High-yielding plane funds pulled out of their nose dive today as their managers attempted to put a gloss on the shock decision by Airbus to stop making the A380 ‘super jumbos’ they lease to the Emirates airline.
Emirates’ reduction in its order for more A380s forced Airbus’ hand and in a knock-on-effect saw shares in four of the five listed plane funds swoop around 10% lower yesterday.
This was in response to analysts’ assessment that the already limited market in second-hand A380s would shrink, further reducing the amount of capital that could be returned to shareholders.
Today Amedeo, the investment manager of Air Four Plus and liaison agent of Doric Nimrod Air One, Two and Three denied this would happen, claiming the Airbus announcement had ‘positive implications for the future values of the installed A380 fleet’.
‘We estimate that the long-term core Emirates A380 fleet will comprise in excess of 100 A380 units which we expect will continue to be operated by Emirates for the entirety of their useful economic lives,’ it said.
Doric Nimrod, asset manager of Doric Nimrod Air One, said other airlines had expressed interesting in buying second-hand A380s. The first double-deck aircraft can carry more passengers and was a solution to ‘dealing with slot-constrained airports’, it said.
The company added: ‘With a finite number of A380s available, this could well prove supportive of the secondary market.’
Although Doric Nimrod Air One (DNA), the oldest of the funds owning just one A380, slipped another 2.75p or 2.7% to 99.25p, the other funds made gains.
Amedeo Air Four Plus (AA4) – the most diversified of the funds because it owns planes other than A380s and leases to other airlines than just Emirates – rose 3.15p or 3.3% to 98.2p.
Liberum analyst Connor Finn was not fully convinced of the funds' arguments. ‘We believe the end of production could improve the values of spare parts on existing aircraft for scarcity reasons but we struggle to see how it benefits mid-life A380s.
‘Fundamentally, the aircraft has not had sufficient demand from operators. Issues that limit the potential operator base for the A380 include high cabin reconfiguration costs, higher trip costs, higher revenue risk and lower versatility,’ Finn said.
The re-sale (or residual) values of A380s have been slipping for some time. The limited share price gains by the plane funds reflects the uncertainty over how far they will fall in future.
Matthew Hose at Jefferies said a 25% ‘haircut’ to residual values of A380s would reduce the internal rates of return (IRR) of AA4 and the three DNA funds from their previous average of 18.5% to 14.4%.
These high rates of return include their stream of dividends which should be unaffected. At their lower levels, the shares' yields have increased from around 8% to 9%.
However, a 50% reduction in residual values would cut the average IRR again to 9.3%, Hose said.
Of the four, Doric Nimrod Air One would be worst affected with its IRR falling from 17.1% to 8.3%, said the analyst. By contrast, AA4 would be the best off with returns declining from 15.1% to 12.3%.
‘Even at a 50% haircut, entailing receiving approximately 25% of purchase costs for the A380, there are still some nominally attractive returns on offer. This is particularly AA4, given that its double-digit IRR is supported by its A350 and 777 exposure, which hasn't been haircut,’ Hose said.
DP Aircraft (DPA), the other London-listed fund, gained 2.4% higher to $1.04. It does not own any A380s but operates a small fleet of four Boeing 787s. Its shares did not moving during yesterday’s Valentine’s Day rout in the sector.