New rules set to bring airlines down to earth

ryanair plane

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

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,
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.

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.

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