Should you invest in aircraft leasing funds?

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Should you invest in aircraft leasing funds?
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It was a loveless Valentine’s Day for investors in the aircraft leasing funds, with the announcement of the end of production of the A380 Airbus sending their share prices into a nose dive.

The decision by Emirates Airlines to reduce its A380 order book by 39 aircraft has meant that Airbus will cease production of it in 2021, although the company will honour all existing orders by delivering a further 14 to Emirates and three to All Nippon Airways.

Aircraft leasing funds use investors’ capital – augmented by debt − to buy new aircraft and then lease them to an airline on a long-term basis. The airline is responsible for all the running costs, maintenance and insurance, with the lease payments being used to repay the loan and to support a dividend. At the end of the term the aim is to sell the aircraft to the airline that has been leasing it, with the proceeds returned to investors.

The key unknown with these funds is the residual value of the aircraft

The key unknown with these funds is the residual value of the aircraft and any news that affects this can have a big impact on their share price. Doric Nimrod Air One (LON:DNA), Doric Nimrod Air Two (LON:DNA2) and Doric Nimrod Air Three (LON:DNA3) are all fully invested in A380s leased to Emirates, which is why their share prices fell by as much as 10% when the news broke on February 14. The three funds now have a combined market value of £580 million and an average yield of around 9%.

Amedeo Air Four Plus (LON:AA4), the other London-listed aircraft leasing fund, provides exposure to 14 aircraft, of which eight are A380s. It is more highly geared than the others, hence the reason its shares were down 10.4% on the news.

The difficulty for investors is trying to estimate the residual value of the A380 given that it is a very large plane with no secondary market. This becomes a bigger element of the overall return over time as the leases mature, so you might think that the decision to end production would kill these funds stone dead, but it could actually be a positive.

A pillar of their fleet

The Chairman and Chief Executive of Emirates Airline has said that the A380 is a differentiator for their company and that it will remain a pillar of their fleet well into the 2030s. They already have more than 100 of these aircraft and it is expected that they will continue to be operated by Emirates for the entirety of their useful economic lives.

Amedeo, the manager of AA4 and liaison agent to the Doric funds, believes that the announcement could have positive implications for the future values of the A380s on their books because they are likely to remain in use for longer. It is also important to note that there are several years outstanding on the leases and that the lease payments are unaffected by the news.

Aircraft leasing funds are highly specialist vehicles and they will probably endure quite a bit of volatility until there is more clarity about the residual values of the A380s. If you are an experienced investor and are comfortable with the risks you might well feel that the 9% yield and the chance of a sizeable capital gain make them a decent bet.


Listed Aircraft Leasing Funds – Summary

    Share % Market Outstanding Residual Projected Returns (p) Launch Lease
Fund Ticker Price (p) Yield Cap £m  Debt £m Value £m Income Capital Date Expiry
Doric Nimrod Air One DNA 102 8.8 43 37 101 38 184 Dec-10 Oct-2023-Nov2024
Doric Nimrod Air Two DNA2 192 9.4 332 420 780 104 356 Jul-11 Dec-22
Doric Nimrod Air Three DNA3 93 8.9 205 274 485 58 173 Jul-13 Aug-Nov 2025
Amedeo Air Four Plus AA4 95 8.7 610 2,104 1,566 80 145 May-15 Sep 2026-Jan 2030
Note: Outstanding debt, residual values and projected returns (p/share) are based on latest company factsheets as at 31 December 2018. Source: Company & Numis Securities Research


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