United Airlines reopened the capital markets for airline debt on Monday when it raised more than a billion dollars to finance 39 new Boeing aircraft in its fleet.
The Chicago-based carrier priced the $1.32 billion single-tranche secured notes, known as enhanced equipment trust certificates (EETC), that mature in 2037 with a 5.8 percent coupon. Proceeds will finance 22 737-8s and 17 737-9s that United took delivery of between August 2022 and May 2023. The deal was not upsized, nor was the collateral pool expanded, between launch and pricing.
United’s return to the debt capital markets signals a shift back towards normal aircraft financing after the disruption of the pandemic. That’s good news, both for airlines and investors, considering the thousands of new planes on order globally for delivery over the next few years.
It comes as the airline industry braces for what could be a historic summer. Trade group Airlines for America (A4A) forecasts a nearly 1 percent increase in passenger numbers over the last peak in 2019. And, at the IATA annual meeting earlier in June, industry leaders repeatedly said travel demand was robust through at least the fall.
“If we’re in the middle of a recession, this is the best recession the airline industry has ever seen,” United Chief Commercial Officer Andrew Nocella said at the IATA event.
United’s EETC, once standard aircraft-financing fare for the likes of American Airlines, British Airways, and United itself, is the first of its kind after a year-and-a-half long pause in the market. That hiatus included no new issues in 2022 due to what J.P. Morgan analysts recently described as “volatile market conditions and sharp increases in costs of debt.” Last year was the first full year without a transaction since the global financial crisis.
The pause came amid a tightening of monetary policy by the U.S. Federal Reserve. From March 2022 through this May, the central bank hiked the federal funds rate, or the amount banks pay to borrow money from each other, by 500 basis points. That has translated to higher borrowing costs for businesses, including airlines.
And, critical to capital markets deals like EETCs, the yield on 10-year U.S. Treasury bonds was up 210 basis points to 3.73 percent on Monday compared to the beginning of 2022. The yield on 10-year Treasuries peaked at 4.25 percent in October 2022. The coupon that airlines pay on their aircraft-backed notes is calculated at a spread over Treasuries, so the higher yield directly translates to higher borrowing costs.
The spread on United’s 2023-1 A notes was 207 basis points over 10-year Treasuries on June 12. That compares to a spread of 143 basis points over 10-year Treasuries on September 3, 2019 for a coupon of 2.7 percent on the airline’s last pre-pandemic EETC, its 2019-2 A notes.
Higher costs, however, did not deter United. The airline is scheduled to receive some 149 new aircraft this year — some of those deliveries will slide into 2024 or later due to Airbus and Boeing’s production issues — and forecasts some $8.5 billion in related capital expenditures. The 737 Maxes financed with the latest EETC are key to the carrier’s growth strategy over the next few years that would increase the average number of seats per departure by 40 percent from 2019 levels to 146 seats in 2026.
J.P. Morgan analysts forecasted that United would likely issue an EETC this year to meet some of its aircraft capital needs. They questioned the airline’s ability to raise enough free cash flow to cover all $8.5 billion in capital expenditures.
United’s latest transaction, the 2023-1 A notes, is scheduled to close on June 20. Citi is the sole structuring agent and a lead bookrunner along with Credit Suisse, Deutsche Bank, and Goldman Sachs. Natixis provided the liquidity facility.
