- Emirates announces plans to expand its retrofit programme
- Amedeo has six A380 and two Boeing 777s leased to the airline
- 2p-a-share quarterly dividend
Emirates Airlines has announced that it will be completely refurbishing another 43 Airbus 380 and 28 Boeing 777 aircraft, expanding its retrofit programme to 191 planes. The original plan called for 120 aircraft – 67 A380s and 53 Boeing 777s – to undergo full refurbishment. The Boeing 777 remains the backbone of the Emirates fleet, and the A380 is the airline’s flagship customer favourite.
It means that Emirates is planning to upgrade 110 of its current fleet of 116 A380s, a material investment that it wouldn’t be making unless the airline planned to retain the upgraded planes for the long term. Bearing this in mind, UK aircraft leasing fund Amedeo Air Four Plus (AA4:42p) has six A380s leased to Emirates. The leases mature between September 2026 and April 2028, but the planes could potentially fly into the late 2030s.
Of course, it is entirely possible that the only six A380 planes that Emirates doesn’t intend retrofitting are the ones owned by Amedeo. However, that wouldn’t make commercial sense as Emirates will be upgrading aircraft with the lowest cumulative flying hours to maximise the remaining life of its assets. Analysts at broker Liberum Capital estimate that there are more than 40 A380s in Emirates' fleet older than Amedeo’s aircraft, with at least 20 leased from other lessors.
Furthermore, Liberum notes that Emirates has previously requested and received consent to upgrade four of Amedeo’s A380s as well as one of the two Boeing 777s leased from the company. The eight aircraft leased to Emirates account for three-quarters of Amedeo’s £1bn fleet valuation. It certainly improves the chance of Emirates retaining the A380 aircraft after the current leases expire.
Deep discount to book value set to narrow
Admittedly, there is limited competition when negotiating a sale or follow-on lease for the A380s, so Emirates holds a strong hand. However, with cash flow from the current Emirates leases set to slash Amedeo’s net debt from £691mn to £478mn by March 2026, the gap between its market capitalisation of £125mn (41.3p) and Liberum’s spot net asset value estimate of £325mn (107p) could narrow markedly in the event of a sale of the aircraft to Emirates or an extension of the leases. It’s worth noting that Emirates would incur substantial costs complying with minimum physical life return conditions and agreeing end-of-lease (EOL) differences compensation if it returned the aircraft to Amedeo.
The shares have delivered a 12.5 per cent total return since I initiated coverage a year ago (Alpha Research: ‘In the ascent for a profitable recovery’, 19 May 2023), and the investment risk looks increasing skewed to further upside. In the meantime, shareholders can earn a 19 per cent dividend yield from the 2p-a-share quarterly dividend. Buy.
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