If you watch either Bloomberg or CNBC then you’ll no doubt have seen the lovely Penelope Cruz regularly touting the joys of flying Emirates. You have to understand I’m a staunch Budget Airline Oak Bloke, even if Ryanair requires some gritting of teeth. But I find myself being taken in by these Emirates adverts. Maybe it’s the doe-eyed Penelope. I start to think hang the cost, perhaps I, too, should fly better.
There’s plenty that do.
In fact Emirates recently reported record profits. $3bn profits.
I watched this advert again. I noticed Penelope says “This is the Emirates A380” and gives a little smile.
Ah. So the A380 is part of the core brand, the reason why she was able to “just take a shower above the clouds” and then give a coquettish blink. Hmmm.
Well investing in Emirates isn’t up my street but what if there were some way to hang on to coat tails of Emirates success? They have invested greatly into the A380 financially and via their brand equity - and continue to do so.
Thinking, too, on my love for juicy discounts to NAV and juicy dividends I set out to find a vehicle for this sort of investment.
I found that the vehicle was none other than the A380.
Lots of them. Leasing them. I say lots. 6 actually. And 2x Boeing 777-300ER and 4x A350-900XWB. To none other than Emirates (and Thai Airways).
Amedeo is trading on a 67% discount to NAV and yielding 16.9% at today’s 41.5p ask price. (I bought this morning at 41.3p)
What’s the Story?
A fairly steady financial picture (if you exclude the pandemic period) where the aircraft assets are offset by payments to reduce debt. The “delta” (the amount of change) year on year is approximately £140m reduction of assets and £130m reduction of creditors. AKA the depreciation and the repayment of debts. I’m being rather conservative on Interest (in 2026 when debt is reduced by about a 1/3 the interest payments will hopefully be more than 1/8 less!)
These are my forecasts for the next few years:
The key questions are:
Q1: What, if any, further share buy backs can occur? Under my models there’s a mild cash build and assumes a fixed dividend. AA4 managed to buy back £30m of shares in recent months.
Q2: Will the aircraft retain their value? Especially for Emirates who use them now. There is talk about the A380 being a dead duck. It’s true they no longer manufacture it. They require long runways. They’re expensive to buy (or lease). It’s true the economics of super jumbos versus smaller (and equally long range) aircraft weren’t as great as anticipated - or smaller planes like the 787 have reduced costs to the point that the cost per passenger mile is nearly equal to the A380. Assuming you can fill them 100%. However Amedeo Chair notes "Two out of service A380s were recently purchased by Emirates for $35m each.” and notes “New widebody replacements are either too small, according to the airline, or entry into service is being delayed by production or development issues. Recent trades show that some widebody values are picking up as new aircraft are simply not available when needed.”
Q3: Will there be another pandemic or Black Swan? That could obviously kybosh Amedeo. Covid vs Vaccines - who would win round 2? Seems to me MRNA is a powerful toolkit for humanity in the future.
Q4: Will travel get shredded in some almighty recession? Airlines still pay leases in bad times so Amedeo is insulated to some degree. Also Amedeo note “the Asia Pacific market opening out again. We are now getting closer to 2019 levels although.. business travel has plateaued.. nevertheless, increased leisure yields”
Q5: Will some new aircraft supercede and obsolete the A380? Boeing is struggling and has struggled with its MAX. Airbus are doing better financially, but there’s no major disruptive airframe or technology on the horizon as in the next 10 years. Hydrogen and Sustainable Aviation Fuel seem to be the focus now.
Q6: What about Thai Airways troubles? Yes, that’s in the past and I see Thailand has record tourism in 2023. It is confident enough to be contemplating substantial new aircraft orders.
So of course there are issues and risks. But there again is Penelope Cruz. There is the marketing effort Emirates are putting behind its brand and the A380 is an integral part of that. There’s a practical limits of what you can and can’t do with a bigger or smaller plane. There are few aircraft where you can have a shower above the clouds, and sit in a game changer seat with binoculars, or meet Penelope to talk business in the aircraft lounge. There is also the simple fact that Emirates are refurbishing some of its A380s in the past 12 months. It makes me think that the fears of the demise of the A380 are greatly exaggerated. In any case a 67% discount represents an awful lot of pessimism. Meanwhile the economics of the business appear compelling. Record profits for Emirates remember. Meanwhile to enjoy a near 17% yield too. Who knows, with Amedeo’s help maybe in the future I will be flying better.
My opinions are my opinions, and you are welcome to enjoy reading them. This is not advice. My advice is to get advice. If you need advice. That’s my only advice.
Oak
Thanks for the interesting post. I've held AA4 for about a year now and the divis have been very nice, while the SP has held up too. I hold an equal stake in a similar aircraft leasing fund, DNA2. After a year spend watching these I've come to learn that a key factor in their SP is the possibility of Emirates renewing/extending leases and/or possibly buying the aircraft. DNA2 recently surged on news that DNA2 agreed the sale of two A380s to Emirates.