Does the Industry Matter? Airline Bankruptcy Prediction

In the chapter, the author discusses the need to take cognizance of the industry specificity when developing bankruptcy forecasting models. First, various ratios for measuring a company’s financial health and going concern status were estimated and thoroughly analysed, including industry specific indicators and relative growth rates. Second, the AirRank approach was built using the multiple criteria decision making method (TOPSIS). The basic model includes five financial indicators that were considered to be the best bankruptcy predictors. An alternative version of the model was also proposed, in which the industry specific indicator PASK was replaced with a highly correlated debt ratio. The warning signals generated by the AirRank are similar to the results of selected bankruptcy prediction models, such as the Altman Z”-Score, AIRSCORE and Pilarski Score. The studies conducted have shown that, in the case of airlines, industry ratios can be replaced by other highly correlated ones. However, it is worth mentioning that financial data exploration to find the best combination of indicators for a given industry may increase the efficiency of the constructed model. The chapter may be useful for those who have an interest in corporate bankruptcy prediction and financial performance evaluation.