraft will be on line with Statoil, Maersk, and Total during the third quarter. So Europe has had a much better second half this year.

Although operations began –

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And now for Heli-One. Heli-One’s revenue from external customers increased nicely during the quarter, but these increases were offset by the acquisition of BHS as external revenue and PBH revenue from BHS last year are now considered internal revenue consolidation this year. Segment EBITDAR for the quarter was $77 million, an increase of $12 million or 18%.

Segment EBITDAR from fleet has increased just an increase in number and value of aircraft inthe fleet compared to the same period last year.

Segment EBITDAR from R&O increased due to segment EBITDAR earned on increased revenue and the estimated impact from the exit of PBH maintenance program.

We are continuing to implement our strategy –

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-- and therefore consistent with the strategy we signed agreements and licences during the second quarter that will provide for the exit from PBH agreements on the Sikorsky S-92 and AgustaWestland AW139 helicopters owned and operated by CHC.

As a result of the exit from these agreements, Heli-One will receive a refund of pre-paid maintenance estimated at $6.9 million while it incurred PBH maintenance expense of $4.6 million. It is estimated that during the second quarter the favourable impact of the exit of these PBH programs was approximately $3.2 million.

On a year-to-date basis, Heli-One maintenance costs are consistent with costs that would be expected outside thePBH program as the refund of PBH is nearly equivalent to thePBH payment over the last six months.

Let me conclude by saying that I’m very pleased with the quarter. We delivered a strong performance in spite of the foreign exchange head winds. The industry fundamentals have never been better and the growth in revenue that we are experiencing right now should continue for several years as we expect the demand for helicopters to exceed supplies.

Industry research is still predicting demand for medium and heavy off-shore helicopters in CHC’s market to exceed 250 aircraft between now and 2015. Over the next five years we have and additional 85 new aircraft on order and the option to purchase an additional 30 over the next seven years. Over 50% of these new aircraft have already been committed to long-term contracts with our customers and nearly allthe rest of them have been allocated to contracts or customers.

On the pricing side, this environment is obviously conducive to much improved rates and we’re continuing to bid successfully for return on capital employed of 20% or higher.

I’m also very excited about Heli-One’s future. Our expansion in Boundary Bay and the new maintenance agreements with OEM gives us a great opportunity to improve our margins and expend our third party revenue on new technology aircraft, making Heli-One a true one-stop shop on virtually all medium and heavy helicopters.

I’d like to now let Rick brief you further on our results and financial position.

Frederick (Rick) Davis

Thank you, Sylvain. Before I move on to a discussion of additional issues related to the second quarter I’d like to point out, as I did in the first quarter, that there were a number of new Canadian accounting standards adapted this year, including comprehensive income, financial instruments, and hedges. The adoption of these new standards under Canadian GAAP resulted inchanges in the company’s accounting and presentation, including transitional documents that have been recorded in opening retained earnings and opening accumulated other comprehensive earnings. As well, a new consolidated statement of comprehensive earnings has been added to our financial statements.

The implementation of these new accounting standards did have a significant impact on financing charges inthe second quarter in relation to the amortization of guarantees and the expense associated with changes in embedded derivatives, which I’ll discuss ina few minutes.

As disclosed in Note 17 to our second quarter financial statements, the adoption of these new standards for Canadian GAAP did result in the identification of certain foreign currency embedded derivatives that should have been separated from their host contracts under U.S. GAAP in prior periods. Most significantly, 2005. As a result, we have concluded that it is appropriate to restate our U.S. GAAP note and associated disclosures for fiscal ’05 to ’07 in our 2007 annual filings. It’s important to note that these adjustments have no impact on our Canadian GAAP financial statements as this is a U.S. GAAP note issue only.

And now I would like to discuss a number of additional issues that impacted the company’s net earnings and financial position in the second quarter and elaborate on some of the issues Sylvain violated earlier inthe call.

Second quarter, corporate and other costs totalled $4.9 million, which is a decrease of $4.4 million from the second quarter of last year. This decrease is primarily due to a 1.5 million reduction in stocks 404 costs and a $1.6 million reduction in claimed reserves on various insured risks in our insurance captive.

One of the most significant items in the quarter is the $7.8 million of foreign exchange losses included inthe financing charges. This FX loss primarily consists of, first of all, a $3.4 million loss related to the revaluation of foreign currency cash balances held in our company’s various subsidiaries. As you know, the company operates in many jurisdictions and as a result has numerous contracts that are not all denominated in the same currency as the functional or reporting currency of each of our subsidiaries. As a result, foreign currency tax balances in our subsidiaries denominated in foreign currencies – most significantly U.S. dollars – are re-valued at period-end rates. With the U.S. dollar at historical lows, a substantial revaluation was recorded inthe second quarter.

