The Treatment of Debt in WACC Calculations in the Airline Industry: Evidence From Equity Research Analysts

Accurate estimation of a firm’s Weighted Average Cost of Capital (WACC) is fundamental to investment decisions, capital structure optimization and firm valuation under the Discounted Cash Flow (DCF) methodology. The airline industry, characterized by its capital intensity, relies extensively on debt and leases for aircraft financing. This paper critically examines prevailing approaches to measuring both the cost and relative portion of debt in WACC calculations, with particular emphasis on the treatment of operating leases - a component often overlooked and inconsistently classified as debt. We further analyze the inclusion of short-term debt and cash balances, and compare methodologies employed by leading data providers such as Bloomberg and FactSet. Our survey of equity research analysts reveals significant variation in the treatment of debt components, resulting in material differences in WACC estimates and, consequently, firm valuations.