‘Predicting Financial Distress of Indian Airline Companies’

1. INTRODUCTION
Indian Aviation is facing its most uncertain phase in more than a decade. After reporting an estimated record loss of just over US $ 2 billion in the 12 months ended 31 st March 2012, India’s airlines are facing an equally challenging year ahead. Weak balance sheets, increasing costs, regulatory uncertainty, a sluggish Indian economy and a difficult global environment will continue to pile the pressure on airlines, especially the poor performing carriers. However, this may in turn create market opportunities to exploit for those that are better positioned. Over the near term the challenges facing the airline operators are related to high debt burden and liquidity constraints - most operators need significant equity infusion to effect a meaningful improvement in balance sheet. Improved financial profile would also allow these players to focus on steps to improve long term viability and brand building through differentiated customer service.Over the long term the operators need to focus on improving cost structure, through rationalization at all levels including mix of fleet and routes, aimed at cost efficiency. At the industry level, long term viability also requires return of pricing power through better alignment of capacity to the underlying demand growth.

However Indian aviation industry promises huge growth potential due to large and growing middle class population, favorable demographics, rapid economic growth, higher disposable incomes, rising aspirations of the middle class, and overall low penetration levels (less than 3%).Against this background this study will critically analyze the current scenario of the aviation industry and will make an attempt to predict the financial distress of Indian Airline Companies using the Altman Z Score model.

2. PROBLEM DEFINITION
Financial distress of infrastructure firms may jeopardize the sustainability of various services offered. The Aviation sector companies in India are facing a problem of financial crunch today, therefore it is necessary to analyze the bankruptcy situation and predict the financial distress of these aviation companies and suggest ways to overcome the problem so as to ensure smooth and sustainable operation of infrastructure companies.

1

‘Predicting Financial Distress of Indian Airline Companies’

3. RESEARCH OBJECTIVE
1. Primary Objective:  To study and understand the Altman’s Z-Score model used to predict the financial heath and viability of the company  To study and understand the Air-score model used to predict thefinancial health and viability specifically for the Airline Industry.

2. Secondary Objective:  To analyze the present status of the Indian Aviation sector and predict the financial condition of the Indian airline companies using the Z-Score model and the Airscore model.  The analysis will be conducted on 3 airline companies listed on BSE viz. Kingfisher Airlines Ltd., SpiceJet Ltd. and Jet Airways Ltd.

4. LITERATURE REVIEW
 The earliest study using multivariate data analysis on failure prediction was conducted by Altman(1968) using a set of financial and economic ratios as possible determinants of corporate failures. Thestudy used sixty-six corporations from manufacturing industries comprising of bankrupt and nonbankruptfirms and 22 ratios from five categories, namely, liquidity, profitability, leverage, solvencyand activity. Five ratios were finally selected for their performance in the prediction of corporatebankruptcy and the derived model correctly classified 95 percent of the total sample (correctlyclassifying 94 percent as bankrupt firms and 97 percent as non-bankrupt firms) one-year prior to bankruptcy. The percentage of the accuracy declined with increasing number of years beforebankruptcy.Altman’s original model is calculated as:

Z= 0.012 X1 + 0.014 X2 + 0.033 X3 + 0.006 X4 + 0.999 X5 Where, X1  Working Capital / Total Assets (a liquidity measure) X2  Retained Earnings / Total Assets (a measure for reinvested earnings) X3  EBIT / Total Assets (a profitability measure) 2

(1998) conducted a study to compare four types of bankruptcy predictionmodels that are based on financial statement ratios.847 X2 + 3. as stakeholdersmight be particularly interested in cash 3 .000 sampled firms with 10 financial ratios as independentvariables. the cash flow model most consistently discriminates betweenbankrupt and on-bankrupt firms. (1994) reported the use of neural network in identification of distressed businessby the Italian central bank. (1995) incorporated the time “bias” factor into the classic business failureprediction model. They concluded that the neural network is not a clearly dominant mathematicaltechnique compared to traditional statistical techniques.107 X3 + 0. the ratio model is the most effective in explaining the likelihood of bankruptcy. and Aharony et al. Using Altman (1968) and Ohlson’s (1980) models to a matched sample of failed andnonfailed firms from 1980’s.’s (1988) model comprised of cash flows. Modification of the original modelconsisted in the total revaluation of the modeland the market value of owner´s equity in variableX4 was substituted with the book value of owner´s equity. a discussion on howthe Z-score model could be used for "non listed companies" started. Aziz et al. they found that the classification of neural networks was very close to that achieved byDiscriminant analysis.‘Predicting Financial Distress of Indian Airline Companies’ X4  Market Value of Equity / Book Value of Total Debt (a leverage measure) X5  Sales / Total Assets (a measure for sales generating ability of a firm’s assets)  After publishing the model.717 X1+ 0.  Mossman et al.998 X5  Altman et al. In 1977 Altman published the final modelapplicable to companies nonlisted at the capitalmarket under the name ZETA and it is as follows: Z= 0.  Begley et al. stock returns’. Using over 1. They found that in the year prior tobankruptcy. They tested four bankruptcy models: Altman’s (1968) Z-score model based on financialratios. and returns standarddeviations. Clark and Weinstein’s (1983) market returnmodel.420 X4 + 0. In thethree years preceding bankruptcy. they found that the predictive accuracy of Altman’s model declinedwhen applied against the 1980’s data.’s (1980) market return variation model. cash flows. The findings explained the importance of incorporating the timefactor in the traditional failure prediction models. The findings suggest different uses for the models.

