• by  • October 1, 2015 • Doric II


    30 September 2015


    LSE: DNA2

    The Company

    Doric Nimrod Air Two Limited (“the Company”) is a Guernsey domiciled company, which was listed on the Specialist Fund Market (SFM) of the London Stock Exchange and the Channel Islands Stock Exchange on 14 July 2011 with the admission of 72.5 million Ordinary Shares at an issue price of 200p per share. On 27 March 2012, the Company issued 100,250,000 C Shares at 200p per share. With effect from 6 March 2013 C Shares were converted into Ordinary Shares. One Ordinary Share has been received for every one C Share, resulting in 172,750,000 Ordinary Shares in total. The market capitalisation of the Company was GBP 386.1 million as of 30 September 2015.

    The Company has four wholly-owned subsidiaries: MSN077 Limited, MSN090 Limited, MSN105 Limited and Doric Nimrod Air Finance Alpha Limited (“DNAFA”).

    The Company acquired a total of seven Airbus A380-861 aircraft between October 2011 and November 2012. Each aircraft is leased to Emirates Airline (“Emirates”) – the national carrier owned by the Investment Corporation of Dubai, based in Dubai, United Arab Emirates – for an initial term of 12 years from the point of delivery, with fixed lease rentals for the duration. In order to complete the purchase of the first three aircraft, MSN077 Limited, MSN090 Limited and MSN105 Limited entered into three separate loans, each of which will be fully amortised with quarterly repayments in arrear over 12 years.

    The net proceeds from the C Share issue (“the Equity”) were used to partially fund the purchase of four of the seven Airbus A380s. In order to help fund the acquisition of these final four aircraft, DNAFA issued two tranches of enhanced equipment trust certificates (“the Certificates” or “EETC”) – a form of debt security – in June 2012 in the aggregate face amount of USD 587.5 million. DNAFA used the proceeds from both the Equity and the Certificates to finance the acquisition of four new Airbus A380 aircraft leased to Emirates.

    Investment Strategy

    The Company’s investment objective is to obtain income returns and a capital return for its shareholders by acquiring, leasing and then selling a portfolio of aircraft. The Company receives income from the lease and its directors are targeting a gross distribution to the shareholders of 4.5 pence per share per quarter (amounting to a yearly distribution of 9.0% based on the initial placing price of 200p per share). It is anticipated that income distributions will continue to be made quarterly.

    The total return for a shareholder investing today (30 September 2015) at the current share price consists of future income distributions during the remaining lease duration and a return of capital at dissolution of the Company. The latter payment is subject to the future value and the respective sales proceeds of the aircraft, quoted in US dollars and the USD/GBP exchange rate at that point in time. Since launch three independent appraisers provide the Company with their future values for the aircraft at the end of each financial year. The latest appraisals available are dated the end of March 2015. The table below summarizes the total return components, calculated on different exchange rates and using the average value of the aircraft as provided by the three independent external appraisers. Regarding the following two tables, there is no guarantee that the aircraft will be sold at such a sale price or that such capital returns would be generated. It is further assumed that the lessee will honour all its contractual obligations during the entire anticipated lease term.

    I. Implied Future Total Return Components Based on Appraisals1

    The implied return figures are not a forecast and assume the Company has not incurred any unexpected costs.

    Aircraft portfolio value at lease expiry according to

    ·      Prospectus appraisal                      USD 863 million

    ·      Latest appraisal                                               USD 805 million

    per Share

    Income Distributions

    Return of Capital

    Total Return2

    Prospectus Appraisal


    Prospectus Appraisal


    Prospectus FX Rate4






    Current FX Rate5






    1 See final sentences of Investment Strategy

    2 Excluding earned dividend

    3 Average of the three appraisals as at the Company’s year-end in the respective expiry year of the respective lease

    4 1.56 USD/GBP Initial Admission / 1.53 USD/GBP C Shares Admission

    5 1.5166 USD/GBP (30 September 2015)

