Losing altitude: The impact of new leasing standards on the liquidity, leverage, profitability and valuation of U.S. and European airlines

Abstract

The global airline industry represents fertile ground for research due to its susceptibility to extraneous demand shocks such as fuel price hikes, terrorist attacks, and global pandemics coupled with high leverage and high reliance on leasing. Accounting Standards Codification (ASC) 842 Leases and International Financial Reporting Standard (IFRS) 16 Leases became effective January 1st, 2019 for publicly-traded firms in the U.S. and overseas, requiring capitalization of the majority of leased assets. This study was motivated by how the acts may have affected reported airline liquidity, leverage, profitability and stock price, and if any evidence existed of lease restructure attempts in order to avoid capitalization; which may provide initial impacts. Using a sample of publicly-traded airlines incorporated in the U.S. and Europe, the current study used firm year-level filings from 2017 to 2019 to determine if passage of the acts were associated with changes in liquidity, leverage, profitability and stock price. One-way analysis of variance (ANOVA) and independent samples t-test parametric statistical testing was employed to determine any statistically significant change in the means of selected ratios operationalizing liquidity, leverage, profitability and firm valuation. The results indicated no significance for any of the variables operationalizing the latent constructs providing evidence contrary to previous predictions, and a significant difference between the two regions, worthy of further study. These findings are significant due to the vast financial reporting implications associated with these acts and their potential to skew financial ratios, juxtaposed against the ever-present threat of extraneous demand shocks which permeate this industry. The research also suggests management may have attempted lease restructures to circumvent the capitalization requirements of the act and warrants further research to investigate the generalizability of these findings to other industries.