It provided an in depth understanding of the development of Altman’s Z-Score model and provided a comparison of various bankruptcy models which are commonly used. The study included 37 Czech companies of which 13 were bankrupt and the results corroborated that the model was highly reliable in predicting the financial distress or more precisely the bankruptcy of a given company. both generic and industry specific. Gritta et al. which was not possible with neural networks that had illogical behavioral pattern.  ‘Business bankruptcy prediction models: A significant study of the Altman’s Z-score model’ an article from the Asian Journal of Management Research. in his paper ‘A Review of the History of Air Carrier Bankruptcy Forecasting and the Application of Various Models to the US Airline Industry:1980-2005’. tried summarizing the studies done in the field of bankruptcy prediction.Alternatively. a large negative shift in accounting ratio variables could be a useful indicator ofimminent financial collapse.All contributions try to answer questions about these problems from differentperspectives. This was mainly as it was possible to learn what the most importantvariables were for explanation purposes.  ‘Possibilities of the Altman zeta model application to Czech firms’ an article from the journal Ekonomika – A Management published in March 2011 tried analyzing the Altman’s Zeta model by applying it to Czech firms. However it also confirmed that the Altman Model canpredict bankruptcies in the distant future onlywith low reliability. subjectspecific traditions and levels of investigation. as well as private & publicly held firms and that discriminant analysis was better than the neural networks. Through the various cases discussed the book provides in depth insights into some of the general problems that research oninsolvency is wrestling with today 4 . that have beenused to assess the financial health of air transportation. It concluded that most of the bankruptcy studies used multiple discriminant analysis (MDA) statistical techniques to develop models and included large and small firms. conducted a study to outline and briefly discuss many of the different models. Volume 3 Issue 1 (2012).  History of Insolvency and Bankruptcyfrom an International Perspective a book by Karl Gratzer and Dieter Stiefel brings together new international research on bankruptcy and insolvency.  Richard D.‘Predicting Financial Distress of Indian Airline Companies’ flow variables as an “early warning” indicators of failure.

annual reports etc.  Data Collection 1. developed by Edward Altman and the Air. Sources of Data: The secondary data is mainly collected from the research papers. SpiceJet Ltd and Kingfisher Airline Ltd 2. SpiceJet Ltd. Desk Research design involves using established information (data) by different agencies and also using the information available from the internal sources of the company. The scope of the study is limited to predicting the financial health or distress of only the public sector companies in the Indian Aviation industry namely Jet Airways Ltd. commercial press and data internally generated by the company are used for the desk research.. and using it for the study of the research problem.‘Predicting Financial Distress of Indian Airline Companies’ 5. are analyzed to predict their solvency using the Altman Z Score model and Air-Score model. and Jet Airways Ltd. The financial statements of the 3 listed Indian airline companies viz. websites and Dion database  Tools Used To predict the financial distress two models have been used namely the Z-Score model. Thus it is actually finding out the required information from published journals. There is heavy reliance on the financial information that is provided by the company’s annual reports and data that is obtained from the Dion database 5 . RESEARCH METHODOLOGY  Research Design Desk Research Design is used to analyze the financial health of various companies. developed specifically for the airline industry  Scope and Limitations 1. Nature of Data: Data collection for this research is completely based on the secondary sources of data 2. The information published in trade journals. company’s annual reports. Kingfisher Airlines Ltd. Due to the time constraints the financial health prediction is limited only to 3 years’ financial performance of the companies 3.Score model.