As well, as noted in my opening comments on recently introduced Canadian accounting standards, a foreign exchange loss of $3 million was recorded on embedded derivatives inthe second quarter. Embedded derivatives exist on contracts when we have a portion of the fixed monthly standing charge paid by our customers ina currency that is not either the currency of the subsidiary or of our customers. This value is market-to-market under the new accounting standards each period. We are currently reviewing these contracts and where it makes economic sense we’ll be working with our customers to make changes to avoid a similar foreign exchange impact in the future. There are other FX amounts of financing charges inthe second quarter, but these two issues are most significant.

Assuming the recovery of the U.S. dollar, this quarter end holds firm and we are successful in renegotiation of certain customer contracts as previously noted, we will likely see some substantial recovery of these losses inthe third quarter.

Equity losses in associated companies were $1.2 million in the second quarter compared to $0.1 million in the same period last year. The loss this quarter relates to a $1.4 million write-down of an investment in a company we have a minority interest in that reported a loss in its most recent fiscal year. Our average effect of tax rate on earnings from continuing operations, excluding falling adjustments, and the enacted tax rate change in the United Kingdom which lead to a $3.1 million recovery in the first quarter, was approximately 23.3% on a year-to-date basis versus 25.4% for the same period last year.

Now for a quick discussion on liquidity and financing activities. The company had unused capacity under its on balance sheet senior credit facilities of $73.8 million and cash of $38.6 million for a total of $112 million at October 31, 2007. Also, as noted in our second quarter disclosures, we did expand an existing lease facility with the Royal Bank of Scotland in partnership with Export Development Canada by $225 million U.S. in the second quarter. This expansion combined with other existing aircraft financing facilities brings the total of our unutilized and credit approved lease capacity to approximately three –

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-- million compared to $41.4 million for the same period last year. Included in this amount is cash of $5.3 million provided from non-cash working capital changes primarily related to, first of all, an increase in trade receivables of $20.2 million due almost entirely to an increase in activity in the second quarter. Increases in A/R due to increase activity was partially offset by a slight reduction in the number of day sales and trade receivables, which dropped from 69 days at the end of the first quarter this year to 68 days on October 31, 2007. About a year ago that number was 73 days. So we’ve come down about five in the last 12 months. We’ve still not achieved our targets on day sales and receivable and see additional opportunities to achieve improvements with specific customers.

Other receivables increased by $7.6 million, again primarily due to the estimated refunds on prepaid maintenance, PBH programs, to the anticipated exit from these programs inthe next 90 to 100-day period.

An increase in trade payables of $32.5 million. It’s important to note that trade payables will be reduced in future periods as we reduce outstanding balances to various trade suppliers.

Cash used in investing activities was $49.6 million for the second quarter primarily related to capital asset additions of $48.8 million, which included the payment for one aircraft, aircraft modification, advances on buildings – including Boundary Bay facility – and spare parts or rotor additions to support a larger fleet with new aircraft types. These capital asset additions and expenditures on major inspections and deposits were offset by proceeds primarily from the sale and leaseback of one aircraft and the disposition of four owned aircraft for combined net proceeds of $15 million. Currently the company has 85 aircraft on order, 24 of which are expected to delivered inthe remainder of fiscal 2008.

As a result of operating in investing activities, total net debt at October 31, 2007, was $747 million, down $18 million from the $765 million at July 31, 2007. Keep inmind that the majority of our debt is denominated in U.S. dollars and therefore FX rate changes reduced our reported debt from the first quarter by approximately $42 million.

In conclusion, I’d like to repeat what Sylvain has already said, which is that despite the fact that the Canadian dollar reached a long-term record high against most currencies – most significantly the U.S. dollar – the company still reported a 17% increase in revenue, a 15% in segment EBITDAR, and a 21% increase in operating income versus the same period last year. This fact, combined with the modest recovery in the strength of the U.S. dollar, a building of profitability in our European operations, and increased capability in Heli-One will lead to improved performance as we move through fiscal 2008 and beyond.

This concludes the formal part of our conference call. We’re now available to answer any questions you might have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question will be from Chris Blake with Scotia Capital. Please go ahead.

