Leases and hidden debt
An airline's debt looks modest until you add its leases. Learn how IFRS 16 and ASC 842 put leases on the balance sheet, how they change EBITDA and leverage, and what still stays off it, using Delta's latest 10-K.
FinanceReading the accounts like an analystAbout 8 min: 8 readingUpdated
General education, not financial advice.
- Build lease-adjusted debt and leverage from a 10-K
- Explain how IFRS 16 and US GAAP differ in where lease costs appear and what that does to EBITDA and cover
- Find commitments that stay outside the lease liability
Builds toward: Judge a company. Read a company's accounts, apply Graham's tests, and make a rough valuation.
Reading the accounts like an analyst: lesson 13 of 14
- Reading the accounts like an analyst
- The three statements and how they link 10 min
- Common-size statements and trends 9 min
- Profitability ratios: margins, ROA and ROE 9 min
- Efficiency ratios and the cash conversion cycle 9 min
- DuPont analysis: where ROE comes from 10 min
- Reading the cash flow statement like an analyst 9 min
- Profit against cash: accruals and earnings quality 11 min
- When is a sale a sale? Revenue timing and channel stuffing 10 min
- The expense side: capitalised costs, reserves and big baths 8 min
- The Beneish M-score: a screen for manipulation, and its limits 10 min
- Liquidity: can they pay what's due this year? 9 min
- Solvency and cover: can they carry their debt? 8 min
- Leases and hidden debt 8 min
- Writing a credit view 9 min
Pairs with IFRS 16 Leases and FASB ASC 842 Leases; any financial statement analysis text (the chapter on liabilities and off-balance-sheet financing)
Mission
This is an exercise in analysis on a real filing, not a recommendation to buy, sell or lend.
From: a portfolio manager comparing airline bonds Due: Wednesday, half a page
Delta reports 14 billion dollars of debt and finance leases, which looks low for an airline earning 8 billion a year before depreciation. I'm comparing it with European airlines that report under IFRS. Give me Delta's leverage on a lease-adjusted basis, explain why the IFRS figures won't be comparable without adjustment, and tell me what obligations still aren't in any of these numbers. Use the 10-K for 2025 (filed 11 February 2026).
The documents (Delta Air Lines, Inc., Form 10-K for 2025; millions of dollars):
| Balance sheet, 31 December 2025 | |
|---|---|
| Current maturities of debt and finance leases | 1,605 |
| Debt and finance leases | 12,507 |
| Current maturities of operating leases | 809 |
| Noncurrent operating leases | 5,353 |
| Pension, postretirement and related benefits | 3,156 |
| Cash and cash equivalents | 4,310 |
| 2025 | |
|---|---|
| Operating income | 5,822 |
| Depreciation and amortisation | 2,443 |
| Interest expense, net | 679 |
For everything else (lease costs, other commitments), use the 10-K's notes and MD&A.
What it is
The toolkit for this job.
Leases on the balance sheet. IFRS 16 (for periods beginning on or after 1 January 2019) and US GAAP's ASC 842 (for US public companies' fiscal years beginning after 15 December 2018) require most leases longer than a year to be shown as a liability (the present value of future lease payments) and a right-of-use asset.
Where the cost goes differs.
- IFRS 16: almost every lease is treated like a financed purchase: depreciation of the right-of-use asset plus interest on the liability. Lease costs leave operating expenses, so EBITDA rises.
- US GAAP: "finance leases" are treated that way, but "operating leases" keep a single straight-line operating lease cost inside operating expenses. EBITDA still bears that cost.
- So the same airline can show a higher EBITDA, and a lower debt ÷ EBITDA, under IFRS than under US GAAP.
Adjusting for comparison. Common ways to put companies on the same footing:
- Lease-adjusted debt = debt + finance leases + operating lease liabilities.
- EBITDAR = EBITDA + operating lease cost (under US GAAP), so the denominator matches the lease-inclusive debt.
- Lease-adjusted leverage = lease-adjusted debt ÷ EBITDAR.