foreign airlines may be interested in taking strategic stakes due to their deeper business understanding. the higher is the financial risk and higher are the chances of bankruptcy under the conditions of low operating profits. elevated fuel prices over the last three quarters coupled with intense competition and unfavorable foreign exchange environment has again deteriorated the financial performance of airlines. aggressive fleet expansion (Low Cost Carrier (LCC) airlines on long termoperating leases. the domestic aviation sector continues to operate under high cost environment due to high taxes on Aviation Turbine Fuel (ATF). To address the concerns surrounding the operating viability of Indian carriers. dearth of experienced commercial pilots.The higher theamount of debt that the firm uses.‘Predicting Financial Distress of Indian Airline Companies’ 6. it was the decline in passenger traffic growth which led to severe underperformance during H2 2008-09 to H1 200910. the Government on its part has recently initiated a series of measures including (a) proposal to allow foreign carriers to make strategic investments (up to 49% stake) in Indian Carriers (b) proposal to allow airlines to directly import ATF (c) lifting the freeze on international expansions of private airlines and (d) financial assistance to the national carrier. However. While most of these factors are not under direct control of airline operators. though foreign airlines are currently not allowed any stake).Besides. Flight Service Carrier’s (FSC) have purchased aircrafts by debt financing backed by bank guarantees) to leverage the anticipated robust growth and to support and expand international operations impacted significantly on the capital structure and weakened the creditprofile of most domestic airlines. longer 6 . industry-wide capacity discipline and relatively stable fuel prices. much in excess of actual demand.While in the beginning of 2008-09. CURRENT SCENARIO OF THE INDIAN AVIATION SECTOR The Indian Aviation Industry has been going through a turbulent phase over the past several years facing multiple headwinds – high oil prices and limited pricing power contributed by industry wide over capacity and periods of subdued demand growth. the problems have compounded due to industry-wide capacity additions. The operating environment improved for a brief period in 2010-11 on back of recovery in passenger traffic. high airport charges.Despite reforms. inflexible labor laws and overall higher cost of capital. the sector was impacted by sharp rise in crude oil prices. While the domestic airlines have not been able to attract foreign investors (up to 49% FDI is allowed. significant congestion at major airports.

While the carrier reported an EBTIDAR profit of INR1. Awards:  Kingfisher Airlines was awarded NDTV Profit Business Leadership Award for Aviation. ATR 72-500 and ATR 42-500. too airlines are going through period of stress which could possibly dissuade their investment plans in newer markets. 7. Incorporated in 1995 as Deccan Aviation. Internationally. the airline has a network in 72 cities operating more than 400 flights a day and commands a market share of 25%.  Kingfisher Airlines was acknowledged as 'India's only 5 Star airline' and '6th airline in the world' was certified by Skytrax.  Kingfisher was rated as Asia Pacific's 'Top Airline Brand' in a survey conducted by TNS on 'Asia Pacific's Top 1.Kingfisher Airlines owns 76 aircraft comprising A330.In India. A 319. the company is engaged in the business of providing passenger services and helicopter charter services. rising disposable incomes and low air travel penetration could attract long-term strategic investments in the sector. Healthy passenger traffic growth on account of favorable demographics.25 billion (USD25 million) in the quarter (EBITDAR margin declined 7 . 2. OVERVIEW OF THE LISTED INDIAN AIRLINE COMPANIES  Kingfisher Airlines Ltd 1. The airline is part of UB Group owned by Dr Vijay Mallya. However there are two key challenges: i) aviation economics is currently not favorable in India resulting in weak financial performance of airlines and ii) Internationally.The name was changed to Kingfisher Airlines in the year 2008. A 321 (single and double cabin).From the working capital standpoint too.‘Predicting Financial Distress of Indian Airline Companies’ investment horizons and overall longer term commitment towards the global aviation industry. it operates flights to Dubai. airlines will need to deploy significant amount of resources in sourcing fuel which may not be easy given the stretched balance sheets and tight liquidity profile of most airlines. A 320 (single and double cabin).000 Brands' for 2008. Company History: Kingfisher Airlines is one of the leading private players in the Indian aviation industry. 3. Financials: Kingfisher’s profitability situation is the most concerning. Colombo and London.

5% in the quarter.1%).2 million) for a net loss margin of 33%.  Jet Airways was awarded ‘Best Cargo Airline of Central Asia’ at the prestigious Cargo Airline of the Year Awards. most likely.The Company’s subsidiaries include Jet Lite (India). will post a full year loss in FY2011/12 and the coming financial year looks equally challenging. its loss after tax stood at INR 1012 million (USD19 million) compared with a profit of INR 1182 million (USD26 million) in 3QFY2011.  Jet Airways Ltd 1. Company History: Jet Airways (India) was incorporated in 1992. Jet Enterprises.  Jet Airways was voted as the Best Airline in Central/South Asia and India in an annual Global Traveler magazine survey.5% to -9. 8 . it was loss-making at the EBITDA level (INR1. However. which is reportedly seeking to raise INR 10 billion (USD203 million) in working capital loans.‘Predicting Financial Distress of Indian Airline Companies’ from 17. with the carrier having success at attracting corporate customers and improving yields and loads factors. as an airline company.5% to 8. Trans Continental e Services. coach services. Jet Airways of India Inc.44 billion (USD90. It provides services such as airport lounges. 3. The carrier also reported a loss before exceptional items and tax of INR5. India Jetairways Pty and Jet Airways Europe Services N. was profitable at an EBITDAR level with an INR 2099 million (USD40 million) profit in the quarter.V.47 billion/USD30 million) with its EBITDA margin declining from 2. Awards:  Jet Airways won ‘airline with best first-class service in the world’ award at Business Traveler’s 20th annual ‘best in business travel’ awards gala in the USA. the airline is likely to benefit from the weakness at both Kingfisher and Air India. 2. While the carrier. which are now in the 85-90% range in the domestic market. Jet Airways LLC. Jet Airways. It operates flight to 20 international destinations.78 billion (USD117 million) and a net loss of INR4. In India it has over 357 fights daily to 42 destinations. complimentary chauffeur drive services. Financials: Jet Airways posted its fourth straight quarterly loss in 3QFY2012. bus services..

