Predicting airline corporate bankruptcies using a modified Altman Z -score model

Since 1979, 150 airlines have filed for bankruptcy. The airline industry was officially deregulated in October 1978, which brought about many changes including the strengthening of hub and spoke operations, fare-cutting, and the entry of new competitors into the industry. However, following deregulation, the airline industry has suffered financially from various problems: the economic recession of the early 1980s; rising jet fuel costs; rising labor costs; maintenance and interest costs; rising insurance costs; and intensified competition. The transition, from a regulated to a deregulated environment, increased the instability of the carriers\u27 operating profits. In 1998, airlines earned record profits, but by 2002, only two of the major carriers turned a profit. Since 1998, six major or national North American airlines filed for bankruptcy; The objective of this study was to analyze bankrupt and non-bankrupt airlines using a traditional bankruptcy prediction model, the Altman Z-score model, in order to evaluate its ability to predict financial distress in the airline industry. The four financial ratios used in the model represented liquidity, cumulative profitability, productivity, and solvency. A second objective of this study was to develop and test a new statistical model that would better differentiate between bankrupt and non-bankrupt airlines; The new model used only three variables, predicted membership to only one of two groups, and used a simple zero as a cut-off to distinguish whether a firm belonged to the bankrupt group or the non-bankrupt group. Furthermore, the new model\u27s predictions were accurate up to four years in advance of a bankruptcy filing. The Z model, on the other hand, used four variables, did not always give a classification to one of two groups, and used two cut-offs. Furthermore, it performed no better than a naive prediction in determining whether an airline firm should be classified as bankrupt or non-bankrupt