Financial Determinants Affecting Leasing Policies: Empirical Evidence From the Airline Industry

Financial Determinants Affecting Leasing Policies: Empirical Evidence From the Airline Industry

Kasım Kiracı (Iskenderun Technical University, Turkey)
Copyright: © 2020 |Pages: 24
DOI: 10.4018/978-1-7998-1093-3.ch009

Abstract

Airline companies have started to develop strategies to increase their market share and expand their network structure with the effect of globalization. In this process, one of the most important sources of airline companies to achieve competitive advantage is aircraft. Airline companies have to increase the number of aircraft in the fleet to expand their network structure. On the other hand, the high price of aircraft has led airline companies to adopt new financing strategies. Leasing is one of the financing methods used frequently by airline companies recently. Therefore, this study focuses on the leasing policies of airline companies. In this study, it is aimed to reveal the factors affecting the leasing policies of airline companies. In this context, 26 airlines operating in the period 2000-2017 were analyzed empirically. Panel data analysis was used as the method in the study. The empirical findings of the study indicate that return on assets, asset structure, tangibility, leverage ratio, and liquidity affects the leasing policies of airline companies.
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Aircraft Leasing In The Airline Industry

A lease is an agreement between the lessee and the lessor for a specified period. In this agreement, the ownership of the asset is given to the lessor, and the right to use is given to the tenant (lessee). The lessee pays the lessor periodically for the asset he or she leases. The most important leasing asset in air transport is the aircraft. Therefore, in the air transport industry, airline companies rent the aircraft they need, and in return, the lessee makes payments to the lessor under the specified conditions.

Businesses resort to leasing to make their financial statements appear stronger to investors and lenders, to use more foreign resources by reducing their cost of capital, and to benefit more from the tax shield effect. In this way, companies can make various investments such as machinery, equipment, or aircraft, requiring large cash outflows by using off-balance sheet financing methods (Öztürk, 2016, p. 2). Airline companies also use leasing to obtain aircraft that require large capital investments. Although considered as a type of financing, leasing plays a distinct role in the capital structure of businesses. The following table shows the position and status of Operating Lease and Financial Lease in corporate liabilities.

Table 1.
Characteristics of corporate liabilities
Types of Corporate LiabilitiesOperating LeaseFinancial LeaseSecured DebtOrdinary DebtSubordinated DebtPreferred StockCommon stock
Priority of claimHighest ←---------------------------------------------------------------------------------------→ Lowest
Can default trigger bankruptcyYesNo
Control rightsRight to use the assetRights limited to covenants in contractRights limited to covenants and voting rights of stockholderRights limited to voting rights
Legal ownershipNoYes
Economic ownershipNoYes
Tax shields: Cash flowsFull lease payment deductibleInterest part lease payment deductibleInterest payment deductibleDividend not deductible
DepreciationNo depreciationAsset financed by financial lease, debt or equity is depreciated by economic owner

Source: Barclay and Smith, 1995, p. 900; Lückerath-Rovers, 2007, p. 31

Key Terms in this Chapter

Empirical: Based on theory.

Financial Analysis: The study about financial information of the companies in order to understand their costs, debt, profits, cash flow, leasing policies, etc.

Panel Data: Longitudinal data/cross-sectional time series data.

Airline: A company that operates services for carrying passengers and/or goods by aircraft.

Assets: Something valuable belonging to airline company that can be used for the payment of debts.

Leasing: Make a legal agreement in order to use aircraft for an agreed period of time.

Aircraft: Vehicle can fly with or without an engine.

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