chapter  9
76 Pages

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).