The Cause of Financial Distress in Airlines Industry
According to International Air Transport Association (IATA), global airline industry has a history of 100 years (2014). Today, there were more than 3 billion passengers and 50 million tonnes of cargo reach their destination through the wonder of flight every year, supporting over 57 million jobs and $2.2 trillion in economic activity (IATA, 2014). The airline industry plays a crucial role in economic because it helps in opening up new possibilities for tourism, business, and human connections, as well as affecting aircraft manufacturers. It is a large and growing industry which required a large capital. Infrastructure of aviation industry has been undergoes a drastic development in term of quality and quantity. Nowadays, people could travel by air easily with an affordable price.
Based on IATA fact sheet of World Industry Statistics, the total net profits of world airlines have shown remarkable instability over the past 24 years. From 1990 to 1993, due to the Gulf War and subsequent economic recession, the world airline industry announced four consecutive years of losses totaling over $22 billion. In the late 1990s, it returned to record profitability with total net profits in excess of $25 billion being reported by world airlines from 1995 to 1999. Even more dramatic was the industry’s plunge into record operating losses and a financial crisis between 2000 and 2005, with cumulative net losses of $40 billion. There are various factors that influence the airline performance such as efficacy of capacity, structural changes, increase in competition, economy slowdown, high labor, as well as, high fuel prices which jeopardize the aviation industry.
Most of the aviation companies are struggling to manage sound solvency position and question is being asked about financial mismanagement in some of famous companies. Edward Altman, a professor of finance at New York University modified his original bankruptcy prediction model for manufacturing companies to Z-Score model for service industry companies in 1968. The Altman Z-Score model is being utilized for predicting the financial distress position in aviation industry firms. According to The Street (2011), applying the Altman Z-Score, puts American at the top of the list of potential industry bankruptcy candidates. In fact, according to the Altman Z-Score formula, despite all the improvements in the industry, each of the nine largest U.S. airlines remains a bankruptcy candidate (Bankruptcy scores: Ranking the airlines, 2011).
Present research paper is an attempt to study and analyze financial distress situation in 30 of the companies in this industry with specific reference to MAS, AirAsia, Air Canada, Australia Qantas Airline, Garuda Indonesia, Jet Airways, Korean Air, Singapore Airlines, Thai Airways, British Airways, Kingfisher Airlines, SpiceJet, American Airlines, Alaska Airlines, Continental Air Lines, Delta Air Lines, America West...