ABSTRACT
Airline finance has in the past generally been readily available to the majority of airlines, in spite of a worse record of profitability than many other industries, and the cyclical nature of airline earnings. This was because of government involvement, either directly through ownership of the national airline or through loan guarantees. However, even privately owned airlines have found little difficulty in financing aircraft (historically 80-90% of total capital expenditure), due to the possibility of re-possession and resale of the asset. The origin of finance for the airlines, as for any other industry, has been
individual and corporate savings. Money from individuals would be channelled through banks as well as pension funds, insurance companies, mutual funds, investment and unit trusts. These institutions would in tum lend to banks, which would act as intermediaries in lending on to airlines, buy airline shares or bonds, or participate in leasing arrangements. Corporations would place surplus funds with banks or participate directly in aircraft leases. Leases might also attract wealthy individuals paying high marginal rates of tax. In the 1980s, Japanese financial institutions supplied around half of the
US$ 20 billion per annum in loans to the air transport industry.' This share has declined significantly in the 1990s, principally because of the gradual application to Japanese banks of the 8% capital adequacy level agreed through the Bank for International Settlements (BIS). Those financial institutions which are most heavily involved in lending to the airline industry will be examined in more detail later in this chapter. Airline capital expenditure can be financed internally from cash or
retained earnings or externally from lenders or lessors using a variety of financial instruments. A comprehensive survey of finance was carried out for aircraft with 70 seats or more delivered between 1991 and 1994, having a total value of US$138.4 billion.' This was a period during which airlines were recording very poor results due to the Gulf War recession. They were thus relying more than usual on external sources of finance (Table 8.1).
