New rules set to bring airlines down to earth

The airline industry stands to incur millions of pounds in liabilities if new accounting standards are adopted which aim at bringing expensive lease contracts on to balance sheets.

The new standards have the potential to undermine confidence in weaker carriers which only own a small portion of their fleets, according to some operators.

Ryanair chief financial officer, Howard Millar, said the changes could expose the weak financial positions of some airlines.

‘Those that will be most impacted will be the weaker airlines who have no ability to borrow cash,’ he said. ‘It may highlight to the public the financial weakness of these businesses.’

He said the proposals would come as no surprise to institutional investors and analysts who already factor in leases when valuing at airlines.

At the moment, companies can pick and choose whether leases are held on or off balance sheets by manipulating the technical distinction between finance and operating leases.

In its 2008/09 annual report, British Airways said the number of aircraft on operating leases reduced by 17 during the year. However, the impact of a weak sterling meant operating lease costs increased by 7.4%, which amounts to £73m.

The airline has 245 aircraft in its fleet. A spokesman declined to comment on the issue.

Deloitte senior technical partner, Ken Wild, welcomed the new standards but said: ‘There will be a lot of complexity in the end and it will make it quite a rocky road getting there.’

In May, the Finance & Leasing Association met with other groups in London to discuss the issue, criticising the new proposal as ‘an excessively burdensome approach for accounting for leases’.

The International Accounting Standard Board, is now seeking feedback on the proposals.

IASB senior project manager on leases, Rachel Knubley, said submissions had so far been split.

'We have a lot of comment from lessors who have significant concerns about the complexity… The users we have spoken to have been broadly supportive of what we have been trying to do,’ she said.

The IASB’s consultation is open until 17 July. A final standard is expected by 2011.