Chris Blake – Scotia Capital Markets

Good morning, gentlemen.

Sylvain Allard

Good morning, Chris.

Frederick (Rick) Davis

Good morning.

Chris Blake – Scotia Capital Markets

Just a few questions here. I just want to touch on your aircraft costs with respect to late deliveries. You mentioned it was probably $0.08 or $2 million. Could you just provide us with some colour, Sylvain, on what exactly the cause of the aircraft delays are for the manufacturers? Is it more production problems or parts delays or is there excess demand?

Sylvain Allard

It’s basically demand catching up. The average would be around three months, but ithas a significant impact. The thing is, you stretch your existing fleet because you always anticipate, you plan your plan according to an arrival and if that’s delayed what happens is you end up compensating with existing, say older technology, like we did in Denmark because we were supposed to have the 3S92s on line. Now the second is there and the third one will be there in the third quarter. We have the same issues on upgrading those SAR aircraft for Statoil. Now they’re on line.

So it’s anywhere from two and up to and a complete SAR aircraft we were as high as six months. But it’s a combination of factors, but mostly the line is tight and by the time you configure it for the customers, which is another, because we take them green as well, so that’s all adding up. Now it’s sort of in the plan, anyway, but it does have an impact on your costs. Like, we had a bunch of training inthe quarter in Europe because of that as well.

But as you get allthe new aircraft not only are you missing the revenue, once the aircraft come in you get the revenue and the training (inaudible) going forward, but it was a very, very busy quarter in Europe on that front because we took delivery late. Most of that will be completed aircraft on contract and training to start too because now the guys are on line. But that was quite evident in Europe that pawn shop (sic). So it’s a combination of all. But the delay is roughly about three months right now on deliveries.

Chris Blake – Scotia Capital Markets

How many aircraft do you believe, you estimate was delayed and not in operation as a result. You took delivery of eight. Was there –

Sylvain Allard

Well, they were all coming in later than we thought. I mean, basically atthe end of the day.

Frederick (Rick) Davis

Yeah, if you look at core number in Europe, I know I did speak to the guys just a short time ago and basically most of the problem is created by poor aircraft, which is a combination primarily of 92s coming into the market. So new technology fair equipment as well.

Sylvain Allard

Yeah, the two SAR aircraft also that we had to roll out on Statoil.

Frederick (Rick) Davis

And that’s a little bit about late delivery, but it’s also about the time it takes to convert, for example, a Super Puma from a standard config to a LIMSAR config, limited search and rescue.

Chris Blake – Scotia Capital Markets

What are the manufacturers saying in response? Have they ramped up production?

Sylvain Allard

Yes.

Chris Blake – Scotia Capital Markets

What have they told you guys in terms of remedying this issue from occurring longer term?

Sylvain Allard

I think they’re beefing up as much as they can as well. I mean, everybody’s trying to do the same thing here. Again, it’s improving. There’s a lot of deliveries happening at the same time. And don’t forget, it’s not always, not only manufacturers. I’ll give you an example. The SAR aircraft that we started on with on the search and rescue contract with the U.K. We had issues of exporting because of the sophisticated equipment on the aircraft had to be signed off by the U.S. Freight (sic) Department. So you can’t blame Sikorsky for that; you gotta go through the paperwork. Because the equipment is so technologically advanced that you need a sign off. So that was for the first two, for example, which delayed our training on U.K. SAR and punched up the cost. Now the aircraft are in and working.

But it’s a combination of things, if you know what I’m saying. It’s hard to pinpoint. But certainly on the manufacturer’s side they have ramped up and we areall getting commitments that things will get back to on-time delivery again. Like I said, it’s just the activity in the industry right now that creates a lot of these issues.

Chris Blake – Scotia Capital Markets

Very good. And you mentioned the (inaudible) market remains very strong. It’s probably fair to assume you’ll continue to seethe upward pressure on flying rates. I think the last quarter you mentioned you were somewhere in the range of 15% to 20% price increase. Has that changed at all quarter over quarter or is that still consistent with last quarter?

Sylvain Allard

It is very much consistent. I think the pricing environment, like I said, is very healthy right now. Obviously on new bids the go forward is 20% or higher on our internal capital and the formula that’s well known to you guys. Also, probably more soin international markets, the ability to go back to customers who ata certain point need more capacity than they have on the current contract gives us an opportunity to sit down and renegotiate better terms on existing contracts. So that’s what we’re focused on. Definitely the environment right now is as good as I’ve seen.