SpiceJet currently operates 83 flights daily to 14 destinations connecting metros and nonmetros.3 million.5 million (USD8 million) in the quarter. It was among the first private companies that stepped into the Indian aviation sector.  SpiceJet was ranked amongst the top 10 budget airlines in Asia by Smart Travel Asia magazine based on a surveyed commissioned 'Best in Travel Poll' on the low-cost carriers.SpiceJet follows Low Cost Carrier (LCC) business model on the lines of the most successful LCCs globally and provides the lowest cost per unit amongst Indian LCCs. in 3QFY2011. Financials: SpiceJet reported a loss before and after tax of INR392. SpiceJet has reported growth at both the top and bottom lines in the past two financial years.It owns 11 Boeing 737 – 800 aircraft.Currently. Company History: Royal Airways-promoted SpiceJet is an airline company.Further. respectively.SpiceJet was launched with an objective to deliver the lowest air fares with the highest consumer value. Awards:  SpiceJet was awarded '2008 Emerging Company of the Year Award for Indian Commercial Aviation' by Frost & Sullivan. 9 .  SpiceJet won 'CIO 100 award' from CIO magazine for its technological innovations in aviation industry. the company enjoys a market share of over 8%. 2. compared to profits of USD24 million and USD19. Despite the losses in the first three quarters of the current fiscal year. The aircraft utilization of SpiceJet is amongst the highest in India. in May 2005 Royal Airways changed its name to SpiceJet.‘Predicting Financial Distress of Indian Airline Companies’  SpiceJet Ltd 1. to price sensitive consumers. 3. which was earlier known as Modiluft.

‘Predicting Financial Distress of Indian Airline Companies’  Graphical Representation The following graphs shows the sales and PAT figures for all the 3 airlines for the year ending March 2012 and their latest quarterly results Graph 1: Annual Results as on Mar ‘12 Graph 2: Latest Quarterly Results 6. OVERVIEW OF THE LISTED INDIAN AIRLINE COMPANIES 10 .

999X5 Where Z  Represents the overall Score X1 Working Capital / Total Assets Working capital/total assets (X₁) is a measure of liquid assets in relation to the firm’s size. 2003) X2  Retained Earnings / Total Assets Retained earnings/total assets (X2) represent a measure of cumulative profitability reflecting the firm’s age as well as its earning power. Altman’s original model is calculated as: Z= 0. The current assets of a firm include cash on hand. Current liabilities consist of the firm’s financial obligations-short-term debt and accounts payable—which will be met during the operating cycle. (Altman. A business entity with a negative working capital will experience difficulty meeting its obligations. Dr. The difference between current assets and current liabilities represents working capital. A positive working capital indicates a firm’s ability to pay its bills. This predictor is a statistical model that combines five financial ratios to produce a product called a Z score. Low retainedearnings may indicate a poor business year or reduced longevity for the firm. the latter two assets are considered current. Altman’s research finds this ratio to be more helpful than other liquidity ratios. if cash conversion is expected within an operating cycle of a business.012X1+0. 50% of businesses fail within the first five years of operation (Altman.014X2+0. 11 .‘Predicting Financial Distress of Indian Airline Companies’ 8. accounts receivable. Chuvakhin& Germania. and inventories. 2000. Edward Altman published what has become the best known predictor of bankruptcy. 2000. A history of profitable operations and reduced debt is signified by firms that retain earnings or reinvest operational profits.033X3+0. such as the current ratio or the quick ratio.006X4+0. The model has proven to be a dependable instrument in forecasting failure in a diverse mix of business entities. ALTMAN’S Z SCORE MODEL In 1968. 2002). According to Dun and Bradstreet.

