Have the major US air carriers finally turned the corner? A financial assessment

The past decade and a half has been an extremely turbulent era for the U.S. airline industry.  The terrorist attack on 9/11, the steep increase in the price of fuel, and the severe recession starting in 2008, all interacted to severely stress all the airlines. By the mid-2010s, the total number of bankruptcy filings in this industry had risen to over 170. The situation, however, may well be changing.  Fuel costs have decreased significantly, mergers have reduced competition in the industry, and the domestic economy has slowly been pulling out of the “funk” resulting from the bursting of the “real estate bubble.” The purpose of this paper is to assess the current financial condition facing the major US carriers. Models designed for specific industries are more accurate than generic models. There are two different models developed using airline statistics that can be used to examine the carrier financial condition; the AIRSCORE and the P SCORE.  P Score has the advantage that its inputs are readily available from data sources such as gurufocus.com, Bloomberg and others. The P-SCORE model is a logit/probit model with generates the probability of failure.  The P Score model is:

W = -1.98X1 –4.95X2 –1.96X3 –0.14X4 –2.38X5

Where:

X1 = operating revenues/total assets

X2 = retained earnings/total assets

X3 = equity/total debt obligations

X4 = liquid assets/current maturities of total debt obligations

X5 = earnings before interest and taxes/operating revenues

P is determined by:  P = 1/[1+e-w]

Rather than producing a score that must be compared to a scale, as is the case with most bankruptcy soring models, this model produces the probability of bankruptcy.  P is that probability.  The higher the P SCORE, the greater financial stress and the more likely chance of failure. The US Department of Transportation (DOT) classifies carriers by groups based on total dollar operating revenues. Major carriers have revenues of $1.0 billion or larger. This study centers on these carriers because of their very high failure rate since 1982. Over the past several years, two factors have influenced the industry in a positive way.  The first is the sharp decline in the price of oil into the mid-$50 per barrel range; the second is the increased concentration in the industry (industry’s four-firm concentration now at approximately 82%). Both factors are increasing profits and it is the authors’ expectation that carrier P SCOREs will decrease and should do so into 2015-2016.