    II. Company Facts (31 March 2015)





    Current Share Price

    223.5p (closing)

    Market Capitalisation

    GBP 386.1 million

    Initial Debt

    USD 1.03 billion

    Outstanding Debt Balance

    USD 760.5 million (74% of Initial Debt)

    Current/Future Anticipated Dividend

    4.5p per quarter (18p per annum)

    Earned Dividends


    Current Dividend Yield


    Dividend Payment Dates

    April, July, October, January

    Expected Future Total Cash Multiple1

    2.11 (based on the Current Share Price)



    Launch Date/Price

    14 July 2011 / 200p

    Average Remaining Lease Duration

    8 years 10 months

    C Share Issue Date/Price

    27 March 2012 / 200p

    C Share Conversion Date/Ratio

    6 March 2013 / 1:1



    Aircraft Registration Numbers
    (Lease Expiry Dates)

    A6-EDP (14.10.2023), A6-EDT (02.12.2023), A6-EDX (01.10.2024), A6-EDY (01.10.2024), A6-EDZ (12.10.2024), A6-EEB (09.11.2024), A6-EEC (30.11.2024)

    Asset Manager

    Doric GmbH

    Corp & Shareholder Advisor

    Nimrod Capital LLP


    JTC (Guernsey) Ltd


    Deloitte LLP

    Market Makers

    Jefferies International Ltd,

    Numis Securities Ltd,

    Shore Capital Ltd,

    Winterflood Securities Ltd


    B3Z6252, GG00B3Z62522

    Year End

    31 March

    Stocks & Shares ISA




    1 See final sentences of Investment Strategy

    Asset Manager’s Comment

    1. The Assets

    In November 2012, the Company completed the purchase of all seven Airbus A380 aircraft, bearing manufacturer’s serial numbers (MSN) 077, 090, 105, 106, 107, 109 and 110. All seven aircraft are leased to Emirates for an initial term of 12 years from the point of delivery with fixed lease rentals for the duration.

    The seven A380s owned by the Company recently visited Auckland, Beijing, Frankfurt, London Heathrow, Manchester, Mauritius, Munich, Paris, and Shanghai.

    Aircraft utilisation for the period from delivery of each Airbus A380 until the end of August 2015 was as follows:


    Delivery Date

    Flight Hours

    Flight Cycles

    Average Flight Duration





    8 h 40 min





    5 h 55 min





    6 h 10 min





    8 h 50 min





    8 h 45 min





    6 h 10 min





    5 h 55 min

    Maintenance Status

    Emirates maintains its A380 aircraft fleet based on a maintenance programme according to which minor maintenance checks are performed every 1,500 flight hours, and more significant maintenance checks (C checks) at 24 month or 12,000 flight hour intervals, whichever occurs sooner. Emirates bears all costs (including for maintenance, repairs and insurance) relating to the aircraft during the lifetime of the lease.


    Results of the inspection completed for MSN 077 during the C check in June 2015 show that the aircraft was physically in a good condition consistent with its age. There is evidence that the aircraft has been well maintained and cleaned regularly. During the check considerable refurbishment of the passenger cabin took place with all soft furnishings and floor coverings being replaced. The cabin now has a near new appearance.

    Doric undertook records audits for MSNs105 and 106 in September 2015. The final reports were not available at the editorial deadline.

    2. Market Overview

    From January to July 2015 passenger demand, measured in revenue passenger kilometres (RPKs), increased by 6.5% compared to the year before. The recent softening in economic growth has had no adverse impacts on RPK volumes so far. Lower fares were fueling demand in air travel, particularly in the leisure travel segment. But according to an IATA press release citing Tony Tyler, IATA’s Director General and CEO, slowing global trade and stock market volatility may lead to some turbulence in the coming months. Nevertheless, expectations for 2015 are broadly positive, due to the continuing low oil price environment. In its latest forecast released in June IATA expects an RPK growth of 6.7% for the current year – an increase of 0.8 percentage points compared to last year’s growth rate. Between January and July 2015 airlines increased their capacities, measured in available seat kilometres (ASKs), by 6.0%. The Middle East (+15.5%) and Asia/Pacific (+7.2%) were the most active regions in terms of capacity growth. The only shrinking market was Africa again.