Represented as earnings before interest and taxes/total assets (X3). X5  Sales / Total Assets (a measure for sales generating ability of a firm’s assets) The next ratio. The stock market. the primary estimator of a firm’s worth. Specifically.81 to 2. Eidleman states “Each of these ratios is multiplied by a predetermined weight factor. the firm is viewed as failing. Finally. Type I errors. Altman (2000) classifies the ratio as a superior measure of profitability that is better than cash flow.‘Predicting Financial Distress of Indian Airline Companies’ X3  EBIT / Total Assets (a profitability measure) A measure of an organization’s operating efficiency separated from any leverage effects is a true depiction of asset production. one year prior to their demise. 1968).99 represent the socalled grey area.His model correctly predicted financial failure for 95% of the firms. and shareholders.99. Yet.22). 2002) defines the market value of equity. X4  Market Value of Equity / Book Value of Total Debt (a leverage measure) Altman (2000. the government. the ratio is an indicator of a firm’s efficient use of assets to create sales (Chuvakhin&Gertmenian. Thirty-three of the firms had filed for bankruptcy and all had assets over$1million.81. Accuracy decreased to 72% two years out and to 52% three years prior to insolvency (Altman. If it is below 1. 2003). Eidleman (1995) explains the applicability of the previously discussed ratios. Altman believes this ratio is a more effective financial distress predictor than net worth/total debt (Book values). sales/total assets (X5) signifies a standard turnover measure that unfortunatelyvaries from one industry to another. as a summation of both preferred and common stock or market value of equity/book value of total debt (X4). or market capitalization. and the results are added together. when there is no clear prediction. Values ranging from 1. the firm is healthy. were shown for 6% of 12 . manufacturing firms. those that predict a bankruptcy that does not occur. Altman (2000) has defined this as “……one measure of management’s capacity in dealing with competitive conditions” (p. If the score is above 2. sugge sts that price changes may foreshadow pending problems if a firm’s liabilities exceed its assets. Altman’s pioneer study was based on a sample of 66 publicly traded. this ratio estimates that cash supply available for allocation to creditors.

107 X3+0.23 and 2. citing four issues: (a) subjectiveness in the weightings. The first three variables are unchanged. 1993). Type II errors predict a solvent firm that files bankruptcy (Altman. and (d) some misleading ratios.56 X1 + 3. the model is unable to accurately forecast financial difficulties for non-manufacturing firms and non-publicly operated forms. 1993).90 are determined to exist in the grey area or zone of ignorance (Altman. the weight factor is again recalculated. In addition. Firms with scores over 2.420 X4+ 0. Altman developed a revised Z-score model for privately held firms. thefourth ratio is difficult to establish in non-public firms. The revised Z-score model uses X4=Net Worth (Book value)/total liabilities to maintain its applicability to privately owned firms. As the market value of equity is based on stock prices. Altman’s new sample produces similar results as the original Z-score model. (b) an element of ambiguity within the model. (c) the univariate approach.72 X3 + 1. Type II errors also were shown for 6% of the firms analyzed. sales/total assets.90 have a 97% chance of continuing operations with financial health (Altman. one that eliminates variables X5.847 X2+ 3. Hence the revised Zscore model is represented as Z=6. Eliminating sales/totals assets minimizes “the potential industry effect which is more likely to take place when such an industry sensitive variable as asset turnover is included”. The new Z-score model known as Zeta Model is as follows Z= 0.05 X4 13 . In 1993.90 are indicators of non bankrupt firms. Altman does not view his original model or his revised Zeta model as perfect.998 X5 Cut off scores were also adjusted so that scores of <1. 1993). In 1983. The revised Z-scores substituted the book value of equity for the market value in X4.9% accuracy in bankruptcy forecasting at least one year prior to actual failure. however. Altman’s continued research produced a further revised model. Firms with scores between 1.23 indicate bankrupt firms and scores of >2.‘Predicting Financial Distress of Indian Airline Companies’ the firms analyzed.26 X2 + 6.717 X1+0. indicating 90. He further feels that the fifth ratio (sales/total assets) does not represent a difference between failed and nonfailed firms and does not reflect any variations from industry to industry.

81 > 2.10 Non bankrupt firms>2. auditors.107 0.05 NA Firms Bankrupt Firms Non Bankrupt Firms Grey Area Accuracy Type I – Accuracy Type II – Accuracy Cutoff Scores < 1.21 1. First. his model does not always have the same accuracy across these businesses.717 0.81 .6 0.56 3.23 > 2. 20 years of studies encompass a diverse assortmentof manufacturing firms that vary in size.60 1. 14 .847 3.999 Revised Model (1983) 0.67 < 1.30 0. Even though Altman’s bankruptcy prediction model is the most popular analytical tool utilized by investors.998 Revised Four Model (1993) 6.60 Grey area= 1.10-2.10 .9% 97% 90.60 94% 97% 90.10 > 2.9% success rate in predicting bankruptcy one year prior to firm’s demise and a 97% accuracy rate for identifying non bankrupt firms with continuing economic solvency.62 1. Table below illustratesAltman’s bankruptcy models Coefficient Variables X1 X2 X3 X4 X5 Original Model (1968) 1. and stakeholders.42 0.9% 97% Altman cautions that his model has limitations in its applicability to different business entities with the same prediction accuracy.‘Predicting Financial Distress of Indian Airline Companies’ Where cut off scores reflect Bankrupt firms< 1.26 6.67 1. Altman advises not to use his formula to the exclusion of other analytical techniques.90 1.23 .2.60 Results of Altman’s newest revised Z-score model exhibit a 90.2.41 3.90 < 1. Second.2.