- Fixed-charge cover = (EBIT + lease cost) ÷ (interest + lease cost).
What stays off the balance sheet. Variable lease payments (for example, airport rents that depend on use), short-term leases, and service contracts that aren't leases, such as many capacity purchase agreements, aren't in the lease liability, though they can be just as committed. Pensions are a separate debt-like liability.
Before you start
No prompts this time. Plan your own approach, then compare it with the expert's.
Why it matters
Before 2019, operating leases were off the balance sheet altogether, and analysts estimated them (often as a multiple of rent). Now they're in the accounts, but the two rule books still present them differently, and the biggest committed costs of an airline or retailer can still sit outside the lease liability. Comparing leverage across companies without adjusting for leases compares different things.
Worked example
An imaginary retailer reports under US GAAP: EBITDA 400 (after operating lease cost of 100), debt 800, operating lease liabilities 600.
- Reported debt ÷ EBITDA = 800 ÷ 400 = 2.0×.
- Lease-adjusted: (800 + 600) ÷ (400 + 100) = 1,400 ÷ 500 = 2.8×.
- Under IFRS 16 the same retailer would show EBITDA of about 500 and debt including leases of 1,400: also about 2.8×. Comparing its US GAAP 2.0× with an IFRS rival's 2.8× would make it look safer than it is.
Common mistake
Comparing a US GAAP company's debt ÷ EBITDA with an IFRS company's without adjusting for leases, or adding lease liabilities to debt while leaving lease costs inside EBITDA. Top and bottom must match.
Key terms
- right-of-use asset
- the asset a lessee records for its right to use a leased item
- lease liability
- the present value of the lease payments not yet made
- operating lease cost
- under US GAAP, the single straight-line cost of an operating lease, shown in operating expenses
- EBITDAR
- EBITDA plus rent (lease) cost
- lease-adjusted debt
- debt plus lease liabilities
- variable lease payments
- lease payments that depend on usage or sales, not included in the lease liability
Practise the key terms
Tap a card to turn it over. 6 cards.
| Front | Back |
|---|---|
| right-of-use asset | the asset a lessee records for its right to use a leased item |
| lease liability | the present value of the lease payments not yet made |
| operating lease cost | under US GAAP, the single straight-line cost of an operating lease, shown in operating expenses |
| EBITDAR | EBITDA plus rent (lease) cost |
| lease-adjusted debt | debt plus lease liabilities |
| variable lease payments | lease payments that depend on usage or sales, not included in the lease liability |
Task
Write the half-page note for the portfolio manager:
- Delta's reported and lease-adjusted debt and leverage, and fixed-charge cover;
- why IFRS airlines' ratios aren't comparable without adjustment, and which way the difference runs;
- the obligations that still aren't in your adjusted figure, and how large they look;
- what would change your view.
Model answer
Show the model answer
| Debt and finance leases | 14,112 |
| + Operating lease liabilities | 6,162 |
| = Lease-adjusted debt | 20,274 |
| EBITDA (5,822 + 2,443) | 8,265 |
| EBITDAR (+ operating lease cost 976) | 9,241 |
| Reported debt ÷ EBITDA | 1.7× |
| Lease-adjusted debt ÷ EBITDAR | 2.2× |
| Fixed-charge cover (6,798 ÷ 1,655) | 4.1× |
Delta: leases add 6.2 billion to debt, and the biggest commitments are outside both · Source: Form 10-K for 2025
Lease-adjusted leverage is 2.2×, not 1.7×. Adding 6.2 billion of operating lease liabilities raises debt by 44%; adding operating lease cost to EBITDA keeps the ratio consistent. Fixed-charge cover is 4.1×, against 8.6× for simple interest cover.
IFRS comparison. An IFRS airline shows almost all lease costs as depreciation and interest, so its EBITDA already excludes them and its debt already includes them; its reported debt ÷ EBITDA is closer to Delta's 2.2× than to its 1.7×. Compare like with like by lease-adjusting Delta, not by taking both companies' reported figures.
