Nonstatistical Factors Influencing Predictions of Financial Distress and Managerial Implications in the All-Cargo Airline Industry
Total Page：16
File Type：pdf, Size：1020Kb
Publications 2012 Nonstatistical Factors Influencing Predictions of Financial Distress and Managerial Implications in the All-Cargo Airline Industry Robert O. Walton Embry-Riddle Aeronautical University, [email protected] Follow this and additional works at: https://commons.erau.edu/publication Part of the Corporate Finance Commons, Finance and Financial Management Commons, and the Transportation Commons Scholarly Commons Citation Walton, R. O. (2012). Nonstatistical Factors Influencing Predictions of Financial Distress and Managerial Implications in the All-Cargo Airline Industry. Nonstatistical Factors Influencing Predictions of Financial Distress and Managerial Implications in the All-Cargo Airline Industry, (). Retrieved from https://commons.erau.edu/publication/1358 This Article is brought to you for free and open access by Scholarly Commons. It has been accepted for inclusion in Publications by an authorized administrator of Scholarly Commons. For more information, please contact [email protected]. Nonstatistical Factors Influencing Predictions of Financial Distress and Managerial Implications in the All-Cargo Airline Industry Dissertation Submitted to Northcentral University Graduate Faculty of the School of Business in Partial Fulfillment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY IN BUSINESS ADMINISTRATION by ROBERT O. WALTON Prescott Valley, Arizona March 2012 Copyright 2012 Robert O. Walton ii Abstract All-cargo airlines carry over 50% of global airfreight, yet they are prone to bankruptcy. Many financial models are designed to predict a firms' financial health, but they do not assess many nonstatistical factors that influence the prediction capability of these models. In this study, qualitative grounded theory design was used to identify nonstatistical factors and explore how they influence bankruptcy prediction models in the all-cargo airline industry. In the first phase of the study, financial data from 2005 to 2009 for 17 all-cargo U.S. airlines were used to determine the bankruptcy prediction ability of the Kroeze financial bankruptcy model. A sample of six all-cargo airlines (ABX Air, Arrow Air, Atlas Air, Cargo 360, Gemini Air Cargo, and Kitty Hawk Air Cargo) were selected containing a mixture of airlines for which the Kroeze model correctly and incorrectly predicted bankruptcy. The sample was used as the starting point to explore the nonstatistical factors using grounded theory. Data were obtained on the six airlines from company annual reports, SEC 10K annual reports, reports from professional journals such as Air Transport Intelligence and Traffic World, news reports and company press releases. The data were coded and grouped into conceptual categories, which were used in theory generation to support the emerging theory. Six categories (management, risk, operations, competitive advantage, financial, and external factors) that relate to the financial stability of an all-cargo airline emerged during the research. Three themes emerged that may improve current quantitative bankruptcy prediction models. The three themes are airline fleet type, type of aircraft flown, and aircraft utilization. The three themes relate to the type, use, and make up of an airline’s fleet. These themes influence bankruptcy prediction model and should be incorporated into failure prediction models to iv improve their overall accuracy. Future research should be conducted to verify these findings on a larger population, such as all-cargo airlines that operate outside the United States. These airlines operate under different financial regimes that may affect the prediction models differently. v Acknowledgments There are many people who have helped me along my path to the completion of this pinnacle moment. I wish to thank my wife, Petra, and daughter, Kinga, for their support over the last 5 years while I completed my doctoral studies and the lost family time while I spent many nights and weekends closed up in my office studying. I wish to also thank my parents for giving me the bug for higher education, and last but not least to my son Reese. I wish to give thanks to Dr. Mike Politano, mentor and friend, and Dr. Indra Sinka who guided me thorough the methodology pit falls. Drs. Schaefer and Munkeby, my dissertation committee, both of whom held me to a high standard and provided great advice for this successful journey; my initial chair, Dr. Phil Bos, who took my frustrated phone calls and kept me moving in the right direction, and Dr. Lonny Ness, who shepherded me through to completion. vi Table of Contents List of Tables ..................................................................................................................... ix List of Figures ..................................................................................................................... x Chapter 1: Introduction ....................................................................................................... 1 Background ................................................................................................................. 2 Problem Statement ...................................................................................................... 4 Purpose ........................................................................................................................ 5 Theoretical Framework ............................................................................................... 6 Research Questions ..................................................................................................... 8 Nature of the Study ...................................................................................................... 8 Significance of the Study ............................................................................................ 9 Definitions ................................................................................................................. 10 Summary ................................................................................................................... 13 Chapter 2: Literature Review ............................................................................................ 14 Nature of Bankruptcy ................................................................................................ 15 Air-Cargo Industry .................................................................................................... 19 Company background ........................................................................................... 23 Industry Economics ................................................................................................... 29 Fleet Management ..................................................................................................... 32 Air-Cargo Revenue Management .............................................................................. 33 Predicting Financial Distress ..................................................................................... 35 Financial Models ....................................................................................................... 36 Altman Z-score model .......................................................................................... 38 Kroeze K-score model .......................................................................................... 43 Multiple discriminant analysis .............................................................................. 45 Neural network models and genetic programming ............................................... 46 Mixed logit models ............................................................................................... 47 Comparison of Models .............................................................................................. 49 Nonstatistical Factors ................................................................................................ 53 Grounded Theory Design .......................................................................................... 55 Summary ................................................................................................................... 58 Chapter 3: Research Method ............................................................................................. 59 Introduction ............................................................................................................... 59 Research Methods and Design .................................................................................. 60 Participants ................................................................................................................ 63 Data Collection Method ............................................................................................ 64 vii Measurement/Assessments ........................................................................................ 66 Data Analyses ............................................................................................................ 67 Methodological Assumptions, Limitations, and Delimitations ................................. 70 Ethical Assurances .................................................................................................... 72 Summary ................................................................................................................... 73 Chapter 4: Findings ........................................................................................................... 75 Introduction