June 2007, Issue 8

Capital Markets Validate the New 737-900ER 

 


Delivery of the first of 60 Boeing Next-Generation 737-900ER (Extended Range) airplanes to launch customer Lion Air in April validated Boeing’s single-aisle product strategy and underscored the importance of asset-based airplane acquisition financing.

Lion Air benefited from aggressive competition among aircraft financiers, including investors and lessors, anxious for the opportunity to underwrite the acquisition and do sale/lease-back transactions. HSH Nordbank won the mandate to finance the first deliveries of this new member of the 737 family.

The first U.S. deliveries will be to Continental Airlines, which will receive 27 of the new models beginning in January 2008. The Continental orders are financed in capital markets through the issuance of a $1.15 billion Enhanced Equipment Trust Certificate (EETC). This unwrapped EETC, a capital debt financing structure that takes into account the risk associated with both the aircraft and the borrower, generated very competitive terms and pricing that clearly demonstrated the market’s enthusiasm for the new airplane product.

   

 


Through May 2007, the 737-900ER has garnered 169 firm orders from nine customers. Thanks to an 8.7-foot (2.7m) stretch, the 737-900ER carries up to 220 passengers in a single-class configuration and is able to serve most of the same routes as the 737-800. The option of adding either one or two auxiliary fuel tanks can extend the 737-900ER’s range to 3,200 nautical miles (5,925 km).

"It's a 737-800 on steroids," said Kostya Zolotusky, managing director of Capital Markets Development for Boeing Capital Corporation. "The airplane has similar range and economics to the -800, but with some 31 additional seats, the -900ER offers a significant revenue upside."

Both airlines and financiers appreciate the high degree of commonality among members of the Next-Generation 737 family. From the standpoint of crew training, airplane maintenance and spare parts, the new 737-900ER is virtually the same airplane as the other three members of the current 737 family.

This commonality means lower total operating costs for airlines and a large global pool of potential remarketing customers. More than 100 current operators of the 737-800 would be logical candidates to take advantage of the 737-900ER’s economics, range and larger size.

Current operators of the Boeing 757 represent an additional potential market for the 737-900ER. Today, only about 3% of 757 flights make use of the 757’s ability to fly beyond the 737-900ER’s range of 3,230 nautical miles. In fact, all domestic U.S. routes that the 757 currently flies are within the range of the 737-900ER.

The 737-900ER’s operating cost advantage makes the newer airplane a strong candidate to fly those routes. Moreover, the 757 makes an excellent standard-body freighter and, as pressure grows to convert 757s from the passenger role to freighter service, the 737-900ER, with nearly the same passenger payload as the 757, is the obvious replacement.

Instrumental in the evolution of the low-cost airline business model, the 737-800 is the gold standard of single-aisle jetliners. The new 737-900ER is the 737-800’s ideal complement. With excellent trip costs and unbeatable seat-mile costs, the 737-900ER offers airlines and financiers a low-risk, economical way to meet growing demand. The large and successful installed base of 737 jetliners and the looming requirement to replace older single-aisle airplanes makes the 737-900ER a valuable asset in an aviation investment portfolio.