ANALYSIS: Doric Lease order points to demand for A380 leases

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Last week Doric Lease's memorandum of understanding announcement for 20 Airbus A380s surprised many in the marketplace.

"Doric? Who is this?" asked one journalist. "Are they English, or Irish?"

"I thought they were Greek, because of the logo," says another.

At the Paris air show's press conference, Airbus' chief operating officer customers John Leahy introduced Doric Lease as the third largest widebody lessor and the largest A380 asset manager.

The company has been a pioneer in arranging, structuring and managing A380 investments for German, UK and North American investors since its establishment eight years ago. Its portfolio under management comprises 35 aircraft with lease customers based in Africa, the Middle East, Asia, Europe and North America.

The announcement to acquire 20 A380s (the memorandum of understanding is expected to be firmed over the next couple of months), marks a turning point in the company's history.

Up until now, Doric had mainly concentrated on an asset management role for financiers. However, just days before the order at the Paris air show, Doric established a Dublin-based leasing company, Doric Lease (DLC).

"Through this order, DLC, is becoming a 'real' leasing company and this is good for the industry," says a financier.

No doubt, the transaction is a good move for Airbus. First, Airbus managed to revive A380 sales (the last order was in December 2012 when Singapore Airlines signed for five units). Second, the Doric agreement is a new means for the manufacturer to "market" the aircraft, and Leahy does not appear too concerned that the lessor might effectively cannibalise Airbus's own sales efforts.

One the same day of the DLC announcement, ILFC, the only other lessor customer in the history of the A380 model (its 10-aircraft order was cancelled two years ago), told journalists, at its 50 Airbus A320neo family order, that the A380 model does not fit into its business model.

"It is not a great aircraft for us. The A380 customer base is limited and the secondary market is unproven," said ILFC's president Henri Courpron.

"The first lease will not be an issue because we have demand for this, but we don't know how the first returns will work," he says.

The return conditions of the first leases have been a dark cloud over the A380's remarketing capabilities.

Airbus said a year ago that in "rare cases" where A380s might require configuration, the cost per seat is "comparable with other long haul aircraft."

In fairness, Airbus has been working on minimising transition costs. The manufacturer is in the process of offering a higher density A380 configuration to customers, Airbus senior vice president leasing markets Andrew Shankland told delegates at the International Society of Transport Aircraft Trading (ISTAT) conference in Tokyo last month.

According to him, the A380 variant currently has an average 525-seat configuration but the potential 50-seat increase will involve switching cabins.

"By switching all economy seats placed in the main deck and simply putting the premium economy, first and business seats in the upper cabin, this will allow airlines to increase capacity and revenues."

Shankland says this version will help customers to better manage reconfiguration costs in the future and allow greater second-hand market penetration.

"Customers will minimise the complexity of their reconfigurations costs this way," he says.

Doric says transition costs were a key point in the discussions with Airbus and this is why it took "almost a year" of negotiations.

Chief executive officer Mark Lapidus believes the lessor can "explain" the aircraft to potential operators and help them to "cross the line" into A380 operations.

He says DLC will offer the A380s with minimum reconfiguration costs in all-economy seating layouts downstairs and premium cabins in the upper deck.

"The perception in the industry is that reconfiguration costs are expensive, but through our order we aim to minimise them," Lapidus says.

The lessor says there is "pent-up demand" for the A380. He sees growth in routes operated by aircraft with over 400 seats, and adds: "These aircraft create new passenger traffic."

DLC is in talks with "two or three" customers regarding its planned order. Lapidus says the lessor has a list of potential clients, and says: "This is why we may not have enough aircraft."

"We see how airlines that do not yet have the A380 are interested in it, approach us and ask questions. This shows us that there is demand for this aircraft," he says.

"If anything, we are perhaps under-ordering the A380."

Ordering the A380 is a logical step in the company's history, Lapidus says. Doric manages a fleet of 18 A380s and is in the process of adding another four aircraft to its portfolio with financings expected to be raised through the capital markets.

"Through this order we are bringing a leasing solution for customers. We will solve their capital cost issue through leasing arrangements," he adds.

While there has been not been any second-hand activity for the A380, Doric says it has had discussions with a number of potential operators for the first A380 coming off lease from Singapore Airlines.

This aircraft is expected to be returned by 2017 although Singapore Airlines has an option for a lease extension.

"Widebody aircraft values are inherently stable and not prone to significant, and cyclical fluctuation."

The lessor sees widebody aircraft as long-lived assets, featuring long-term value sustainability.

According to Doric, a new 747-400 delivered in 1989 retains about 50% of its value in a 12- year period, and the lessor believes the same holds true for the A380 as well.