Air Transport World

Where has all the money gone? Aircraft purchasing ideas may be more flexible in the future as new financing sources pop up.

where has all the money gone?

The airline industry last year scored a phenomenal success in the stock market. During 1983 28 airlines went to the public 43 times to obtain almost $2.4 billion in equity or equity-related issues. That is an industry record, says Merrill Lynch VP Edmund Greenslet, and came on top of $800 million raised in 1982 and almost $400 million in 1981--a period when the industry recorded its most miserable financial record.

Moreover, predicts Greenslet, this year will be no slouch. There is the possibility of tapping the maket for another $1.5-2 billion.

After adding up the numbers, the natural question arises: What did the airlines do with all of that money?

"They're cleaning up their balance sheets,' says Paul lgnatius, president of the Air Transport Association. It is clear that balance sheets are badly in need of restoration. The airlines went on an aircraft order binge in the 1970s, and started taking delivery on those aircraft just at the wrong time, in the early 1980s, when the recession, high interest rates and competition converged. So debt went up to pay for the airplanes, and equity took a beating when retained earnings disappeared from the airlines' dictionary of financial terms.

The airlines' capital structure stood at $7.7 billion in debt and $7.1 billion in equity in 1978 according to Dr. George James, senior VP-finance and economics at ATA. At the end of the third quarter of 1983, the figures were $15 billion in debt and $7 billion in equity, despite the equity-raising results. Net interest payments for the years 1979-1983 were $1.1 billion a year.

Two-edged sword

Thus, while $3.6 billion worth of new money and rediscovered operating profits should start people thinking about buying big batches of new equipment, that is not the case. Or, at least, not quite yet. A 50:50 debt/equity ratio is considered minimal to attract investors in an unprotected, deregulated environment. Moreover, as James points out, even if 1984 is a very good year for profits the industry will need $1. …

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