    The average passenger load factor in the first seven months of this year was 80.1%. This is an increase of 0.4 percentage points compared to the same period the year before. IATA expects an average worldwide passenger load factor of 80.2% for the full year 2015.

    A regional breakdown reveals that the Middle East airlines continue to outperform the overall market in 2015. Until the end of July RPKs increased by 12.4% compared to the first seven months in 2014. Asia/Pacific-based operators followed with 9.1%. Latin America grew by 6.4% and Europe by 5.1%. North American market participants recorded 3.6% more RPKs. Africa shrank by 1.3%.

    After a sharp decline in oil prices starting in the autumn of 2014, IATA has revised its fuel price target several times in the recent past. In its latest outlook, released in June, the industry association expects an average price per barrel of USD 78 during this year. Fuel is the single largest operating cost of airlines and has significant effects on the industry’s profitability. Comparatively low oil prices could drive the average share of fuel costs in operating expenses down to 28%. This could result in a significant boost of the industry-wide net profit to an estimated USD 29.3 billion in 2015. The net profit margin of 4.0% would be the highest for more than a decade.

    © International Air Transport Association, 2015. Air Passenger Market Analysis July 2014 / Air Passenger Market Analysis July 2015 / Economic Performance of the Airline Industry, 2015 mid-year report. All Rights Reserved. Available on IATA Economics page.

    3. Lessee – Emirates Key Financials

    Emirates recorded steady performance and significant growth during the 2014/15 financial year which ended on 31 March 2015. Revenue, including other operating income, reached a record high of USD 24.2 billion, up by 7.5% compared to the previous financial year.

    The airline posted a net profit of USD 1.2 billion, representing an increase of 40% over last year’s results. This was Emirates’ 27th consecutive year of profit and one of the best performances to date according to His Highness Sheikh Ahmed bin Saeed Al Maktoum, Chairman and Chief Executive of Emirates Airline and Group. Nonetheless the company faced many global and operational challenges. Revenues were impacted by flight plan adjustments made to address the Ebola outbreak in Africa, armed conflicts in several regions, and the 80-day runway upgrading work at Dubai International Airport. Emirates’ net profit was impacted by the strong rise of the US dollar against many revenue generating currencies of the airline. The bottom line has improved due to a significant drop in jet fuel prices during the second half of the 2014/15 financial year. Overall, the airline’s fuel bill decreased by 6.5% compared to the period before and currently represents 34.6% of operating costs, remaining the biggest component for the carrier.

    As of 31 March 2015, the balance sheet total amounted to USD 30.3 billion, an increase of 9.6% compared to the beginning of the financial year. Total equity increased by 11.1% to USD 7.7 billion with an equity ratio of 25.4%. The current ratio stood at 0.80, meaning the airline would be able to meet most of its current liabilities by liquidating all of its current assets. Significant items on the liabilities side of the balance sheet included current and non-current borrowings and lease liabilities in the amount of USD 13 billion. As of 31 March 2015, the carrier’s cash balance was USD 4.6 billion, down by USD 88 million compared with the beginning of the 2014/15 financial year.

    During the 2014/15 financial year the airline’s ASKs increased by 9.1%. Measured in RPKs passenger traffic grew by 9.4%, resulting in an average passenger load factor of 79.6%. This is above the 79.4% reached in the prior period. A record 49.3 million passengers flew with Emirates between 1 April 2014 and 31 March 2015 – an increase of 10.7% compared to the previous financial year.

