Air France's decision not to renew leases for A380 jetliners, following the lead of Singapore Airlines, increases the pressure on managers of closed-end A380 funds to find new lessors or sell the planes for parts. No option looks easy.
German retail investors have placed approximately EUR 1.6bn in a total of 21 Airbus A380s through closed-end funds. The lessees are Singapore Airlines, Air France and Emirates Airlines.
Lease extensions would ensure that the funds receive income well beyond the typical 12-13 year duration of the debt taken on to buy the aircraft. Conversely, if the airlines return the aircraft at the first possible opportunity, when the 10-year leases expire, that leaves the funds with residual debt to pay back, plus the costs of storing the aircraft, and the challenge of finding a new income stream.
“The A380 has proved much less popular with airlines than passengers which is reflected in the funds trading today at around 46% on average of their initial value,” says Frank Netscher, senior analyst at Scope Analysis.
The A380 has fallen out of favour partly because carriers have found too few routes to regularly fill the plane’s 500-plus seats. They have also baulked at the four-engine A380’s relative high running costs compared with smaller two-engine, long-distance aircraft such as Boeing Co.’s 787 and new versions of the 777 and Airbus’s own new A350. Airbus has struggled to find new takers for plane beyond its launch customers.
Since the return of the five leased aircraft, the asset managers of the funds in question have been tried to find new lessees. So far, only one A380 has been leased to the Portuguese airline Hi Fly for just 70 months. Two more A380s are in storage. The other two A380s will be sold for spare parts.
Leasing contracts for another 16 Airbus A380s owned by German closed-end funds will expire over the next few years. The five A380s leased from Air France will be returned between 2020 and 2024.
Should Emirates also waive extension option, a total of twelve A380s would be returned by the airlines between 2020 and 2022. If fund managers cannot find new lessors, these planes would have to be dismantled and sold for spare parts, confronting the parts market with the risk of oversupply.
“This could have a further negative impact on the performance of the funds,” says Netscher.