Special Reports: Aircraft Leasing
Testing times as A380 turns ten
November 1st 2015
As big carriers, including Singapore Airlines (SIA), Emirates Airline and Qantas Airways, consider returning their A380s, taken under 10-year sale-leaseback contracts, to their owners, a leading air finance banker has warned the residual value of the aircraft may not meet expectations. Read More »
Head of aviation at DVD Bank in London, Bertrand Grabowski, told delegates at a recent conference in Prague that the big jet will have its value tested as it reaches a landmark in its operations next year.
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| First of SIA’s A380s to return to the market after a decade of flying |
He said the lease contract for SIA’s early A380s runs out in 2017. Whether the Asian carrier returns the aircraft to German investor and holder of the title, Dr. Peters Gruppe, or negotiates a drastically reduced rate to keep it, the airliner’s residual value will be established at a lower level than Airbus would wish.
“It’s going to be a test. You have a recipe for a correction in terms of lease-pricing for the A380,” he said. Already, SIA is indicating it might not want to keep the plane, although this may be a tactic on the part of SIA to negotiate a better rate for a renewed lease, Grabowski said.
The warning comes as Airbus struggles to secure new orders for the plane. Chief operating officer customers, John Leahy, said at the Paris Air Show in June, Airbus expected to sell 25 A380s this year. There have been no orders for months but Orient Aviation has been told “an order can be expected soon”, believed to be from Saudi Arabia.
Airbus also has to deal with some A380 customers who are reported to be considering a reduction in their A380 fleets.
Malaysia Airlines Berhad (MAB), which inherited six A380s from its predecessor, MAS, has said reports it would dump its entire A380 fleet are premature and that the carrier’s future fleet composition remains under consideration.
Grabowski said Airbus’ unsuccessful efforts to deliver new sales of the A380 to demonstrate there is demand for the aircraft could have a detrimental effect on pricing. Airbus itself has suggested planes retired by premium carriers could find a new life plying six to eight hour routes for low-cost Asian airlines.
The cost of refitting the A380 after a decade in service is unknown, he said, which made it difficult for financiers to assess the value of supporting secondhand transactions. SIA and Emirates mostly purchased their A380s directly from Airbus. They transferred them to investors via sale and leasebacks, which placed the residual value with the new owners.
The only lessor to have ordered the A380 is Amedeo (formerly Doric Lease Corporation), which is taking 22 of the planes. The biggest A380 operator, Emirates, is taking four of the jets next year through Amedeo. Not surprisingly, the German-based lessor is talking up the future lease market for the aircraft, including used planes.
Director aircraft management and German fund manager, Doric GmbH, Maurick Groeneveld, said that until recently the A380 has been perceived as a flying palace that led many airlines to believe they couldn’t afford it.
“Admittedly, the affordability of an A380 was not helped when it became public knowledge that long-term A380 leases have rates of US$2 million or more a month. Additionally, speculatively ordered A380s are being ‘promoted’ with high lease rates for long-term leases,” he said.
“However, with the first used A380s now entering the market, genuine opportunities are available for operators that so far have been hesitant to take A380s.”
Instead of a 10-year lease with high amortization profiles, the second lessee can benefit from a significantly lower lease rental, the Doric expert argues. “Consequently, used A380 lease rentals are roughly comparable with lease rentals for small wide-body aircraft,” he said.
“However, when used A380s are offered for a second lease period, there is no requirement to enter into a very long-term commitment as a lease period of six years could be accepted for a used A380 lessor. The economics of used A380s are further enhanced when operated at a higher capacity, i.e. with over 600 seats in two classes.” ■