not specifically developed for the airline industry. Altman and Gritta.095 Grey area= 0. With that in mind. 1982. Gritta and Leung. an industry specificmodel.34140X1 + 0. In these two studiesgeneric bankruptcy models. several “gray zones” were defined and the model yieldedresults similar to the Altman Z Score and to ZETA® credit scores. were appliedon airline data to assess the risk of bankruptcy.‘Predicting Financial Distress of Indian Airline Companies’ 9.03 to -0. it did seem to be a bit biased toward the larger carriers in thesample. The interested reader is referred to the article for different cutoffs and the results. It can be argued that a model derived from a sample of the same industrywould be even more accurate that a generalized model such as the Altman ZScore or ZETAcredit scores. Gritta and Leung 1991). depending on the zone used. 1991).03 Firms in trouble < -0. AIR-SCORE MODEL Bankruptcy and distress prediction for airlines was pioneered by two financial based DMAstudies in the early eighties (Gritta.095 15 . the model derivedwas: Air-Score = -0. was specified using a sample restricted to the airlineindustry (Chow. named AIRSCORE (Chow. While the modelwas somewhat accurate. Air-Score.36134X3 The three ratios that were predictive of insolvency or stress were: X1 = interest/total liabilities (the imputed interest rate on debt) X2 =operating revenues per air mile X3 = shareholders’ equity/ total liabilities Because the distribution of the scores made the application of a single cut-off pointdifficult and inappropriate. Usingan MDA approached similar to that utilized by Altman. 1984). It was able to achieveaccuracy rates of between 76% and 83%. Where Air-Score reflect Healthy firms>0.00003X2 + 0. Later a dedicated MDA model for the airlineindustry appeared. It included a significant sample ofthe large and smaller carriers (the latter referred to as regional airlines).

81) for all the three years. government and other shareholders have also suffered for the year 2012.864 1. DATA ANALYSIS AND INTERPRETATION  Kingfisher Airlines Ltd.809 2011 0.044 0.dionglobal.228 1.604 (-) 0.074 0.250 Source: https:\insight.334 (-) 1.423 (-) 1. Table 1: Computation of Z Scores for Kingfisher Airline Ltd. To improve its financial position the company will have operate more efficiently and make optimum utilization of resources.although improving.518 1.217 0. has been continuously in the gray zone(Between 2.in Graph 1: Graphical Representation of Z Scores for Kingfisher Airline Ltd. otherwise it would be difficult for them to sustain in the long run.317 1.‘Predicting Financial Distress of Indian Airline Companies’ 10. 16 . Interpretation: The company has been continuously failing in terms of improving its profitability and is continuously running into losses.736 0.67 to 1.303 0. The Z-score. Variable Working Capital to Total Assets (X1) Retained Earnings to Total Assets (X2) EBIT to Total Assets (X3) MV of Equity to BV of Debt (X4) Sales to Total Assets Z Score 2012 0.259 1.512 2010 0. a poor Retained earnings to Total Assets ratio puts a question mark on the firms longevity. The cash supply available for creditors.510 (-) 2.239 1.

72425 -0.77074 2011 0.00496 -0. Interpretation: It can be interpreted that Kingfisher Airlines has not been doing well in the past three years and have negative retained earnings leading to negative shareholders’ equity to liabilities ratio indicating their performance was not good enough.‘Predicting Financial Distress of Indian Airline Companies’ Table 2: Computation of Air-Scores for Kingfisher Airline Ltd.in. 17 .43301 4.55352 Source: https:\insight. the firm is in trouble (< -0.558028 4 -1. Variable Interest to Total Assets (X1) Operating Revenues per air mile (X2) Shareholders’ equity to Total Liabilities (X3) Air-Score 2012 0.569992 4. Annual Report Graph 2: Graphical Representation of Air-Scores for Kingfisher Airline Ltd.46525 2010 0. As per the Air-Score model.74942 -0.095) and must take steps necessary to improve their finances or they face a very high risk of going bankrupt in the near future.29 -1.76 -0.dionglobal.

Table 2: Computation of Z Scores for Jet Airways Ltd. a poor Retained earnings to Total Assets is an indication of the same. points to the distress situation (< 1.486 1.473 2011 0. Also for the year 2012 the company has registered a negative working capital to total assets ratio showing the companies poor liquidity condition.‘Predicting Financial Distress of Indian Airline Companies’  Jet Airways Ltd.709 0. 18 .088 0.898 2012 0. Interpretation: The company has been running into losses.123 0. government and other shareholders have also suffered for the year 2012.028 (-) 0.050 0.050 0.351 (-) 0.81) that the company is in.although improving. The cash supply available for creditors.189 0. The company will have to work towards improving its overall profitability and liquidity in order to survive this stressed industry.347 0.004 (-) 0.474 1.713 Graph 2: Graphical Representation of Z Scores for Jet Airways Ltd.893 0. Variable Working Capital to Total Assets (X1) Retained Earnings to Total Assets (X2) EBIT to Total Assets (X3) MV of Equity to BV of Debt (X4) Sales to Total Assets Z Score 2010 (-) 0. The Z-score.357 0.123 0.