    During the 2014/15 financial year Emirates took delivery of 24 wide-body aircraft including 12 Airbus A380s, 10 Boeing 777-300ERs and two Boeing 777 freighters. Ten older aircraft were phased out. As of 31 March 2015 the carrier’s average fleet age was 75 months, compared to the industry average of 140 months.

    As of 31 August 2015 Emirates had 238 wide-body aircraft in operation. Emirates is the world’s largest operator of wide-body passenger aircraft. The number of Emirates’ orders yet to be delivered stood at 269 aircraft. The airline operates the world’s largest fleets of Airbus A380 and Boeing 777-300ER aircraft. As part of the fleet renewal programme, Emirates is to phase out ten aircraft by the end of the current fiscal year. Between 1 April 2015 and 31 March 2016 it is expected that 26 aircraft will have entered into service, two more than in the same period the year before.

    In August 2015 Emirates announced it will commence flights to Panama City from 1 February 2016 on. The daily service with a scheduled flight time of 17 hours and 35 minutes will become the world’s longest non-stop flight and the airline’s first destination gateway to Central America. Currently the network counts 149 destinations in 81 countries.

    Source: Ascend, Emirates

    4. Aircraft – A380

    As of September 2015 Emirates operated a fleet of 67 A380s which currently serve 34 destinations from its Dubai hub: Amsterdam, Auckland, Bangkok, Barcelona, Beijing, Brisbane, Dallas, Dusseldorf, Frankfurt, Hong Kong, Houston, Jeddah, Kuwait, London Gatwick, London Heathrow, Los Angeles, Madrid, Manchester, Mauritius, Melbourne, Milan, Mumbai, Munich, New York JFK, Paris, Perth, Rome, San Francisco, Seoul, Shanghai, Singapore, Sydney, Toronto and Zurich.

    The increasing number of A380 joining the fleet allows Emirates to increase its capacities in line with customer demand, but without the need for adding further frequencies at slot-constraint airports. Seven years after London became Emirates’ second A380 destination, all eight daily flights to London will be operated by A380s from 1 January 2016 on. During the last five years alone, the carrier has increased its capacities into London by a quarter. Also from the beginning of next year, another European financial centre will benefit from Emirates increasing A380 capacities. A second daily A380 flight to Frankfurt (Germany) will be launched. Currently the service is operated by a Boeing 777-300ER. According to Hubert Frach, Emirates’ Divisional Senior Vice President, Commercial Operations West, this step will provide more A380 to A380 connectivity. Starting from 1 December 2015 a further Boeing 777-300ER flight will be replaced by an A380. Emirates announced it will add its fourth daily A380 service to the Thai capital, Bangkok.

    The global A380 fleet consisted of 171 commercially used planes in service in September 2015. The thirteen operators are Emirates (67 A380 aircraft), Singapore Airlines (19), Deutsche Lufthansa (14), Qantas (12), Air France (10), Korean Airways (10), British Airways (9), Malaysia Airlines (6), Thai Airways (6), China Southern Airlines (5), Qatar Airways (5), Asiana (4) and Etihad Airways (4).

    In August 2015 Airbus finally confirmed that the first delivery of an Airbus A380 to the Russian carrier Transaero will be delayed past the end of this year. The determination of new delivery dates is still in process. Aeroflot is about to acquire Transaero, which had ordered four A380 aircraft in total.

    In September 2015 the number of undelivered A380 orders stood at 147.

    Emirates’ president Tim Clark believes that the second-hand market for the Airbus A380 will be a good opportunity for carriers to explore the economic capabilities of the jet: “It’s clear to me that there are carriers interested in the A380 that can’t afford one.” He believes the second-hand market for the type will be “fairly strong”, especially as passenger demand increases with a recovering global economy. In April 2015 Tim Clark said that used A380s present a “very good value proposition” for customers who “want to come in at a slightly lower price”.

    Source: Ascend, Emirates