LEASE CAPITALIZATION AND THE EFFECT ON THE DEBT RATIOS OF THE MAJOR U.S. AIRLINES

Leasing has been an important and growing source of financing to the U.S. airline industry over the past several decades, and it continues to be in 1992. Leasing, however, is not a magical source of funds. It is simply debt financing. Leasing thus increases financial leverage and the risk that it entails. Research by one of the authors in 1973 and 1974 examined both the extent of airline lease finance and its effects on the financial structure of the airline industry in the 1960s. That research argued that certain types of leases (then called financial leases) should be capitalized and reflected in the calculation of carrier debt ratios. The purpose of this paper is to update that research and to compare and contrast the situation in the early 1990s with that of the late 1960s and early 1970s. It is argued that data important for understanding the financial condition of the industry are still not disclosed. This is a highly significant finding in an industry already plagued by severe financial distress. The paper is organized in four parts. Part I is an introduction. In Part II, conditions in the 1960s and early 1970s are outlined. In the process, a critical distinction is made between operating and financial lease contracts. In Part III, the current situation is documented and compared to the early 1970s. A switch by carriers to the use of non-cancelable operating leases and a subtle change in the definition of the capital leases is shown to cause difficulties in the analysis of carrier financial structures. Finally, Part IV, the Conclusion, argues for changes in data reporting requirements.

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  • Corporate Authors:

    University of Denver College of Law

    Editor in Chief, 7039 E 18th Avenue
    Denver, CO  United States  80220
  • Authors:
    • Gritta, R D
    • Lippman, E
    • Chow, G
  • Publication Date: 1994

Language

  • English

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Filing Info

  • Accession Number: 00666255
  • Record Type: Publication
  • Files: TRIS
  • Created Date: Sep 22 1994 12:00AM