Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

What do German dentists and architects have in common with Yorkshire council workers? Bizarrely, they're all part-owners of Airbus A380s.

Airbus SE is struggling to sell the A380 and a second-hand market hasn't become established yet. But Airbus isn't the only one facing a problem: German retail investors and British pension funds have savings tied up in alternative investment vehicles that have purchased A380s and leased them to airlines. Still, there are reasons to think those investments might not be quite as dangerous as they sound.

A decade after the double-decker aircraft entered commercial service, Singapore Airlines Ltd has returned the first of its leased A380s to the German fund manager Dr Peters Group.

So far Dr Peters hasn't found a buyer or another lease customer, so the aircraft has been parked near the Pyrenees and stripped of its Rolls-Royce engines, so these can be rented out. Several other A380s will soon be looking for a new home too.

That's worrying for Dr Peters' wealthy German clients, who each paid a five-figure sum to own a slice of one of several A380s in its portfolio of closed-end funds. German investors have poured more than 1.6 billion euros ($1.9 billion) of equity capital into similar funds that have purchased 21 A380s, estimates Scope Analysis.  Lately, these funds have traded at little more than half their nominal value on the secondary market.

Doubts about the aircraft's future are also buffeting UK-listed A380 investment vehicles such as Amedeo Air Four Plus Ltd. and the Doric Nimrod Air funds, whose investors include the West Yorkshire, East Riding of Yorkshire and Merseyside pension plans, according to Bloomberg data. Because of their extensive holdings, those English public sector employees and retirees will eventually own a couple of A380s outright, by my calculation.  Some funds slumped last month when Emirates failed to place another order for new A380s at the Dubai Air Show.

Super-jumbo Jitters
Airbus' failure to secure another A380 order is a worry for leasing company investors
Source: Bloomberg
Doric Nimrod Air Two has seven A380s on lease to Emirates

Fortunately, most of these funds shouldn't lose money for their investors. Airlines typically committed to leases lasting at least 10 years and operators like Singapore Airlines, Emirates or Air France don't pose much default risk. The airlines' lease payments are usually enough to pay off the debt attached to the aircraft before the lease expires.  They provide regular payouts for equity holders too. Dividend yields of about 8 percent are common. 

Investors should have got at least 60 percent of their capital back by the time their aircraft is returned and possibly all of it. Most of the recently established funds have longer lease terms, or conditions that make a lease extension pretty certain.

Of course, nobody ties up money for a decade just to get an equal amount back. The idea was to make a big profit when the aircraft was sold or leased again. Appraisers advising Doric Nimrod Air One, which owns one A380, anticipate a residual value of about $104 million for the jet when the lease expires in 2022, or three-quarters more than the fund's market capitalization. If it sold its first A380 today, Dr Peters would need about $65 million to stop its investors losing money, by my rough calculation, compared to a purchase price of almost $200 million.  

But investors can't be sure whether there will be enough buyers or new lessees of these used superjumbos, or what terms they may demand. British Airways might be interested in acquiring second-hand A380s, but its enthusiasm doesn't seem widely shared. Dr Peters has mooted breaking up A380s for spares, which are scarce and therefore valuable. But the more planes broken up, the less profitable that strategy becomes.

Other potential uses include carrying pilgrims to Mecca or re-purposing them for VIP customers. Yet customers know they can drive a hard bargain. Last month, Dublin-based lessor Amedeo said it was planning a quasi airline-for-hire with a separate order for 20 Airbus A380s. That's either an innovative solution or a sign of increasing desperation.  

The planes in the London-listed Doric Nimrod Air and Amedeo Air Four Plus funds don't start coming off lease for several years, which allows more time for a second-hand market to develop. In the meantime, Amedeo Air Four Plus has been adding Boeing 777 and Airbus A350s to its portfolio, spreading its exposure. 

Investing in funds backed by an aircraft -- rather than commercial property -- sounds exotic but needn't be. A more fungible asset such as the top-selling narrow-body A320 would doubtless have caused fewer worries but potential returns would presumably have been smaller. Next time you stop by a Yorkshire tea-room and the discussions turn to an A380's residual value, you'll know why.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. A discount of up to 20 percent is normal as closed-end funds aren't liquid.  

  2. That's because some of the Doric Nimrod funds own more than one aircraft. 

  3. Moody's also downgraded several Doric Nimrod notes in August citing concern about the value of the aircraft collateral.

  4. That's not the case with several of the Dr Peters funds: a second tranche of debt is still outstanding, which helps explain why it's renting out aircraft engines. Some of Amedeo Four Limited's junior debt will also be repaid once the aircraft has been sold or re-leased. 

  5. This is roughly what investors in the first Dr Peters fund have received so far.

  6. It's generally the airline's responsibility to restore the plane to its original condition.

  7. That's because the fund still has a second tranche of debt to pay off but has a liquidity reserve. The DNA and Dr Peters jets aren't directly comparable.

  8. Nb Amedeo Air Four is a separate entity and isn't the one buying those 20 planes.

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net