Capital markets remain a good deal for airlines

Why have Air Canada, British Airways, Hawaiian Airlines and Emirates all tapped the capital markets for the first time to finance new aircraft during the past 18 months? It is a great deal, that is why.

All-in financing costs on long-term enhanced equipment trust certificate (EETC) deals, the common instrument used for secured capital markets aircraft financings, are roughly between 4% and 5% compared to historical rates between 7% and 9%, says Kostya Zolotusky, managing director of capital markets, leasing and aircraft financial services at Boeing Capital, at a briefing on 7 August.

This is true even as the base rates on new debt have risen. The yield on 10-year treasury notes was 2.61% on 7 August, which is up more than 40% from 1.86% at the beginning of the year.

For example, the coupon on the $720.4 million senior A tranche of United Airlines 2013-1 EETC – the most recent deal to price – came in at 4.3% on 1 August. This is a 30bp premium over the $711.6 million A tranche of United’s last issue in September 2012 but with a tighter spread of 156bp over 10-year treasuries compared to 220bp over 10-year treasuries on the previous deal.

United 737-900ER

United financed 18 Boeing 737-900ER deliveries with its 2013-1 EETC. (United Airlines)

Clearly there is a strong demand for the collateral – in this case aircraft owned and operated by United.

American Airlines and US Airways have taken advantage of the strong demand by tapping the market at least twice so far this year. Delta Air Lines, while not active during the first half, is likely to launch a new EETC sometime in the second half to meet some of its nearly $2.18 billion in aircraft purchase and lease commitments through the end of 2014.

Turkish Airlines and WestJet are also understood to be looking at the capital markets for their respective aircraft financing needs, both of which would be first time issuers.

“The EETC market is, by far, the deepest and most efficient market that exists today,” says Zolotusky. “Airlines like Delta or American or United are currently borrowing money on longer tenors and at much cheaper costs than any airline in the world.”

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