Shares in high-yielding plane-leasing funds tumbled today after the Emirates’ decision to slash its order for new A380 ‘super jumbos’ cast further doubt on their second-hand values which underpin the amount of capital their investors can expect to receive back.
Amedeo Air Four Plus (AA4), which has 69% of its fleet in the superjumbos, slid 5.9% to 99.72p.
Emirates, the national airline of the United Arab Emirates, has been the main buyer of Airbus-made A380s. Its decision to cut its orders for the aircraft from 162 to 123 in favour of buying smaller planes has left Airbus with no substantial backlog.
As a result the European aerospace group has announced it will stop production of A380s in 2021, putting at risk 3,500 jobs.
Although the reduction in A380s will not affect the income the funds receive leasing out the planes they own or their dividends they pay out, which before today’s fall offered yields of around 8%, it will knock the residual – or resale value – of the fleet which determines the capital return shareholders receive on their investment.
Conor Finn, alternative funds analyst at Liberum, said: ‘Residual value uncertainty has always been the key risk for the London-listed funds given their focus on the A380.
‘The A380 is used by a small number of operators and does not have an established secondary market. We believe it is highly unlikely the funds will achieve the latest appraised values at the end of the respective leases.’
Finn noted that funds’ appraisers had trimmed their original residual value estimates in recent years reducing DNA by 8.2% since acquisition, DNA2 by 9.6% and DNA3 by 12.8%.
He believed A380 residual values could now halve, adding: ‘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 Doric funds are managed by Doric Asset Finance and had a combined market value of £630 million before today’s falls. Amedeo is the largest with a market value of around £684 million.
DP Aircraft (DPA) is the other fund in the sub-sector. Managed by DS Aviation in Germany, it does not own any A380s, operating four Boeing 787s instead. Its shares were unchanged at $1.02 valuing the company at £166 million. It pays quarterly dividends, like its rivals, and yields 8.8%.
Despite the uncertainty over the re-sale values of A380s in recent years, investor demand for the funds' high yields has pushed their share prices well above their underlying net asset value. According to Numis Securities data, Doric Nimrod Air One, the oldest of the funds launched eight years ago and which owns a single jet, stood on a premium of nearly 9% at yesterday's close.
By contrast, the Air Two fund, which owns seven A380s, traded on a 23% premium; and Air Three, launched five years ago and operating four A380s, stood on a 51% premium over net asset value.
Over five years the three Doric funds have delivered total shareholder returns of 32.2%, 22.4% and 28.9%, according to Numis.