Chris Blake – Scotia Capital Markets

And just on Boundary Bay. Could you just give us a quick progress report on where that project stands in terms of your inventories, building up the inventory necessary to support the operation, as well as your personnel training? Can you give us an indication of how much (inaudible), can you give us an indication of how much interest you’re receiving from third parties for your services?

Sylvain Allard

Oh, I think it’s very clear that from an inventory standpoint we’re using a lot of the inventory we already go. A build up of inventory will be related to the new technology agreements that we sign (i.e. buying spares to support the new technology aircraft). So that’s something that’s going to happen in the next, say, four to six.

The progress in Boundary Bay, physical move of the admin staff will be around right after Christmas, during the Christmas slowdown, if you will. So administratively we’ll be moved there before, well, in January. And from a fully operational status, we’ll be ready to go probably around March because we move basically shop by shop. Obviously the build up, the interest, right now, we’re capacity constraint in many ways on this side of the Atlantic. That’s going to allow us to basically carry on inthe third party and certainly interest in this business is you gotta establish your capabilities and they will come to you. There’s no question about it. So we’re very confident about it.

Certainly with the new technology agreements that we have now, it’s a great opportunity for us to grow Boundary Bay.

Chris Blake – Scotia Capital Markets

And just where are you seeing those expressions of interest? More so from the military type of work or is it more civilian type of work that you’re seeing in terms of Boundary Bay?

Sylvain Allard

Well, again, don’t forget, our new technology it starts. We gotta gear up for our own sort of requirements. Certainly interest from the new technology side, because these aircraft are still fairly new, that’ll come as the fleet starts to accumulate hours. We seeit from all fronts really. It’s hard for me to pinpoint the specific area that’s more active than the other, but certainly based on the experience that we have in Europe, the military side was the strongest part of our business in Europe and that might continue on this side. On the, don’t forget, the 92 is primarily still a commercial aircraft as well. So.

Chris Blake – Scotia Capital Markets

Okay. Just lastly, you’ve mentioned that you’ve got $225 million of initial lease financing in place from EDC and Royal Bank of Scotland. As a result of the recent credit concerns inviting credit spreads, can you just give a sense of how that’s impacted your lending rates or lease rates?

Frederick (Rick) Davis

Yeah, sure. Two parts to that question: one is in terms of capacity or volume. As I said inthe conference call, we’ve not had this degree of forward capacity credit approved and unutilized history of CT, so on that note it’s positive, again, above $360 million approved today unused.

In terms of pricing, again, to date no upward pressure on pricing. In fact, some of the individual smaller deals we’ve closed in the last 60 days are actually better rates than we’ve seen historically.

Why is that? Well, I think ithas a lot to do with the value of a helicopter and the macro on the oil and gas industry in general. But it’s on both counts, in terms of capacity and pricing, they’re both favourable.

Chris Blake – Scotia Capital Markets

Very good. That’s it for me. Thanks, guys.

Sylvain Allard

Okay. Thanks, Chris.

Operator

Thank you. The next question will be from Greg McLeish of GMP Securities. Please go ahead.

Greg McLeish – Griffiths McBurney & Partners

Good morning, guys. I know you chatted a bit about the U.K. SAR contract, the upcoming one, but have there been any changes in the number of bidders or there’s still four bidders out there on that contract?

Sylvain Allard

It’s three now.

Greg McLeish – Griffiths McBurney & Partners

And who is –

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-- just dropped out?

Sylvain Allard

Let me try to remember now.

Frederick (Rick) Davis

That would be the AgustaWestland.

Sylvain Allard

Yeah, the AgustaWestland will be a provider of aircraft but will not bea direct bidder.

Greg McLeish – Griffiths McBurney & Partners

Okay. And who’s the, I mean, it’s you, Bristow, and who’s the other player in there?

Frederick (Rick) Davis

Lockheed Martin/VT.

Greg McLeish – Griffiths McBurney & Partners

Okay. And secondly, you mentioned demand for helicopters for 2015 is 250 helicopters. How do you break that down? Is that new and replacement helicopters or just 250 demand?

Sylvain Allard

It’s a combination of both. What happens is looking at the retirement cycle, a survey was done on aircraft – in fact, if you assume that you retire everything over 25 years, which is not practical in my view, you would get a much higher number. This number includes the retirement of medium and heavy of 50% of the fleet that would be over 25 years old, only half the aircraft, and the other would be new demand due to basically number of platforms off shore increasing pretty well all over the place. This does not include the U.S. market. This is only the market that CHC operates.