216255 0. Annual Report Graph 2: Graphical Representation of Air-Scores for Jet Airways Ltd.95 0.0852 2011 0.dionglobal.03 to -0.in. Interpretation: It can be seen that the solvency of Jet Airways has been deteriorating over the past 3 years indicating their performance was not good enough.058441 -0.05616752 -0.‘Predicting Financial Distress of Indian Airline Companies’ Table 2: Computation of Air-Scores for Jet Airways Ltd.0522 -0.095) but they will have to improve upon their profitability to prevent insolvency.19473 4. 19 . Variable Interest to Total Assets (X1) Operating Revenues per air mile (X2) Shareholders’ equity to Total Liabilities (X3) Air-Score 2012 0.Howeveras per the Air-Score model they are neither in a healthy state nor in trouble (between 0.48811 -0.12392972 6.02341 2010 0.130803 4.0218055 Source: https:\insight.

20 .67 above which the company is considered to be having enough solvency to survive. Interpretation: The company was in a very strong position in 2010 with a Z-Score of 22. Table 1: Computation of Z Scores for SpiceJet Ltd.062 5.782 3. Variable Working Capital to Total Assets (X1) Retained Earnings to Total Assets (X2) EBIT to Total Assets (X3) MV of Equity to BV of Debt (X4) Sales to Total Assets Z Score 2010 (-) 0.52 in 2012.8 way above 2.077 7.691 22.526 2011 (-) 0.770 22. However as per the Z-Score model the company falls in the category of Non-Bankrupt firms (> 2.464 22.386 5.077 (-) 8.The profitability and liquidity of the company is under pressure for the last two years and therefore their Z-Score have come drastically down to 5.308 7.201 (-) 1.67) and therefore has good solvency state in the category.114 2012 (-) 3.716 (-) 1.804 Graph 1: Graphical Representation of Z Scores for SpiceJet Ltd.773 1.568 5.874 (-) 0.‘Predicting Financial Distress of Indian Airline Companies’  SpiceJet Ltd.556 4.

12392972 6. Annual Report Graph 2: Graphical Representation of Air-Scores for Jet Airways Ltd. So the company can keep on improving and optimizing in terms of their asset utilization so as to come out of this trouble state and move towards the healthy state slowly and steadily.in.130803 4.dionglobal.19473 4. Variable Interest to Total Assets (X1) Operating Revenues per air mile (X2) Shareholders’ equity to Total Liabilities (X3) Air-Score 2012 0.0218055 Source: https:\insight.48811 -0.‘Predicting Financial Distress of Indian Airline Companies’ Table 2: Computation of Air-Scores for Jet Airways Ltd.095) but only by a slight margin.05616752 -0.0522 -0.02341 2010 0.0852 2011 0.95 0. 21 . Their performance.058441 -0.although improving.216255 0. as per the Air-Score model they are in trouble (< -0. Interpretation: It can be seen that the solvency of SpiceJet has been improving over the past 3 years indicating that the company is trying hard to improve its overall operations and thereby improve its profitability and liquidity.

68 5.78 1.15 1.26 -605. 22 . inefficient infrastructure and an inability to raise fares in a highly competitive market.68 -1179.492 -539.10024 Graph 7:Jet Airways. As a result.77074 Jet Airways 15224.473 -0.4 -6213.‘Predicting Financial Distress of Indian Airline Companies’ 11.809 -0. As previously noted. compounded by heavy taxation.45 -625.05 158.77 -142. COMPARATIVE ANALYSIS Particulars Net Sales Net Profit Net Working Capital Return on Assets Interest as a % of EBIT Net Worth Reserves Z-Score AIRSCORE Kingfisher Airlines 5493.44% -147. growth in the robust domestic market has failed to translate into profits for India's airline industry.54 -25. SpiceJet and Kingfisher net profit (loss) margin: 1QFY2010 to 3QFY2012 The losses in the quarter reflect not only issues at the individual carriers but some fundamental and structural challenges in the Indian aviation sector.0852 SpiceJet 3943.74 -9.526 -0. In addition.41 -2328.85 -7.23 -588.51 -3621.63 -58.01 1504.82 -5082. the nation’s airlines are seeing a sharp increase in their cost base at a time when yield and unit revenue growth is pressured. All the major carriers are loss-making as a result of the impact of high jet fuel costs.07 -30. rising debt levels and a depreciating rupee are placing further pressure on margins.

