Hard-pressed plane-leasing funds have sealed their place as this year’s best recovery play after Emirates airline agreed to buy back the single jet owned by Doric Nimrod Air One (DNA ), triggering another surge in its share price.

Emirates has agreed to pay £25.3m for the Airbus A380-861 it has leased from DNA for 12 years, enabling the £26m investment company to return the capital to shareholders before winding up next year.

Including quarterly dividends, DNA will return a total of 66p per share once it has received the payment from the national carrier after the lease ends in December.

Shares in the Guernsey-closed-end fund have soared 78%, or 26.5p to 60.5p since the news broke on Friday. Already one of the best performers in the difficult first half of the year, DNA is currently 2022’s top investment company with a 135% total return. 

However, its five-year return of just 18.5% – most of it through the high-yielder’s dividends – shows the painful period during the pandemic when the aviation sector was grounded.

Two sister funds, Doric Nimrod Air Two (DNA2 ) and Three (DNA ), also managed by Nimrod Capital, have jumped to 15% in the past week on hopes their A380 super-jumbos may also fetch good prices from the Emirates in the next two or three years.

Good offer

Emirates’ offer impressed the City where analysts had estimated a payout of less than half that amount, particularly if the Emirates had chosen to exercise an option to return the plane to the fund in full working condition, which would then have had to find another buyer or tenant.

High-yielding plane funds have been constantly dogged by concerns over the resale values of their craft. Although the amount Emirates is paying is less than shareholders would have originally hoped for at DNA’s launch in 2010, the transaction nevertheless vindicates the model of these alternative income funds which bought planes and leased them on sensible terms to credit-worthy flag carriers. 

Since flotation, when its shares were first issued at 100p, shareholders have received 108p share in dividends over 12 years and can now look forward to a further 66p. This represents an attractive 7% annual internal rate of return, according to sources close to the company, largely funded from income with DNA consistently paying dividends even through the Covid crash.

Emirates’ decision to buy the wide-body airliner represents a major turnaround in fortunes for both the aviation sector and the Airbus jet. Airlines, including the Emirates, had planned to retire their fleets of A380s, whose double-deck structure enabled them to carry around 525 passengers. 

However, problems with delivering new planes, notably Airbus’s 737 MAX which were grounded after two fatal crashes in 2019 and 2020, and a surge in demand for long-haul travel after the pandemic, has prompted a re-think.

It is possible that Emirates, which now has a fleet of 118 A380s, will use the Doric plane for spare parts to service the ageing craft which first entered service in 2007.

Half-life

Jefferies analyst Matthew Hose said the 11 A380s owned by DNA2 and 3 were younger than DNA’s and had in the past been valued up to $3m and $7m higher than the plane just sold.

However, he cautioned against assuming the funds would receive more money as it was likely Emirates would opt to return them in ‘half-life’ condition 16 months before their leases expired, along with a payment of around $12m.

It had done this with two of DNA2’s seven planes so far, and had only refrained from doing so with DNA as it would have required doing so last summer when its plans were uncertain. 

‘This could signal a lower price paid for DNA2 and DNA3’s A380s given that the prohibitively high cost of returning the aircraft to full-life condition may have been reflected in the price Emirates has agreed to pay DNA, and even potentially outweighs the impact of the aircraft’s older age,’ Hose said.

Stifel analyst Sachin Saggar said the latest appraised value of DNA2’s planes was $270m based on the average of three independent valuers. This equated to a 139p per share capital return, or 180p including dividends. The shares closed today at 98p.