Pricing of airline assets and their valuation by securities market

Staunton, Michael (1992) Pricing of airline assets and their valuation by securities market. Doctoral thesis, University of London: London Business School.

Abstract

This thesis examines the US airline industry, from a model of aircraft values, using a nearly comprehensive set of transaction prices covering the years from 1970 to 1986. My aim is to ascertain the scale and pattern of capitalised economic rents over time, by constructing market value balance sheets for all of the main US airlines. The aircraft values are estimated using the Box-Cox transformation (with price, aircraft age and date of trade each transformed) followed by a non-linear least squares optimisation. I find that the cross-sectional age effect for aircraft is accelerated compared to the straight-line depreciation normally used in airline accounts. This highlights the bias that can occur in a regulated industry with allowed returns based on accounting numbers alone. I derive asset cash flow profiles and find that the net expected cash flow for a representativea ircraft decreasesw ith age, and that the reduction in cash flow for a typical used aircraft is broadly equivalent to the increased level of maintenance costs. I go on to discover that major aircraft fleets have relatively low annual variabilities, and consequently estimated betas that are insignificantly different from zero. The capitalised economic rents, both for the airline industry as a whole and for individual airlines, are large but predominantly negative, with the -most important influence being fuel costs. Positive rents for individual airlines are exceptional and even then are very difficult to sustain. Individual airlines, when judged by patterns of scaled rents, are far more alike than different. The persistence of negative rents remains a puzzle that has similarities with the discounts to net asset value seen in investment trust share prices. However my finding that airlines tend to be acquired at close to fair value suggests that outsiders would be unlikely to succeed in capturing the hidden value. Nevertheless it remains a mystery why airline managers have continued to make substantial additions to their fleets in assets with a negative present value. Detailed annual profiles of aircraft types by airline, and major airline fleets by aircraft type are also given.