and its staff and fuel costs remained higher than its peers as a proportion of revenue.527 million (USD887 million). Jet Airways and SpiceJet saw the ratio of employee expenses to sales reduce.42/USD8. Revenue moved in the other direction for Jet Airways and SpiceJet.949 million (USD244 million). On the other hand. Jet Airways and SpiceJet are also loss-making but are fundamentally more robust. with revenue growth of 14% to INR39. Jet Airways also reported double-digit operating costs increases. fund the operations of loss-making JetLite and ensure the carrier continues as a 'going concern'. 23 . reflecting the carrier curtailing operations during the Dec-2011 quarter. as the net worth of the company has been eroded substantially.  CAPA India estimated losses by Indian carriers. by 67% to INR11.Kingfisher's employee expenses as a percentage of sales increased from around 12% in Sep-2011 quarter to more than 13% in Dec-2012 quarter.758 million (USD240 million) for SpiceJet.While Kingfisher Airlines reported a lower increase in operating costs.  Operating Costs: SpiceJet reported the largest year-on-year increase in total operating costs. Also for SpiceJet too the networth has eroded however the airline noted an increase in its net worth in the last quarter after its promoters infused funds into the carrier. of 34% to INR44.869 million (USD794 million) for Jet Airways and 42% to INR11.4% to 9.7% for SpiceJet.‘Predicting Financial Distress of Indian Airline Companies’  Viability: There is a huge concern over Kingfisher’s ability to remain a ‘Going Concern’ for which the company would require to inject more funds. from 13% to 11. its unit costs remained high at INR4. of 7% to INR16.  Revenues: Kingfisher Airlines reported a 5% decline in revenue in the quarter to USD314 million. For Jet Airways the carrier needs to raise funds in order to meet its obligations.4% for Jet Airways and from 11.97 (+12%). three months ended 30-Sep-2012 Jet Airways: (USD45-60 million loss) Kingfisher: (USD110-130 million loss) SpiceJet: (USD25-28 million loss) Thus Kingfisher’s ill-timed expansion and limited funding options have brought its operations to a stand-still.940 million (USD344 million).

03  Kingfisher Airlines Ltd.81 1. According to the Z-Score model Kingfisher Airlines Ltd is predicted to have financial distress.67 Air-Score Less than -0.095 Greater than 0.526 -0. Bankruptcy Prediction Model Z-Score Model Air-Score Model Score 1. Bankruptcy Prediction Model Z-Score Model Air-Score Model Score 5. According to the Air-score model Jet Airways is neither healthy nor in trouble with respect to solvency.‘Predicting Financial Distress of Indian Airline Companies’ 12. According to the Air-score model Kingfisher is in trouble with respect to solvency.03 to -0.81 to 2. Bankruptcy Prediction Model Z-Score Model Air-Score Model Score 1.67 Greater than 2.10024 Conclusion Airline in Distress Airline in Gray Zone 24 .809 -0.0852 Conclusion Airline in Distress Airline in Gray Zone  SpiceJet Ltd. According to the Z-Score model SpiceJet Ltd is predicted to have financial distress. According to the Air-score model SpiceJet is neither healthy nor in trouble with respect to solvency.095 0.77074 Conclusion Airline in Distress Airline in Distress  Jet Airways Ltd.473 -0. According to the Z-Score model Jet Airways Ltd is predicted to have financial distress. FINDINGS Criteria Airline In Distress Airline in Gray Zone Airline is Healthy Z-Score Less than 1.

RECOMMENDATIONS  The company can deal the financial distress by disposing of real properties and may opt to sell the property to pay the creditors so that working capital of the companies will improve. two & three years in advance.better is the solvency position of the companies. It can be safely said that Altman’s Z score Model can be applied to modern economy to predict distress and bankruptcy one. The operating costs and other costs can be financed by such activity. CONCLUSION Altman’s Z-score model is one of the most effective Multiple Discriminant Analysis. Researchers have used Altman’s Z score model in the service industry.  The company can use its authorized capital by offering the stake to foreign companies. publically listed companies. It is possible forthe companies to reduce the rate of bankruptcy through the use of such models by identifying and controllingthe variables that induce the financial failure.‘Predicting Financial Distress of Indian Airline Companies’ 13. 14. 25 . Hence more the earnings. with constructive predictability. EBIT is an important factor responsible for the solvencyposition of the company along with it the retained profits and the utilization of capital overthe assets also have a key role to play. All the 3 revision of Altman equation has being used by different authors in their studies. Also an industry specific model. The rise in the creditors and liabilities create pressure on thefinancial position as the interest payment pulls down the overall profit margins. instead of adding leverages into capital structure. Finally we can infer that there are number of prediction models available for bankruptcy prediction. and banks alike to predict if the business will have a downfall. bolstered the prediction made by Z-Score model. Air-Score model.By applying these models various stakeholders can use these models to find out how the company is performing so as to avoid further losses and also it could assist companies in knowing in which direction they are headed if they are not performing well.  The merger or strategic alliance can put the distressed company back in good financial position. manufacturing industry. which has been researched throughout the last 40 yearsand has been usedin various industries to predict bankruptcy.  The companies can reframe the terms and condition with creditors to extend the credit period and the new interest rate to save the company from bankruptcy.