Investors in closed-end Airbus A380 funds that are approaching end-of-life will likely not face losses from their investments into Airbus's flagship jet roughly a decade ago.
However, significant profits are highly unlikely, given the aircraft's uncertain secondary market prospects.
After all, a closed-end aircraft fund's yield is determined not just by the aircraft lease income over the fund's lifespan, but also by the secondary-market disposal of the asset once the fund matures.
NO DEFAULTS
One positive for A380 fund investors is that no lessee has defaulted, meaning that all lease payments have been made.
Crucially, in terms of recouping their principal, this has meant high payouts, of 7% to 8.5% per annum, over 10 years, and with the financing loans mostly paid off, the invested-in A380s are unencumbered, analyst firm Scope Analysis states in a report on A380 closed-end funds.
German investors are the most exposed to these investments, Scope notes. Since 2006, over €1.6 billion ($1.9 billion) of German-based money has been invested in 20 closed-end funds with 21 Airbus A380s as assets.
Indeed, over the last decade, more than half of German retail investments in aircraft were channelled solely into the A380, Scope asserts.
POOR CHANCE OF PROFITS
Profits, though, will be harder to come by, the Scope report suggests.
"Alongside recurring income, disposal proceeds represent a decisive performance factor," it states.
If the A380 can be sold at a good price upon the lease's expiry, investors will receive a high final payout, Scope acknowledges, but it adds: "Failing this, anticipated yield targets will not be met and investors may even make losses. The sale of used aircraft stands or falls on its fungibility. Fungible models are chiefly characterised by a broad operator base, i.e. they can be used by numerous airlines."
Unlike other aircraft, such as the A320 or Boeing's 737, the A380 does not appear to have a viable secondary market.
"A brisk second-hand market exists for the most fungible models like the A320 or Boeing 737. Almost every airline operates these models. The secondary market is just as liquid. This does not apply for the A380," Scope writes.
Dr Peters-managed A380s on lease to Singapore Airlines are the most prominent examples highlighting the difficulties of remarketing the A380. The first of the aircraft is set to come off lease in October.
As previously reported by FlightGlobal, the German asset manager has been considering a range of secondary market options for the superjumbos, including teardown. However, an A380's part-out value may prove surprisingly low. Some sources put it as low as $30 million.
Portuguese charter carrier Hi Fly is looking at acquiring two A380s from Dr Peters, FlightGlobal understands. However, even if that deal does come to fruition, there is scant evidence that enough secondary-market demand will emerge to cope with the likely supply, so it may remain a struggle for A380 owners to dispose of the double-deckers at prices that make commercial sense.
"Up until now, the leasing income of all A380 funds have been in line with prospectuses and investors have received high annual payouts," says Scope. "However, once the normal 10-year lease term ends, prospectus targets are unlikely to be reached."
Indeed, the market has been pricing in this expectation for some time, Scope adds.
PRICING-IN LOW EXPECTATIONS
The average price of A380 funds on Fondsborse Deutschland, a secondary fund market in Germany, has fallen from 80% of the nominal value in 2009-2012 to a little over 50% this year.
Typically, secondary-market prices show a 20% discount from the nominal even if the fund is trading at expectations. But those funds that are nearing the end of their initial A380 lease term are being discounted by 75%, Scope notes, suggesting that investors lack faith in the aircraft type's prospects once the first lease periods end.
"From the beginning, the A380 fund concept wagered that these aircraft would be received well on the market. The bet does not seem to be working out, however, as indicated clearly by transactions on Fondsborse Deutschland," Scope's report states.
"Even so, the payouts made so far mean investors will most likely not make losses, even if disposal proceeds prove disappointing. For example, if an A380 is sold for only 50% of the original price, a positive yield is still very likely on the investment. However, the yields envisaged in the prospectus will clearly miss the mark. They can only be achieved if the aircraft are leased for another five to eight years at favourable terms, or sold at a high price. Right now, both scenarios are looking unlikely."
Even though the A380 closed-end funds look like they will not generate profits for their investors, financing aircraft through these structures may still be possible in the future. But these funds will be far more diversified across aircraft types – and therefore need a higher volume of capital – than the A380 funds. In the current environment, however, many issuers are at the moment not willing to take the risk on these funds due to the large pre-financing sums, Scope notes.
Nonetheless, it is to some extent a positive for the wider aircraft finance market that despite A380 closed-end funds likely under-delivering, the structure will still be an option in the future.
Source: Cirium Dashboard
