Airline capital structure and cost of capital
The airline industry is highly capital-intensive, since it requires signiﬁcant amounts of capital for the acquisition of aircraft and investment in airport infrastructure and information technology; hence the examination of its capital structure is critical to understanding the ﬁnancial position of an individual airline. The term “capital structure” refers to the mixture of debt and equity that fund a company’s assets. The industry’s demand for large amounts of capital has a profound impact on the proﬁtability and the survival prospects of individual airlines. In the past, the industry has been able to generate only about half of its capital needs from internal cash ﬂow, the rest being raised through issuing bonds and stocks, as well as ﬁnance from aircraft manufacturers and leasing companies. Moreover, the industry is very susceptible to economic, political, and/or environmental crises, which, combined with a cyclical and relatively poor proﬁt record, inevitably increase the difﬁculty of external funding. For example, the 2009 outbreak of the H1N1 virus and the airspace closure caused by the 2010 Icelandic volcano ash cloud were estimated to have cost the industry around $1 billion and $1.7 billion of revenue, respectively (Reals, 2010).