Frederick (Rick) Davis

And in fact, the world market demand, this is the new technology replacing, well, fulfilling new demand and replacing old technology which retires. So it’s all new technology, plus the world population is greater than the 250 that Sylvain quoted because that is only in the market that CHC operates.

Sylvain Allard

So it would say, it would be half of those aircraft be retired and the other half would be new demand.

Greg McLeish – Griffiths McBurney & Partners

Yeah, I guess the interesting thing to look at is between you and your major competitor you dominate the world’s sort of demand there. Soit looks like the demand is far out of cheating potential supply even coming on for you guys.

Frederick (Rick) Davis

That’s correct.

Sylvain Allard

Yes. And the adjusting element of that, Greg, is, how quickly can you retire the old fleet? So to satisfy demand that means that you delay the retirement of old equipment. Right now I just took an assumption that half of the 25 or older, and that could be an aircraft of 30 or 40 years that we keep on until we are able to get the new equipment.

Frederick (Rick) Davis

That’s why it’s very difficult for us to predict dispositions. We were asked by yourself and others how many aircraft we do sell and the answer is, well, we think this, but we’ll always be wrong because the demand will always exceed supply and therefore we keep older technology longer.

Greg McLeish – Griffiths McBurney & Partners

Okay. And do you guys have any major contracts up for renewal this year or inthe next 12 months?

Frederick (Rick) Davis

I’m thinking no.

Sylvain Allard

Well, you know, there’s an ongoing all these bids, but like, huge contracts, no.

Frederick (Rick) Davis

In general you can expect, again with a five-year average contract, 20% of your –

--- Break in recording

Greg McLeish – Griffiths McBurney & Partners

-- thanks a lot guys. Great quarter.

Sylvain Allard

Okay. Thanks.

Operator

Thank you. The next question will be from Cameron Doerksen of Versant Partners. Please go ahead.

Cameron Doerksen – Versant Partners

Good morning. I guess a question on the U.K. SAR contract, the one that you guys are doing right now. I guess deferred revenue inthe quarter was $9 million. Was that all U.K. SAR contract related?

Frederick (Rick) Davis

Yeah, the deferred revenue wouldn’t be that amount, but what we’re doing is, this is a Canadian GAAP thing, but what we do is we have four bases each treated as a separate facility. For accounting we defer thecost and we defer the revenue until that facility, that base, is up and operating.

Sylvain Allard

With the new technology.

Frederick (Rick) Davis

With the new technology. So for example, in October you heard Sylvain mention that our first base, which is Stornoway, became operational early October with two S-92s. Now in October we’re starting to recognize the revenue costs and contribution from that. It’s very small because it’s only one month. Two months later Sumburagh will come up with two S-92s and so on and so on. So every two months we come up with another base and by the end of the year we’re basically done. I think we got one more aircraft to fly in May of 2008 and then all aircraft are flying and all aircraft are generating revenue and contribution. But before that time we’ll actually have some deferred net costs on our balance sheet.

Cameron Doerksen – Versant Partners

Okay. And the timeline on, I guess, this contract being fully operational, if I recall correctly it was January ’08 and now you’re saying Q1 ’09. Is that really just, you know, is that the case, first off, and secondly is that mainly because of OEM delays in delivering the helicopters?

Sylvain Allard

No, this one actually we did start the aircraft on time.

Frederick (Rick) Davis

No, we haven’t yet. The vast majority of all aircraft, six of the seven aircraft will be flying by the 30th. I think we always said we’d be fully functional by the end of this fiscal year. Which we will be. I think there’s one aircraft that starts a couple weeks after that. But the essentially all aircraft will generate about 20 million pounds sterling of revenue a year, so each base is about 5 million pounds or $10 million CAD. So if you model that you’ll end up with the right roll in.

Sylvain Allard

What will happen on the deliveries, Cameron, is the aircraft, we have to commence our training ina much quicker period in order to start on time.

Frederick (Rick) Davis

Cameron, I think the $9 million probably came from our cash flow discussions in our MDA which talk about the programming, which is not the same as free operating expenses. Deferred revenue we actually sold some aircraft and did recognize revenue because the sales transaction wasn’t actually complete. So that’s a completely different issue.

Cameron Doerksen – Versant Partners

Okay, I just wanted to clarify that. Okay. That makes sense.

The, right down in the – I guess the image is pretty small, but right down inthe investment inthe associated company that ran through the equity earnings line, can you just give us the details on what that actually is?

