The small fleet of listed airplane leasing funds keep cropping up on my contrarian radar.
Is it time to buy yet? Most of the listed funds suffered mightily earlier in the year after the A380 new planes program was terminated.
Since then we’ve been kept in a holding pattern trying to work out what the resale price of the planes might be. In truth, we are probably no nearer any sensible answer but last week the funds – AA4, DNA, DNA2, and DNA3 – did announce updated aircraft appraisal values. The overall message wasn’t terrifically surprising. There were some small downgrades for the Doric funds (but only of the order of 2%) while two funds including my watchlist favorite AA4 saw an increase in values.
Below I’ve pasted in the most informed analysis, first from Matt Hose at Jefferies and then the Alternative funds’ team at Liberum.
My own view is, unfortunately, it might still be a bit early. We are still waiting for more hints from the leasing market about what happens to these planes when they come out of the lease. My own hunch is that the big airlines that make extensive use of them will soldier on and even hire in a few new planes, but with revised deals. Overall though I suspect there will be attrition around the margins as most other airlines look to reduce their A380 exposure.
My own sense is that we are probably closer to a 50% haircut to IRRs (see below, Jefferies numbers) than we are to either the appraised current value of a 25% haircut. But happy to be proved wrong – even if we do get to 50% the IRRs don’t look bad and investors should still get their dividend payouts.
Anyway, first up we have a useful state of the market summary from Matt Hose at Jefferies.
Waiting on Emirates: In spite of the largely unchanged average values, the overall stream of negative newsflow on the A380 means a continued decline in residual values remains our working assumption. The one event that may alter this is news from Emirates on its plans for the future usage of the aircraft. Here Amedeo is notably bullish, stating within the AA4 quarterly report that it expects the airline’s core A380 fleet of in excess of 100 units ‘will continue to be operated by Emirates for the entirety of their useful economic lives‘. As previously highlighted, six Emirates operated A380s will come off lease over the next four years, entailing that we may start to understand the airline’s intentions this year or next. If Amedeo is correct, and Emirates begins to re-lease (or acquire) its older A380s, it would substantially reduce the funds’ risk profile and provide a positive catalyst for the shares.
Mixed recent newsflow: On 1 July Emirates started flying from Dubai to Muscat with an A380, replacing the 777 previously used for the route. At only 340km between the two cities, this is the shortest scheduled route for the A380 to date (we like the nugget that the A380’s 500km of wiring is longer than the distance travelled!). Moreover, wet-lease operator Hi Fly is reportedly considering the acquisition of a further second-hand A380. In reality, this positive newsflow is more than offset by the recent confirmation that Qatar Airways plans to retire its fleet of ten A380s from 2024.
|Exhibit 2 – Aircraft leasing funds – Prospective return sensitivity analysis|
|Source: Companies/Jefferies *Only the A380 RVs have been haircut|
Next up is Liberum’s take on the funds, followed by a very useful summary table of valuations for all five of the funds.
” Our base case IRR estimates are shown below on the basis of the current price, expected dividend payments over the remaining terms of the lease and the latest appraised values as disclosed by each of the funds. Our stressed case assumes a 50% reduction in residual values from the latest published estimates. In our worst case scenario, the income returns are unchanged and reduce the residual values of the A380s to the sum of 10% of acquisition cost and the return condition payments under the respective leases. The shares of the funds with A380 exposure have sold off by an average of 15% following the Airbus announcement in February. In combination with Sterling depreciation, all of the funds now have a positive return, even under our worst-case assumptions. “
Summary of London-listed aircraft leasing funds
Source: Liberum estimates
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