While the market for EETCs, a specialized form of aircraft-backed debt, is well established, issuances in the past two years have been few and far between. United Airlines Holdings Inc. (BB/Stable/--) is the only airline to have issued publicly rated EETCs over the past two years: $1.3 billion (Class A) in 2023 and about $1.35 billion (Classes AA and A) in 2024. We can't predict the future for EETC financing, but we expect it to remain a component of future airline financing as new aircraft deliveries increase in 2025 and thereafter.

The modest pace of EETC issuances over the past two years can be explained by a two key factors. First, airline credit profiles for the most seasoned issuers--namely U.S. network carriers and Air Canada-–have improved in recent years, with a strategic focus that includes steady debt reduction. Improvement in earnings and cash flow has contributed to free cash flow generation, affording certain airlines the ability to self-fund aircraft purchases. Second, lower-than-expected aircraft deliveries have resulted in uncertainty and reduced the availability of new aircraft collateral that otherwise would have been potentially financeable.

However, larger airlines face looming debt maturities that we believe will be addressed in part with new debt (see "North American Airlines Patient Ahead Of Looming Debt Maturities", published March 12, 2025, on RatingsDirect). We believe EETCs could account for a portion of new debt funding within the sector.

We summarize below some of our key observations related to EETC issues and answer frequently asked questions on these debt instruments.

EETC Overview: Ratings Have Climbed Higher

• EETC ratings range from AA to CCC+ in North America.
• American hold the most rated EETCs (20), from B+ (2013-1A due 2025) to AA- (2016-1AA, 2016-2AA, 2016-3AA, 2019-1AA).
• United (2015-1AA, 2024-1AA) and Delta (2020-1AA) represent the three EETCs rated at AA.
• Air Canada (2018-1, 2020-2) account for 2 Class B ratings at A+; Spirit Airlines (2017-1B) accounts for the CCC+ rating (company currently in creditor protection).

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There is a wide range of EETC ratings relative to the underlying airline issuer credit rating:

• Delta EETCs notched up by 3-6 notches
• United EETCs notched up by 6-9 notches
• American EETCs notched up by 0-10 notches
• Air Canada EETCs notched up by 0-8 notches
• Alaska Air EETCs notched up by 6-7 notches
• Hawaiian Airlines EETCs notched up by 1 notch (1 EETC)
• Spirit Airlines notched up by 2-8 notches (ratings pending emergence from creditor protection)

EETC issuances have lagged, but upgrades have been widespread since 2023.

• Delta, United, American, and Air Canada upgrades have underpinned higher EETC ratings since 2023.
• However, higher collateral credit was also a key contributor to the positive trend in EETC ratings.
• United was the only airline to issue new, rated EETCs in 2023 and 2024 and maintains a significant cash position.

Higher aircraft valuations have led to stronger collateral credit.

• Stable/higher aircraft valuations led to collateral coverage that is strengthening beyond our expectations.
• Higher collateral credit resulted from lower loan to values (LTVs) as collateral assessments were generally unchanged.
• Base values are relatively stable amid steady debt amortization, although the current market value is much higher.

Valuation strength is widespread across EETCs.

• New aircraft delivery constraints and engine reliability issues will take time to address.
• There are no signs that aggregate narrowbody and widebody demand is slowing.
• An increased demand for older aircraft (due to new aircraft delays and well-documented engine issues) has led to relatively favorable valuations.
• Recent aircraft monetization and deferrals by certain rated issuers is not related to any expected softening in demand. Instead, it's linked mainly to lower planned capacity.
• United included seasoned, unencumbered aircraft in its 2024-1 EETC collateral.

EETC rating momentum is positive.

• Issuer credit ratings are the starting point for EETC ratings.
• Lower LTVs have led to higher collateral credit for several EETCs.
• Solid collateral valuations have led to steady principal amortization, ultimately lifting EETC ratings.
• Higher collateral credit is a key contributor to EETC upgrades.
• Sustained aircraft value strength adds potential upside to certain EETC ratings.

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Collateral valuations benefitted from OEM delays.

• Narrowbody and widebody demand remains strong. Boeing 737 MAX deliveries are trending up.
• Boeing is now producing MAX aircrafts at about low-20s per month, with a target of 38 per month in the second half of 2025.
• MAX aircrafts saw a post-production overhaul following a fuselage panel blow-out and a strike in late 2024.
• Airbus averaged 50 A320 deliveries per month in 2024. The company pushed its 75 per month target back to 2027 due to supply chain constraints.
• Widebody production remains under pressure amid supply chain constraints.
• Airbus holds the lead in narrowbody backlog, while Boeing holds the lead in widebody.

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Aircraft valuations are resilient.