Frederick (Rick) Davis

Yeah, we have a minority interest in a subsidiary and we account for that on acost basis because we don’t –

Sylvain Allard

It’s basically one of our foreign subs that we operate through.

Cameron Doerksen – Versant Partners

Okay.

Sylvain Allard

And they’re always fairly sort of on the profit line quite thin. We felt it was the best approach conservatively to not have an equity investment because it hasn’t made any money. It’s one of those vehicles we use, type of thing.

Frederick (Rick) Davis

Yeah, we had obviously an investment, so they reported a loss and we wrote down our investment. That’s all.

Cameron Doerksen – Versant Partners

Okay. I understand. You received some compensation from the OEMs. Do you expect to receive any more for some of the delays?

Sylvain Allard

It’s hard to quantify that. Basically it’s part of an ongoing discussion on several fronts. And as you know, by contract you’re not really, we don’t have anything firmed up in our contracts. So it’s really basically based on demonstrating the costs. So I can’t make any prediction on that. I think so far we’re obviously satisfied with what we got. But on a go-forward, as the delivery improve I don’t see this becoming a factor in terms of more recovery.

--- Break in Recording

-- you see we’re watching Kazakhstan very closely. We’ve come close to an agreement now with the consortia. That’s a very big market, as you know. Not all off shore, but there’s 13 varying barrels of oil in Kazakhstan and we got a pretty good position now, we’ve got partnership established, we’re operating a couple of M3s and thebig picture is if this thing goes ahead the way it’s planned we could be looking at probably eight or nine heavies.

A big area, the other one, is Southeast Asia. Fleet renewal areas like, you know, Malaysia, we see some activity picking nicely now in Australia. In fact, capacity in Australia is an issue. I wish I had more aircraft in there. So it’s very robust. There’s no question about it. In fact, this is why some of the shorter term areas, like we had in Africa, we decided to just, you know, these contracts not renew and redeploy the fleet in areas where we seethe demand and get much higher rates, you know?

Cameron Doerksen – Versant Partners

Okay.

Sylvain Allard

And Brazil, obviously with the new discovery, we’re watching that. It’s not going to happen tomorrow, but certainly thebig discovery in Brazil and with our position we’re very, you know, all very excited about this, but again, this is several years down the road. And it basically just supports the whole thesis on this demand that we’re anticipating.

Cameron Doerksen – Versant Partners

Great. That’s all I had. Thanks very much.

Sylvain Allard

Okay, Cam.

Operator

Thank you. The next question will be from Chris Buncic of Cormark Securities.

Chris Buncic – Cormark Securities

Oh, hi. Good morning. I just have a couple questions about your operating leases and some of the costs associated. So what percentage of the total leases that you’ve got now are at fixed interest rates?

Frederick (Rick) Davis

About 55% to 60%.

Chris Buncic – Cormark Securities

And can you provide me with any kind of like a blended lease rate on those?

Frederick (Rick) Davis

Yup. It would be LIBOR with a spread of 150 to 170 at this point.

Sylvain Allard

Plus depreciation.

Chris Buncic – Cormark Securities

Okay. So I guess for the 55% to 60%, to what degree does the term of the fixed match the term of the lease period?

Frederick (Rick) Davis

Our typical lease terms are seven to eight years and our typical contract with customer third-party oil and gas would be between, it’s roughly five years at this point in time, but generally they have five year plus two one-year renewals. So they’re not far off being matched at this point in time.

Chris Buncic – Cormark Securities

Okay. All right. That’s great. Thanks very much.

Sylvain Allard

Thanks, Chris.

Operator

Thank you. The next question will be from Michael Mills of Beacon Securities. Please go ahead.

Michael Mills – Beacon Securities

Good morning, guys.

Frederick (Rick) Davis

Hi, Mike.

Michael Mills – Beacon Securities

Just wondering how confident you are that the 24 aircraft on order will actually be received on time by the end of this year.

---Laughter

Sylvain Allard

That’s for the display, our plan sort of includes a bit of, how can I say, a buffer. Because they’re catching up, but it’s not happening as quickly as I would like to see. But some of these aircraft, for example, we already know inthe delivery schedule. We know when they’re going to arrive now, but it’s later than we had anticipated, say, 12 months ago. So we know they’re going to be slipping a little bit, but not from the date. I think that the date that we got right now is a good one. But they slip from what I thought, say, 12 months ago.

