A tailored approach to bankruptcy risk in the airline industry: a two dimensional financial distress indicator

The airline industry has long faced high financial distress and frequent bankruptcies, with traditional bankruptcy prediction models struggling to provide timely and industry-specific early warning signals. Existing financial models, such as the Altman Z-score and its adaptations, have been widely applied but often fail to capture the unique financial structures and risk factors of airlines. This study introduces a novel two-dimensional financial distress indicator explicitly designed for the airline industry. The proposed model hypothesis-tests and visualizes an airline’s bankruptcy risk using two key financial parameters: the operational ratio (OPR)—calculated as operating expenses divided by operating revenues—and the equity-to-debt ratio (E/D). These metrics are plotted on a two-dimensional graph to illustrate the financial position of airlines over time. To quantify bankruptcy risk, the model integrates the Pilarski bankruptcy score, a logit-based probability model tailored to the airline sector. A dataset of 52 airlines covering the period 2015–2019 is analyzed to evaluate the effectiveness of the model. The results highlight distinct financial patterns: airlines with lower operational ratios and higher equity-to-debt ratios tend to exhibit greater financial stability, whereas highly leveraged carriers with poor operational efficiency show a significantly higher probability of bankruptcy. The model successfully differentiates between financially robust and distressed airlines, demonstrating a clear visual representation of financial trajectories. Comparative analysis across U.S. and European airlines reveals key industry trends. U.S. low-cost carriers (LCCs) tend to maintain stronger financial positions, while European carriers display a wider variation in financial health. Airlines such as Delta and British Airways emerge as strong performers, whereas carriers with excessive leverage, such as American Airlines, show elevated financial risk for the period studied. Unlike traditional bankruptcy models, which often provide only static, one-year-ahead reliable predictions, this approach allows for dynamic time-path analysis. By tracking an airline’s financial evolution, managers can take proactive corrective actions to improve financial performance. This model also facilitates competitive benchmarking, enabling industry stakeholders to assess an airline’s position relative to its peers. Overall, the proposed two-dimensional financial distress indicator provides a practical, visual, and industry-specific tool for assessing airline financial health. It enhances traditional bankruptcy models by incorporating a clear temporal dimension, allowing for improved decision-making and risk management by the airlines and bankers.