• Base collateral appraisals for rated Delta, United, and American EETCs have been relatively stable since 2023. We typically observe steady annual depreciation.
• Current market values (CMV) are much higher, but typically only applied to airlines with 'B-' issuer credit ratings when deriving LTVs for EETCs.
• Steady debt amortization and generally stable base values reduce LTVs and, in several cases, led to higher collateral credit/EETC ratings.
• We believe there is currently limited downside to EETC ratings, barring a substantial decline in aircraft values or an airline downgrade.
• We expect EETC debt held by the Big 3 (on average) to decline 20% cumulatively by year-end 2025, excluding debt maturing this year.
• Year-to-date 2025 base values have declined less than 5% on average since 2023. This has lowered LTVs for many EETCs held by the Big 3 (as well as Air Canada and Alaska Air Group) since 2023.
• Lower LTVs have contributed to higher collateral credit that, in several (but not all) instances, led to EETC rating upgrades.
• The longer collateral values remain steady, the greater downside cushion (and potential upside) there is to EETC ratings amid continuing debt amortization.

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Affirmation Credit Observations

• Most EETC ratings in North America are notched up from the airline issuer credit rating, with affirmation credit and collateral credit component scores
• Affirmation credit is effectively our assessment of the likelihood for airlines to affirm the EETC after a bankruptcy filing (or similar event)
• Affirmation credit is usually (91%) '4' for Class AA (senior-most tranche) and '3' for Class A that are subordinate to Class AA within the same EETC
• Affirmation credit is lowest for Class B/C due to subordination, but also very high LTVs or less desirable aircraft in collateral (in our view)
• 41% of Class A tranches that we rate have '4' collateral credit. They would be higher if not for senior-ranking Class AA tranches in the same EETC
• Average affirmation credit: 3.9 (Class AA); 3.1 (Class A); 1.7 (Class B/C) – relatively stable since 2023

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Collateral Credit Observations

• Collateral credit provides the most potential upside to EETC ratings (up to 7 notches are possible)
• Collateral credit is highly sensitive to LTV and collateral assessment (technological risk, resale liquidity, diversification of collateral)
• Class AA tends to have the highest collateral credit (since subordinated tranches of the same EETC have higher LTVs)
• Collateral credit on average has migrated higher over the past two years: 64% of Class AA at '6' (vs. 20% in 2023); 34% of Class A at '4' (vs. 22% in 2023)
• Average Collateral Credit: 5.5 (Class AA); 3.2 (Class A); 2.9 (Class B/C)

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Appendix: Frequently Asked Questions

What is the maximum rating that an EETC can achieve?

• We cap ratings at 10 notches above the issuer credit rating for an airline.
• Other rating caps that can apply (i.e., sovereign considerations/legal regime assessment outside of U.S./Canada, threshold ratings, liquidity provider ratings).
• We rate 3 EETCs at 'AA', the highest issue rating among our rated EETCs. United Airlines has 2 and Delta Air Lines has 1.

Are EETCs basically guaranteed to be rated multiple notches above an issuer credit rating?

• No. We rate 2 EETCs equal to the underlying issuer credit rating (no notches) and 2 EETCs 1 notch above the underlying issuer credit rating.
• These issues are characterized by high LTVs & our view of low likelihood for affirmation in bankruptcy/restructuring (older aircraft).
• On average, S&P Global Ratings-rated EETCs are 6 notches above airline issuer credit ratings--most for Class AA, least for Class B/C.

How does S&P Global Ratings view the potential substitution of collateral within an EETC?

• Provisions within certain EETC indentures afford issuers the ability to substitute aircraft collateral for a like-value of comparable aircraft.
• While it is not explicit in our criteria, substitution has not affected ratings. Ability to substitute collateral is contingent on rating agency's confirmation of no ratings impact.
• However, we acknowledge that substituted aircraft (if a different number, model, age, etc.) could lead to future divergence in value, collateral assessment, and importance to the airline, for example, relative to the outgoing aircraft. However, this risk would be considered at the time that substitution is proposed.

The collateral in United Airlines' 2024-1AA EETC includes older aircraft. Did this hurt the EETC rating in any way?

• There is no negative impact from the inclusion of older aircraft (Boeing 737-900ER: average age of 12 years; Boeing 737-800: average age of about 13.5 years)
• The majority of these aircraft exit the pool in 2031 (the year of estimated peak LTV, which is used to derive collateral credit for new ratings).
• Collateral credit was '6' (at the stronger end of the 45%-50% LTV range).
• None of the aircraft exceeded 15 years of age at deal inception (and account for less than 50% of the total EETC collateral value)--hence, no collateral assessment penalty.

When should we expect new EETC issuances?

It's difficult to say, but several factors lend support for potential new issuances this year:

• Unencumbered asset values are significant/growing.
• Aircraft deliveries are likely to increase as OEM constraints likely ease. Sources for available collateral will presumably grow.
• Aircraft valuations are widely appraised and easily discoverable compared to certain other collateral types.
• Ratings that are multiple notches above an issuer credit rating can translate into relatively lower funding costs.
• A material share of short-term debt maturities are likely to be refinanced with new debt (and several EETCs mature in 2025 and 2026).
• There are several inbound inquiries on existing/potential EETCs.

However, the Big 3 (the largest EETC issuers collectively) can all finance new aircraft capex internally at least through 2025, which affords high funding flexibility and patience. Additionally, there are numerous debt types available (i.e., notes, term loans, loyalty financing, SGR financing, mortgages, leases, etc.). Deleveraging also remains a key strategic focus, and most North American airlines have retained large cash positions.

Appendix: EETC Ratings Construct

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