Michael Mills – Beacon Securities

And in terms of your conversations with customers, obviously they’re aware of the situation, but are they pressing you on the matter or how are those discussions going?

Sylvain Allard

Well, obviously they’re agitated about what’s happening inthe industry and they’d rather have the aircraft on time, I can tell you right now. But there’s a lot of pressure on us and we’re obviously pushing now ourselves to make sure that everything is – The thing is, we deliver the service, it’s just that they’re carrying on with the existing aircraft for a couple months, sometimes, three, sometimes three or four months with the aircraft they already, the older technology aircraft waiting for the new one to arrive. So, and for us, the incentive is to put the aircraft as soon as we can because you get better rates and they get better service.

Michael Mills – Beacon Securities

All right. I’m just moving over to theACM receivable. It seems to be nothing else growing. Is there any progress in trying to collect a good chunk of that?

Sylvain Allard

We put an awful lot of pressure now on all our customers to collect. This is obviously a constant area. The thing, what you seein the ACM, don’t forget, the business in Nigeria is also growing, but we’ve been collecting regularly out of there, but obviously it’s a large amount because just the size of the business we’ve got in Nigeria is very, very significant.

Michael Mills – Beacon Securities

Yeah. Okay. And on the GNA front, are we kind of atan appropriate run rate now or this quarter was around $5.4 million. Is that a good run rate?

Frederick (Rick) Davis

No.

Sylvain Allard

I wish it was a run rate.

Frederick (Rick) Davis

It is except for the $1.6 million we talked about and that is the insurance adjustment because, yeah, if you add that back then you’re closer to a good run rate.

Michael Mills – Beacon Securities

Okay. Thank you.

Frederick (Rick) Davis

Okay.

Operator

Thank you. As a reminder, if you have a question please press *1 at this time. The next question will be from David Newman of National Bank Financial. Please go ahead.

David Newman – National Bank Financial

Good morning, gentlemen.

Sylvain Allard

Hi, David.

David Newman – National Bank Financial

How are you?

Sylvain Allard

We’re pretty good.

David Newman – National Bank Financial

Good. Just in terms of the penalty in foregone high-rate revenues. How much, what percent of that was covered off by this payment from the OEMs and how much was that actual payment?

Sylvain Allard

I’d rather, I’ll tell you what, these things area little bit sensitive about on the amounts and how it is because these things are some things that we do with certain manufacturers and I don’t want to give you a number on that one. But all I can tell you is that it was pertaining to prior period, as well.

Frederick (Rick) Davis

Yeah, we just want to stay away from it, David.

David Newman – National Bank Financial

Okay. Okay, but going forward, how do you protect yourselves from a similar situation. Obviously you’ve got a very robust delivery schedule. Is it through contract specifications with your customers? Are you looking for further recovery from the OEMs? How do you handle this going forward because obviously the delays, etcetera, and I think the expectation would be give more of the OEMs are that that could recur, right?

Sylvain Allard

It could and, you know what, Dave, when the production line is sold out for two and a half years, you know, what I’m saying to is that it’s a tough argument when you buy new aircraft. They’re ina very strong position. They’ve got a huge demand ahead of them and I’m doing my best to get the best terms and conditions on deliveries. But historically, delivery contracts are not subject to penalties.

David Newman – National Bank Financial

Yeah.

Sylvain Allard

And we’re trying to exclude those delivery delays now with our own customers.

David Newman – National Bank Financial

Right. Right.

Sylvain Allard

So we don’t get caught in the middle. Ideally you would have to have the supply chain accountable for everything they do and be perfect. So I think, let’s put it this way, I think the whole industry understands now, are working hard toward improving because it’s not, it’s in everyone’s best interest to deliver on time. They want to sell the aircraft as soon as we can, as soon as they can, we’re going to put it on contract as soon as we can. But I think it’s fair to say that as more and more are entering the market I would propose to you that it’s going to get better and better.

David Newman – National Bank Financial

Okay. And do you, in your contract specification are you getting into a situation now where you can kind of maybe not get dinged with penalties by having a flexible start? How do you work that?

Sylvain Allard

I think right now what is happening, David, is that I see customers, large customers, purposely putting extra capacity on the contract so they don’t have any issues. I think what the market realizes is where ina patch you have enough aircraft to satisfy more than the demand that was there is gone. And so now you got big customers anticipating that, hey, helicopters are helicopters. What they want is service at the end of the day. The regime that they have. And it’s primarily a European phenomenon where they want the delivery, they want you to take off on every flight within 15 minutes. Very demanding. And that’s what they want atthe end of the day. They don’t want penalty. They’re putting penalty because they want the service. So now they’re saying if we put extra capacity that’s what we want at the end. So let’s put it this way, when you have extra capacity that was never an issue. When capacity’s tight it becomes an issue for everybody and everybody’s looking for an appropriate solution. Atthe end of the day things are improving, there’s no question about it.

