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surprising considering its long history of financial success. However, Southwest Airlines is not
immune from the multitude of challenges facing the airline industry – it may just be the best
positioned airline to survive the challenges.
Predicting Insolvency
Airlines are known for their vulnerability to insolvency (Gritta, Adrangi, and Sergio,
2004). Many airlines have been under bankruptcy protection of Chapter 11 and some airlines
went bankrupt even when the market conditions were favorable. More than nine airlines have
already filed for bankruptcy or ceased operations since December 2007, with many airlines
blame the significant increase in fuel costs as a major contributing factor. Many airlines such as
Air Midwest, Aloha Airlines, ATA Airlines, Big Sky Air, Delta Air Lines, Northwest Airlines,
Champion Air, EOS Airlines, Frontier Airlines, MAXjet Airways, and Skybus Airlines have
filed for bankruptcy or have ceased operations (GAO, 2008).
In 2005 more than half of the U.S. airline capacity was with airlines that were acting
under chapter 11 bankruptcy protection (Isidore, 2005). Chapter 11 allows U.S. airlines the
possibility of existing even after bankruptcy. This fact has caused much concern, especially
among the solvent airlines, as the following quote aptly demonstrates: “There is much concern
that companies are taking advantage of the liberal U.S. bankruptcy laws, to the extent that
incompetent executives keep their jobs, poorly managed companies survive, better managed
companies are faced with unfair competition, and bankruptcy lawyers profit from unreasonably
high fees… But the real problem may be that the stigma which once accompanied bankruptcy
filing is gone” (Yang, Galen, 1993).
With bankruptcy so prevalent in the airline industry, are there any indices or measures that might
predict insolvency? Many ratios are useful in predicting the financial health of an airline. For
example, traditional ratio analysis is a frequently used tool for financial analysis. Presently, there
are three theories that predict the likelihood of insolvency and these can be used to help
investment decisions. These are: the Altman Z-score model, the Springate Z-score model, and
the, Fulmer H-score model. These models will be discussed in turn.