CAL to refinance $200m in EETCs

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Continental Airlines is in the market to refinance $200m worth of EETCs, which are backed by older Boeing 737-800s, with 10-year bullets that are about to mature.

However, given the current banking environment, the refinancing could prove challenging. 

 “Some banks, for whatever reasons, are less than thrilled about the 10-year old 737-800s,” says Gerry Laderman, SVP finance at Continental Airlines.  

In February, Continental ordered additional Boeing 777 and 737 aircraft. With these additional orders, but excluding five Boeing 737 aircraft that were delivered in 2008, Continental  has firm commitments for 111 new aircraft (78 Boeing 737 aircraft, eight Boeing 777 aircraft and 25 Boeing 787 aircraft) scheduled for delivery through the end of 2013.

The total order is valued at $6.3 billion, including related spare engines. The airline also has options to purchase a total of 102 additional Boeing aircraft.

Continental recorded related debt of $191 million due to the delivery of the five 737s in 2008.

The airline’s long-term debt and capital lease obligations totalled approximately $5 billion (including current maturities) at 31 December.

The airline does not currently have any undrawn lines of credit or revolving credit facilities and most of its otherwise readily financeable assets are encumbered, according to a 10-K filing with the Securities and Exchange Commission.


Continental has secured financing for its upcoming aircraft deliveries. The airline obtained EETC financing for 12 Boeing 737-800s and 18 Boeing 737-900ERs, which it expects to apply to 30 of the 32 Boeing aircraft scheduled to be delivered in 2008. However, the airline may instead choose to substitute certain Boeing 737-900ER aircraft scheduled to be delivered in the first quarter of 2009.

The airline was fortunate enough to tap the capital markets in 2007 before they became unattractive and raised $1.1 billion through the issuance of three classes of pass-through certificates. As the airline takes delivery of each of the 30 aircraft in 2008 or 2009, it will issue equipment notes to the trusts, which will purchase such notes with a portion of the escrowed funds.

In addition, Continental has secured manufacturer backstop financing for up to 18 (depending on the model selected) Boeing 737 aircraft scheduled to be delivered through the end of 2009 and which are not otherwise covered by other financings.

However, the airline does not have backstop financing, or any other financing, in place for its other aircraft on order.

Although Continental has traditionally secured diversified sources of financing for its deliveries, the airline tends to shy away from operating leases.

The reason for this is because Continental had a bad experience in the past, where “a party ran away with reserves”, says Laderman.

“Lessors always want maintenance reserves, but we don’t want to enter into lease with maintenance reserves. This is why we don’t do a lot of operating leases,” explains Laderman.

During 2007, Continental incurred $190 million of floating rate indebtedness related to existing finance agreements secured by two Boeing 777-200ER aircraft, which were delivered in March and April 2007.

This indebtedness consists of $156 million of senior notes due in 2019 and $34 million of junior notes due in 2014. The loans bear interest at Libor plus a blended margin of approximately 1.9% per year. The commitments under these finance agreements are now fully funded.

In addition, Continental entered into agreements to sell 15 owned Boeing 737-500 aircraft in 2007. It also entered into an agreement to terminate the leases and arranged for the sale of five leased Boeing 737-500 aircraft. The airline delivered three of the owned aircraft in the fourth quarter and received cash proceeds of $44 million. The remaining 17 aircraft are scheduled for delivery to the purchasers by the end of 2008.


At the end of 2007, Continental had $2.8 billion in unrestricted cash, cash equivalents and short-term investments, which is $319 million higher than in the year-earlier period. The airline also had $179 million of restricted cash, which was primarily collateral for estimated future workers' compensation claims, performance bonds, letters of credit and credit card processing contracts.

Capital expenditures for 2008 are expected to be in the range of $538 million to $688 million. This includes $93 million that Continental expects to pay for winter slots it has agreed to acquire at Heathrow.

The airline’s capital expenditures for 2007 were $445 million, or $664 million after considering aircraft purchase deposits to be paid, net of purchase deposits to be refunded.

Continental intends to grow its mainline capacity between 2% and 3% this year. However, the airline expects to decrease its domestic mainline capacity slightly compared with 2007.

The airline reported an increase of between 5% and 6% in passenger revenue per available seat mile in February.

Continental’s traffic rose 4.5% in February, but capacity increased 5.8%.