Turbulence hits the aircraft leasing sector
It's been a tough year, but the outlook for aircraft-leasing funds is improving. David Stevenson explains which ones could be worth a look
Investors often overlook the small fleet of specialist funds that invest in plane leases. The last year has been tough for this subsector, but I think we are now approaching a point where adventurous fund investors might want to start taking a look again. The attraction of these funds is the long-term cash payments from big, reputable airlines that result in regular dividend payments. The steady lease payments flow through to generous dividend yields, some above 10%.
The downside? Many of these funds focus on the big A380 double-decker planes leased to the likes of Emirates. These face a finite future: Airbus will stop making them by the end of next year and airlines will slowly phase them out over the next few decades. As demand tails off we should expect resale values to drop sharply.
Selling planes on
Doubt surrounds the resale value of these huge planes. The issue is whether they really will be worth between 40% and 50% of the original purchase price (around $250m), which is the working assumption of most of the funds in this sector.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Investors aren’t so sure and have marked prices down to levels where these planes might only fetch between 10% and 15%. Then total returns (income and capital) might be in the single-digit range, implying big capital losses. My guess is that over the next year or so we’ll see these planes either re-leased (at lower rates) or sold second-hand to a small group of buyers (who might even use them for parts).
I think we could see resale prices closer to a 20%-35% ($75m) range, at which point, assuming the debts built into the fund structures get paid off, we could see a full return of capital – plus those juicy dividend payouts. But that’s still a guess and there’s not a lot of hard data out there to base any hard predictions on. One of the few independent pieces of research comes from an outfit called Scope Analysis, which rightly points out the risks. It reckons that German investors have allocated around €1.6bn to a total of 21 Airbus A380s through their own local closed-end funds.
The lessees of these aircraft are Singapore Airlines, Air France and Emirates – and the first two of those airlines appear to be going cold on the A380, while Emirates has been reducing its orders for the plane.
But it’s not all bad news. According to Scope’s Frank Netscher, “the prices of funds whose A380s are already in a part-out – selling the aircraft for their parts – have risen slightly from previous lows: the process has provided investors with greater certainty over the expiry of the aircraft leases and return of the aircraft to their owners amid near-zero secondary-market demand for the planes”.
One aircraft leasing fund to research
The upshot? Top of my watchlist is a fund called Amadeo Air Four Plus (LSE: AA4), currently trading at 76p on a yield of just under 11%. Its A380s only represent a part of a diversified portfolio – currently eight A380s and six other planes. This vehicle’s leases only expire between September 2026 and January 2030. So there’s a lot of cash flow from leases still to come.
As Matthew Hose of Jefferies, an investment bank, puts it, “even at a 50% haircut, entailing receiving approximately 25% of purchase costs for the A380, there are still some nominally attractive returns on offer [especially] for AA4, given its [return] is supported by its A350 and 777 exposure, which hasn’t [had a] haircut”.
The market has probably priced these funds about right and AA4 looks the most diversified, least risky way in. But worries about industry leverage (especially at Norwegian) and concerns about aviation contributing to carbon emissions, could cause turbulence over the next few months.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
David Stevenson has been writing the Financial Times Adventurous Investor column for nearly 15 years and is also a regular columnist for Citywire. He writes his own widely read Adventurous Investor SubStack newsletter at davidstevenson.substack.com
David has also had a successful career as a media entrepreneur setting up the big European fintech news and event outfit www.altfi.com as well as www.etfstream.com in the asset management space.
Before that, he was a founding partner in the Rocket Science Group, a successful corporate comms business.
David has also written a number of books on investing, funds, ETFs, and stock picking and is currently a non-executive director on a number of stockmarket-listed funds including Gresham House Energy Storage and the Aurora Investment Trust.
In what remains of his spare time he is a presiding justice on the Southampton magistrates bench.
-
Will a Santa Rally bring festive cheer to investor portfolios this year?
Investors will be hoping for a seasonal stock market boost in December
By Marc Shoffman Published
-
ChatGPT turns two: how has it impacted markets?
Two years on from ChatGPT’s explosive launch into the public sphere, we assess the impact that it has had on stock markets and the world of technology
By Dan McEvoy Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go? We round up the best investing apps
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated