• by  • October 1, 2014 • Doric II



    LSE: DNA2

    The Company

    Doric Nimrod Air Two Limited (“the Company”) is a Guernsey domiciled company which 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 403.4 million as of 30 September 2014.

    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.

    In 2014 the Specialist Fund Market (SFM) was deemed a recognisable market for Individual Savings Accounts (ISA). As a result the listing on the Channel Islands Stock Exchange, which had served this purpose previously, was cancelled. The Company’s shares are therefore now only traded on the SFM of the London Stock Exchange.

    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.

    Company Facts (30 September 2014)

    Listing LSE
    Ticker DNA2
    Share Price 233.5p
    Market Capitalisation GBP 403.4 million
    Aircraft Registration Numbers A6-EDP, A6-EDT, A6-EDX, A6-EDY, A6-EDZ, A6-EEB, A6-EEC
    Current/Future Anticipated Dividend 4.5p per quarter (18p per annum)
    Dividend Payment Dates April, July, October, January
    Currency GBP
    Launch Date/Price 14 July 2011 / 200p
    C Share Issue Date/Price 27 March 2012 / 200p
    C Share Conversion Date/Ratio 6 March 2013 / 1:1
    Incorporation Guernsey
    Asset Manager Doric GmbH
    Corp & Shareholder Advisor Nimrod Capital LLP
    Administrator JTC Fund Managers (Guernsey) Ltd
    Auditor Deloitte LLP
    Market Makers Jefferies International Ltd/

    Numis Securities Ltd/

    Shore Capital Ltd/

    Winterflood Securities Ltd

    SEDOL, ISIN B3Z6252, GG00B3Z62522
    Year End 31 March
    Stocks & Shares ISA Eligible
    Website www.dnairtwo.com

    Asset Manager’s Comment

    1. The Assets

    In November 2012, the Company had 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, London Heathrow, Hong Kong, Kuala Lumpur, Manchester, Moscow, Mumbai, Rome, Seoul, Toronto, and Zurich.

    Aircraft utilisation for the period from delivery of each Airbus A380 until the end of August 2014 was:

    MSN Delivery Date Flight Hours Flight Cycles Average Flight Duration
    077 14/10/2011 13,490 1,564 8 h 40 min
    090 02/12/2011 11,662 1,981 5 h 55 min
    105 01/10/2012 8,223 1,331 6 h 10 min
    106 01/10/2012 9,421 1,070 8 h 50 min
    107 12/10/2012 8,793 990 8 h 55 min
    109 09/11/2012 7,700 1,249 6 h 10 min
    110 30/11/2012 7,763 1,318 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 the earlier of 24 months or 12,000 flight hour intervals. Emirates bears all costs (including maintenance, repair and insurance) relating to the aircraft during the lifetime of the lease.

    First C checks for MSNs 105 and 107 were completed in August 2014. The C check for MSN 106 has been completed the following month.


    During the period under review, the asset manager Doric undertook records audits for MSNs 105 and 106 in August 2014. The lessee was again very helpful in the responses given to the asset manager’s technical staff and the technical documentation was found to be in good order.

    Doric also performed physical inspections of MSNs 106 and 107. Doric inspected MSN 107 in August 2014 during its first C check. The aircraft is in good condition and consistent with its age. There is evidence that the aircraft has been well maintained and cleaned regularly. Extensive cabin refurbishment work was being performed with cabin carpets and seat covers all being replaced. Inspection results for MSN 106 were not yet available at the editorial deadline.

    Hairline Cracks

    In late 2011, hairline cracks were detected in a small number of L-shaped metal brackets (known as wing rib feet) within the wing structure of some A380s. The aircraft remain fully airworthy and the hairline cracks pose no risk to flight safety as affirmed by the European Aviation Safety Agency (EASA) and Airbus.

    As previously reported, EASA released its latest Airworthiness Directive in May 2013, outlining which modifications need to be made and the respective compliance terms. The wing rib feet modification programme for Emirates’ aircraft is essentially managed by Airbus. All modification activities will be covered by the applicable manufacturer’s warranties. Emirates decided to embody all modifications in one step.

    During the period under review modification works for the last two aircraft have been completed: MSN 107 on 19 July and MSN 106 on 19 September, both with SNT (Sabena Technics) in Bordeaux (France). The wing rib feet modification programme for the portfolio’s aircraft has been completed successfully. Recurring inspections are no longer necessary.