Still outside: 3.3 billion of variable lease cost and 0.3 billion of short-term lease cost, which the notes classify mainly within landing fees and other rents and regional carrier expense, carry no lease liability; and the 2.6 billion of regional carrier expense is paid under long-term capacity purchase agreements. The two overlap (part of the variable lease cost sits inside regional carrier expense), so don't add them together. The MD&A sizes the capacity purchase commitments: estimated minimum fixed obligations of 6.0 billion at the year end, falling from about 1.8 billion in 2026 to 0.3 billion in 2030. That is debt-like but sits in no debt measure. Pension and postretirement liabilities of 3.2 billion are debt-like and many analysts add them; with them, adjusted debt is about 23.4 billion.
What would change my view: a rise in leased aircraft or capacity commitments, or EBITDAR falling with fuel or demand: airline earnings swing far more than their fixed costs.
How the expert gets there. They rebuild the debt figure from the notes, then make the earnings figure match it. They know which way the IFRS and US GAAP difference runs before comparing anything, and they read the lease note (operating, variable and short-term lease cost) and the MD&A's contract carrier obligations for costs that are committed but not recorded as debt.
What a reviewer would flag:
- Adding lease liabilities to debt but not lease cost to EBITDA.
- Saying IFRS airlines "have more debt" when they simply present the same leases differently.
- Missing the variable lease and capacity purchase costs, or adding them together when the notes show they overlap.
Practice
Transfer: a retailer's bonds. Kohl's 10-K for the year to 31 January 2026 shows long-term debt of 1.4 billion dollars and an operating income of 624 million. A colleague says leverage is "only about 1×". Open the balance sheet and lease note. In three sentences: do you agree, and what would change your mind?
A model answer
No: Kohl's lease obligations are several times its bonds, and adjusted leverage is above 4×. The balance sheet carries 2.45 billion of finance leases and financing obligations and 2.74 billion of operating leases besides 1.44 billion of long-term debt: 6.6 billion in all. Against EBITDAR of about 1.47 billion (operating income 624 + depreciation 700 + operating lease cost 271, less the one-off 129 million legal gain), that is about 4.5×. What would change my mind: EBITDAR recovering strongly as sales stabilise, or store closures that cut lease liabilities faster than earnings.
How the expert gets there: they read every liability line, not just "long-term debt", and match the earnings to the liabilities they've added.
What a reviewer would flag: using long-term debt alone; forgetting the finance leases, which are already debt-like even before ASC 842.
In short
- IFRS 16 and ASC 842 put most leases on the balance sheet.
- Under IFRS, lease costs become depreciation and interest; under US GAAP, operating lease cost stays in operating expenses.
- Compare leverage on a lease-adjusted basis: debt + leases over EBITDAR.
- Variable lease payments, short-term leases and service agreements stay outside the liability.
- Pensions are debt-like too: decide, and say, whether you include them.
Check yourself
Answer in your head first, then open the answer. Nothing is saved.
Debt 1,000, operating lease liabilities 500, EBITDA 300, operating lease cost 60. What is lease-adjusted leverage?
Show answer
1,500 ÷ 360 ≈ 4.2×.
Why does IFRS 16 raise EBITDA compared with US GAAP for the same operating leases?
Show answer
Under IFRS 16 the lease cost is split into depreciation and interest, both below EBITDA; under US GAAP the operating lease cost stays in operating expenses, above EBITDA.
Name two kinds of committed cost that aren't in an airline's lease liability.
Show answer
Variable lease payments (such as usage-based airport rents) and service agreements such as capacity purchase agreements with regional carriers; short-term leases too.
Further reading
- IFRS Foundation, IFRS 16 Leases (effective 2019); FASB, ASC 842 Leases.
- Delta Air Lines, Inc., Form 10-K for 2025, notes on leases and regional carriers; Kohl's Corporation, Form 10-K for the year ended 31 January 2026.
- On this site: Solvency and cover: can they carry their debt?.
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