Premium 316 - The Future of Used A380s in Aviation

The first aircraft (picture) was delivered to the airline on October 15th 2007 and manufactured in 2006. It is on lease from Doric Asset Finance through October 2017. Reports from various sources indicate that the lease is not likely to be extended. What happens next? Doric has 45 aircraft “under management”. Of these five are A380s with Singapore Airlines and 17 are with Emirates. Over half Doric’s aircraft portfolio value is in A380s. The following table lays out the Doric A380 fleet. the last column lists when each aircraft hits its tenth year in service. Over the next seven years, Doric could potentially be taking back all of these aircraft. The first 80 A380s were overweight, some of which are highlighted in yellow in the chart. These aircraft will have lower residual values than later models and could necessitate lower lease prices in today’s market. Even if those aircraft were acquired at fabulous launch prices, the low value may not bring Doric the return it initially expected. The industry consensus says these aircraft will not be wanted by anyone, given the current lack of sales for A380. We disagree. We believe that there will be a demand for these aircraft for several reasons: They were operated by first tier airlines and had the best MRO care. Whatever initial kinks they had have been wrung out. Doric’s internal views notwithstanding, they will be available at very attractive pricing. They will arrive on the market with fuel prices remaining low. The risk the A380 represents to an airline is by now well understood. It is no longer the as risky a decision it once was. While one still has to fill the aircraft, technical and maintenance issues are well understood and the opportunity to acquire them at a lower capital cost results in favorable economics. The first five aircraft, all operated by Singapore, may be on the market by year end 2018. This provides enough of a pool from which an operator could create a sub-fleet for long and thick routes, which is what the A380 was designed for. For the A380 to command market leading airline economics it needs to have a capacity of around 590 seats per lessor Amedeo. As anyone who has flown a long haul recently can attest, airlines have tried to shoehorn in a fourth class of service called “premium economy” or something similar. The A380 has the best flexibility of any passenger aircraft given its large floor space and two decks. Airlines can optimize their premium classes in various sections of the airplane. Note that Emirates has several seat configurations on their A380s, depending on which markets are being served. By having the space of offer a meaningful seat capacity for all four classes, the A380 becomes a much better revenue generator. Even if an airline does not offer first class, the amount of space an A380 offers ensures an airline can exploit that space optimally for premium seating. Aircraft valuations for these initial A380s are likely to be below what the appraisers expect, which is currently around $100m. We believe these initial A380s may in fact be on offer for closer to $80m each or at a lease rate of around $800,000 per month. This is about 20% cheaper on a per seat basis that an equivalent aged A320. Such a discount is likely to be sufficient to attract an airline with the necessary traffic flow and the financial capacity to take on the much lower risk of operating these A380s.

No results