    2. Market Overview

    From January to July 2014 passenger demand, measured in revenue passenger kilometres (RPKs), expanded by 5.9% compared to the same period the year before. Demand gained momentum especially during the second quarter of this year. Between January and July 2014 airlines increased their capacities, measured in available seat kilometres (ASKs), by 5.6%. Operators are adhering to their strategy to expand their supply carefully.

    The average passenger load factor during the first seven months of this year was 79.3%. This is a decrease of 0.2 percentage compared to the same period the year before. From a historic perspective passenger load factors remain at a high level. In 2014 worldwide passenger load factors could exceed 80% for the first time in the industry’s history. According to the latest traffic forecast released by the International Air Transport Association (IATA) in June 2014, RPKs are expected to grow by 5.9% in 2014 and 6.7% in 2015. Tony Tyler, IATA’s General Director and CEO, expects that “despite the various economic challenges, the outlook for passenger travel remains broadly positive”. But events, like the Ebola outbreak in West Africa, the conflict between the Ukraine and Russia and Eurozone’s economic situation, present ongoing uncertainty.

    A regional breakdown reveals that the Middle East airlines continue to outperform the overall market in 2014. RPKs increased by 12.3% during the first seven months of this year compared to the same period the year before. Second best were Asia/Pacific based operators with 6.8%. Latin America grew by 6.5% and 6.0% growth in Europe was virtually in line with the market average across all regions. North American market participants recorded 2.7% more RPKs. In Africa there was no growth in the number of RPKs.

    IATA released its latest industry outlook in June 2014 according to which global industry profits are expected to reach USD 18.0 billion in 2014. With a net profit margin of just 2.4%, the aviation industry’s buffer to absorb external shocks remains fairly small.

    Source: IATA

    3. Lessee – Emirates Key Financials and Outlook

    Emirates announced its 26th consecutive year of profit and company-wide growth for the financial year ended on 31 March 2014, despite competitive pressure and a global economic environment that is only slowly recovering.

    Revenue reached a record high of USD 22.5 billion, up by 13% compared to the previous financial year, and continues to be well balanced with no region contributing more than 30%. East Asia and Australasia remained the highest revenue contributing regions with USD 6.5 billion, up 14.1% from 2012/2013. Gulf and Middle East (up 16.6% to USD 2.3 billion), Europe (up 16.3% to USD 6.4 billion) and Africa (up 15.1% to USD 2.1 billion) saw the most significant growth rates, reflecting new destinations as well as increased frequency and capacity to these regions.

    The airline posted a net profit of USD 887 million, representing an increase of 43% over last year’s results. With a share of nearly 40% fuel remains the largest operating cost category. Compared to last financial year, the average price of jet fuel was slightly lower relieving the carrier’s bottom line. Due to the growing fleet Emirates’ fuel bill increased by 10% to reach USD 8.4 billion. Total operating costs showed a smaller increase (+11.5%) than the revenues (+13%) in the financial year 2013/2014 resulting in an improved profit margin of 3.9%.

    As of 31 March 2014 the balance sheet total amounted to USD 27.7 billion, an increase of 7.2% from the previous year. Total equity increased by 10.6% to USD 6.9 billion with an equity ratio of 25.1%. The current ratio was 0.84; therefore 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 finance leases in the amount of USD 8.6 billion and revenues received in advance from passenger and freight sales (USD 3.1 billion). As of 31 March 2014 the carrier’s cash balance was USD 4.5 billion.

    Between April 2013 and March 2014, as compared to the prior financial year, the airline’s ASKs increased by 14.6%. Measured in RPKs passenger traffic grew by 14.2%, resulting in an average passenger load factor of 79.4%. This is slightly below the 79.7% reached in the period before. A record 44.5 million passengers flew with Emirates between April 2013 and March 2014 – an increase of 13.1% compared to the previous period.

    During the last financial year the airline received 24 widebody aircraft, including 16 Airbus A380s, 6 Boeing 777-300ER and 2 Boeing 777-200LRF aircraft. At the Dubai Air Show in November 2013 Emirates signed contracts with Airbus and Boeing for a combined value of USD 99 billion (list prices) consisting of 150 Boeing 777X and another 50 Airbus A380. According to the operator, the first 25 of the additional A380 will come into service before the first quarter of 2018. Deliveries for the 777Xs are scheduled to start in 2020. By that year Emirates expects to have more than 250 widebody aircraft in the air serving some 70 million passengers a year.

    As of 31 August 2014 Emirates had 227 widebody aircraft in operation. All Emirates’ aircraft temporarily parked during the 80-day runway upgrading works at Dubai International Airport, which lasted from May to July 2014, returned to service. The works included resurfacing, upgraded lights, additional taxiways and high-speed exits.

    The number of Emirates orders yet to be delivered at the end of August was 293 aircraft. The airline operates the world’s largest fleets of Airbus A380 and Boeing 777-300ER aircraft. During the financial year 2013/2014 Emirates raised USD 3.3 billion in new funding mainly to secure its on-going fleet expansion. The carrier made use of a variety of financing structures to meet its refinancing needs, including a second Enhanced Equipment Trust Certificate (EETC) issue through a subsidiary of Doric Nimrod Air Three Ltd.

    With its increased fleet and resources, Emirates launched nine additional destinations during the last financial year. In September 2014 Emirates operated flights to 145 destinations in 82 countries on six continents. During the calendar year 2013 the airline’s fleet travelled more than 751 million kilometres, circling the globe over 18,000 times and carrying over 43 million passengers.

    In the current financial year the airline has already added another four passenger routes including Abuja (Nigeria), Brussels, Chicago, and Oslo. Budapest (Hungary) is scheduled for the end of October 2014.

    In September 2014 Dubai Airports, which owns and manages Dubai International (DXB) and Al Maktoum International (DWC), announced a USD 32 billion expansion plan for DWC. In the first stage facilities will be upgraded to accommodate up to 120 million passengers annually. Completion is planned within the next six to eight years. It is expected that Emirates will relocate its international hub operations to DWC by the mid-2020s. Due to limited options to increase the capacity at DXB beyond 100 million passengers, DWCs expansion is vital to support Emirates Airline’s long-term growth plans. According to Dubai Airports the new facilities are designed to service 100 Airbus A380 at the same time. Emirates is already using DWC for its cargo operations.

    Source: Ascend, Dubai Airports, Emirates, Flightglobal

    4. Aircraft – A380

    As of September 2014 Emirates had a fleet of 52 A380s which currently serve 29 destinations from its Dubai hub: Amsterdam, Auckland, Bangkok, Barcelona, Beijing, Brisbane, Frankfurt, Hong Kong, Jeddah, Kuala Lumpur, Kuwait, London Gatwick, London Heathrow, Los Angeles, Manchester, Mauritius, Melbourne, Moscow, Mumbai, Munich, New York JFK, Paris, Rome, Seoul, Shanghai, Singapore, Sydney, Toronto and Zurich. Dallas (1 October), San Francisco (1 December), and Houston (3 December) will be added in the course of 2014. Less than a year after Emirates’ initial A380 launch to Mauritius the airline announced the introduction of a second daily A380 service. Starting on 26 October and more than a month ahead of schedule the superjumbo will replace a Boeing 777 with an increased capacity of 1,890 seats per week. Emirates has a further 88 Airbus A380s on order and has expressed an intention to order further aircraft providing Airbus is willing to make available a reengined version of the type, A380neo.

    The global A380 fleet consisted of 139 commercially used planes in service at the end of August 2014. The eleven operators are Emirates (51 A380 aircraft), Singapore Airlines (19), Qantas (12), Deutsche Lufthansa (12), Air France (10), Korean Airways (10), China Southern Airlines (5), Malaysia Airlines (6), Thai Airways (6), British Airways (6) and Asiana (2) at this point in time. On 16 September Qatar Airways accepted its first Airbus A380. Starting in October Qatar’s first A380 route will connect London Heathrow with its recently finished hub Hamad International Airport in Doha.

    At the end of August 2014 the number of undelivered orders amounted to 178 aircraft. This number takes into account the cancellation of six aircraft which were originally ordered by Skymark Airlines. In July 2014 Airbus announced that it was terminating the entire purchase order, which was placed by the Japan-based carrier back in 2011.

    According to Airbus, in the period from the aircraft’s first introduction to September 2014 the combined worldwide A380 fleet has accumulated over 1.5 million flight hours on some 180,000 commercial flights. The number of passengers who have flown aboard an Airbus A380 to date is over 65 million.

    Source: Airbus, Ascend, Emirates, Flightglobal