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Abstract
Leasing has always been an important source of finance to carriers in the U.S. airline industry. In
the 1960-1970s, many carriers employed a type of lease called a financial lease as an alternative
source of funds to acquire aircraft. It had a major advantage over purchasing the aircraft. It was
“off-the-balance sheet financing,” as the obligations under this type of lease appeared only in the
footnotes to carrier balance sheets. Little use was made of short-term lease agreements during this
period. The situation has changed radically over the past three decades. In 1976, the Financial
Accounting Standards Board issued SFAS No. 13 defining specific criteria for capital leases that
required the reporting of these “off-the-balance sheet financing” as both a leasehold asset and a
long-term liability recorded under the long-term debt section of the balance sheet. In response,
the air carriers substantially altered the way they finance airplanes. Carriers began to lease more
and more of their aircraft, but they did so by structuring leases as shorter-term operating leases,
which are not reported on companies’ balance sheets. By strategically violating the criteria for
capital leases, the air carriers once again pushed the leases off the balance sheet. The purpose of
this research is to demonstrate the switch in the characteristics of aircraft leasing and to quantify
the effects of such leases on air carrier debt burdens. In the process it will be argued that “debt is
debt” no matter how it is structured. The paper updates two research studies by the authors to 2008.