in Aircraft values, Lease Rates & Returns , Aviation Banks and Lenders
Tuesday 9 June 2020
Negative A380 prospects weigh down closed-end funds
Correction: A previous version of this article incorrectly stated that Amedeo had sold two A380s for approximately $82 million each. That amount is the proceeds from the sale based on aggregate net cash proceeds of approximately GBP 130,860,000 after the payment of all applicable transaction costs, fees and expenses (which amount to approximately GBP 5,100,000).
Few aircraft types have been as badly hit by the Covid-19 crisis as the Airbus A380. As of 9th June, all but 12* A380s in service have been grounded for at least three months, making it one of the most eschewed aircraft types during the crisis. Several operators have moved A380s to long-term storage including some for immediate phase-out.
Prospects for the A380 beyond initial lease were already bleak pre-crisis. The expectation now of depressed air travel demand for the next few years is likely to be the finishing stroke for the asset type.
Approximately 41 A380s are owned by traded funds, representing around 16% of all A380s produced to date. Of those 41, 18 belong to four funds listed on the London Stock Exchange Main Market which have seen their share price decline by 54% on average since the start of the year.
Closed-end funds tumble
Source: Bloomberg and Ishka calculations. The daily abnormal return of a security is defined as the actual daily return of the security, less its expected daily return, whereby the latter is calculated using the Capital Asset Pricing Model (CAPM). Ishka has made the following choices in its calculations: Risk free rate = 1-month LIBOR UK (Bloomberg ticker BP0001M); market rate of return = return of the FTSE All-Share Index; beta = the unadjusted raw beta for each of the equities as published by Bloomberg. Data extracted on 8th June.
Source: Bloomberg. Data extracted on 8th June.
The first graph shows cumulative abnormal returns for Amedeo Air Four Plus (AA4 LN Equity) and the three Doric Nimrod Air (DNA) funds – DNA1, DNA2 and DNA3. AA4 Plus recorded some gains in late February following the sale of two A380s on lease to Etihad (MSNs 233 and 237) to the airline, for which it recorded £130.86 million ($164.41 million) in proceeds. The surprise sale also appeared to have a mild positive effect on DNA3.
However, the Etihad sale was immediately followed by severe contraction in the stock markets in late March in response to the Covid-19 pandemic and the oil price war between Saudi Arabia and Russia. In the case of AA4 Plus, a slight recovery in late March and early April reversed course again following a temporary suspension of dividends announced on 6th April. The FTSE All-Share Index has since begun a slow recovery, but the four funds have seen little variation in prices and are currently down 54% on average from the start of the year.
AA4 Plus contains six A380s and two B777-300ERs on lease to Emirates as well as four A350-900s on lease to Thai Airways, while the DNA funds have 12 A380s on lease to Emirates: one in DNA1, seven in DNA2 and four in DNA3. For a full breakdown of the 41 A380s in listed funds, see this table.
The other 23 A380s are owned by German closed-end funds, a market said to be “in misery” due to the effects of Covid-19 on real assets including aviation, according to an article by German daily Frankfurter Allgemeine in April. The article did not provide data points as trading of closed-end funds in Germany was “offline” as of April due to bank closures and lack of digital sales platforms, according to Sonja Knorr, head of alternative investments at German ratings agency Scope.
Early phase-outs
Last August Ishka reflected on looming A380 retirements and the lack of opportunities for the aircraft in the secondary market (see Insight: ‘A380 retirement horizon: What’s coming?’). Some operators have in recent weeks announced the total or partial phase out of A380 fleets, bringing forward that problem, while other airlines have left the question hanging:
- Air France has phased out its entire A380 fleet, which previously was set to be decommissioned by 2022. The nine aircraft include seven owned by funds managed by German asset manager Dr Peters. Two of those A380s were already retired last year and are undergoing par-out. Dr Peters notes in its website that the carrier’s decision to shut down its A380 fleet “will have no direct impact on Air France's contractual obligations to the respective investment companies” and notes that it is “already in negotiations” with new parties regarding the future of the for four A380s still on lease.
- Lufthansa is permanently decommissioning six A380s, which it previously aimed to phase out in 2022/2023 with a deal to sell them back to Airbus.
- Qantas CEO Alan Joyce said there “is potential” to reactivate all 12 A380s in its fleet but there is also a potential “to bring less than 12 back.”
- Qatar Airways CEO Akbar Al Baker said its 10 A380s will not return for at least a year “and maybe never."
- Thai Airways (which filed for bankruptcy protection on 26th May) and Asiana are in restructuring processes expected to result in reduced fleets.
As for the largest A380 operator, Emirates, CEO Tim Clark has assured that the type will regain its place in the airline’s network “on the scale it had before,” although not before 2022. The airline, however, is reportedly in talks with Airbus to cancel some of its eight remaining A380 orders. Etihad, another A380 operator, also said it is keeping the aircraft in its fleet.
Lease deferrals
Crowding in the secondary market and the possibility of depressed part-out are not the only things keeping investors worried: several funds are also receiving requests for lease deferrals.
Dr Peters notes in its website that it has granted lease deferral requests to Air France and Emirates. Air France was allowed to defer half of the lease rates for the months of April, May and June for leases paid into three of the funds, and “contrary to what the airline would like” the deferred amounts will need to be paid by the end of 2020. Emirates approached all funds for rental holidays and was granted “at least a partial and temporary deferral” which, Dr Peters notes separately, “has no effect on the funds’ performance.”
The lessor remains bullish on the quality of its lessees. In a separate note to investors, Dr Peters noted that both Emirates and Air France-KLM have received approval for or confirmation of state financial aid (see Insight: ‘Covid-19 bailouts: Big week for big European airlines (1st May)’).
AA4 Plus notified investors in mid-April that its largest lessee Emirates was seeking some form of financial accommodation for their two 777-300ERs and six A380s on lease, but noted that the lease rentals were to “remain current and up-to-date” until an agreement was achieved.
AA4 Plus is also in discussions with the debt rehabilitation planners of Thai Airways to understand their intentions. Prior to Thai’s bankruptcy filing, AA4 Plus was negotiating a six-month lease deferral to be repaid with interest over the following three years. As of 29th May, Thai had not paid any lease payments to AA4 Plus for the four A350s since 22nd May.
The Ishka View
Investors in A380 funds have a difficult road ahead. Closed-end funds may need to forego their typically attractive dividends for the time being as funds grant lessees rent deferrals, while a recovery of the A380’s resale value is deemed unlikely. Many shareholders in AA4 Plus were pleased by the sale of two aircraft to Etihad before the Covid-19 slump fully unravelled as it created a precedent for the disposal of an A380 halfway through its lease term.
Highlighting tensions, shareholders in AA4 Plus have requested a reduction in remuneration from managers and advisors in light of recent performance, fund manager Amedeo noted on 1st June. Amedeo reduced its fees for its role in arranging the Etihad sale, but a proposal by Nimrod Capital (Corporate and Shareholder Adviser to AA4 Plus as well as an adviser to the Doric funds) to accommodate reduced remuneration was said to have fallen “considerably short of this objective and contained unacceptable conditions.”
* Based on Flightradar24 data. Lufthansa operated three A380s until mid-April for repatriation flights, British Airways reactivated one A380 on 31st May for Johannesburg flights after undergoing heavy maintenance in Manila for 2.5 months, China Southern has been operating its five A380s infrequently since January, Malaysia Airlines used two of its A380s to operate one return flight to London and one to Cairo in late April, Hi Fly has been operating its A380 as a PPE and medical equipment freighter
Sign in to post a comment. If you don't have an account register here.