David Newman – National Bank Financial

And the OEM production lines, are they cranking this up? Are they adding capacity? Are they expanding their production footprint? What are they doing to try to get realigned with the demand that they’re seeing?

Sylvain Allard

I think you’re seeing on all fronts. I know that AgustaWestland now hasa new production facility on this side of the Atlantic. On the ABW139. I know Sikorsky has ramped up the S-76 to about, I’d say, 36 to 40, probably 38 aircraft now a year. The 92 is still at about, say, 20 to 24, I think it’s, let’s say two a month. And they will, what they’re saying is they will ramp it up. But it’s a very slow process. I mean, the lead time on major components is still a very, you know, it takes a long time to get a gear box.

David Newman – National Bank Financial

Yeah, for sure. And on a positive front, I mean, obviously you’ve got some big wins here on the in-sourcing from those power-by-the-hour contracts. Do you guys have any guidance on what you might seein terms of a run rate on savings on operating margins on in-sourcing those?

Sylvain Allard

Actually, like I said in my prepared statement there that if you look atthe six months run rate of cost and maintenance it would be equivalent to, it’s the same as if we hadn’t been on PBH for the six months. Because what we paid inPBH payments during the six months is roughly equivalent to the refund.

David Newman – National Bank Financial

Okay.

Sylvain Allard

So the savings in the first few years is substantial because basically you’re covered by warranty.

David Newman – National Bank Financial

Right.

Sylvain Allard

So if you look at allthe new aircraft then use a normalized, say, in Europe you’d be looking at 1,500 or 1,800 hours a year, say. These aircraft, you’ve got a good idea of what the maintenance costs would be, you know that it’s over $1,000, probably $1,200 an hour.

David Newman – National Bank Financial

Yeah.

Sylvain Allard

And during the first couple of years you’ve got very light maintenance because most of it is covered. Right, in fact, the first five years. Until you get to the first removal of components and overhaul where you would get a run rate then historically, as you know, our maintenance costs internally we manage to make 20% to 25% margins on that maintenance. That would be –

Frederick (Rick) Davis

So even when you reach steady states, David, you still save. Of course the cost of that would bethe capital that you need to invest in terms of facilities, spare parts, and –

David Newman – National Bank Financial

How you save the margin.

Frederick (Rick) Davis

-- technology. But you get the margin. Even long term, steady state, and it takes a long time to get there when you add as many new aircraft as we are adding to our fleet.

David Newman – National Bank Financial

Okay. Very good. And on a corporate side, you really, I mean, you saw a significant drop in your corporate costs. Obviously the stocks topped. It looks like it’s sustainable. This reduction in claims reserves, could that possibly reverse and increase again? How does that work?

Frederick (Rick) Davis

That’s always a little bumpy, so if you’re trying to normalize it’s FC&A or corporate costs you would take that out.

David Newman – National Bank Financial

Okay. And last question. On the U.K. search and rescue you’ve got January 30th coming up. What’s the next major milestone after that?

Sylvain Allard

They will review this as, I hate to say indicative. I mean, it’s a serious bid we’re putting together, but it’s not the end of it.

Frederick (Rick) Davis

That bid will drive a down selection process which will end, I think, mid-2008. So we’ll go from three to two and then three-quarters later we’ll be likely, and it could be spring or summer of 2009 when a decision is made.

Sylvain Allard

If they stick to the schedule it will be mid-09 calendar.

David Newman – National Bank Financial

That’s all. Thanks, gentlemen, and I think it’s been a good quarter and it looks like you’re seeing a turn here. Is that your view?

Sylvain Allard

Absolutely.

David Newman – National Bank Financial

Excellent. Thank you.

Operator

Thank you. There are no further questions registered at this time, so I’d like to return the meeting back to Mr. Allard.

Sylvain Allard

Gentlemen, this is the time of the year, so I wish you all a Merry – What’s? Happy Holidays I guess now is the proper term. So, and a Happy New Year and stay tuned for next year. Thank you.

Operator

Thank you. The conference has concluded. You may disconnect your telephone lines. We thank you very much for your participation.

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