Abstract
This chapter investigates the financial performance of airline companies and proposes a harmonic index to state a performance ranking for the COVID-19 era covering the years 2018, 2019, and 2020. All data required for this study were obtained from the Thomson-Reuters database. A total number of 111 airlines are reached and listed by total assets. The 20 biggest airlines by total assets in 2020 are chosen for this study. A harmonic index is constructed by using performance indicators for profitability, liquidity, and efficiency. Then, the biggest 20 airlines are ranked by the harmonic index values for the COVID-19 era. The results revealed that North America and European-based airlines performed very badly in 2020 compared to pre-COVID years while Far East-based airlines were able to manage the pandemic year much better.
TopBackground
In recent years, many airline companies have come to the fore with frequent flight disruptions, layoffs and financial problems. Even many big and well-known airlines have tried to solve their financial problems by seeking government support or finding a new partner or strategically collaborating with other airlines. Netherlands based KLM and French government owned Air France was merged in 2004. Alitalia was purchased by another Italian air carrier, AirOne, in 2008. Then, Air France-KLM purchased 25% shares of Alitalia in 2008. London based British Airways and Madrid based Iberia was merged in 2011 and created an Anglo-Spanish multinational airlines named International Consolidated Airlines. Meanwhile, international carriers seeked strategic cooperation to stay competitive. Star Alliance formed in 1997 with five founding members is the first multilateral airlines alliance in the world. It currently has 26 member airlines and its headquarter is located in Frankfurt. Oneworld founded in 1999 with 14 member airlines is headquartered in New York City. Sky Team founded in 2000 has 19 member airlines and its headquarter is located in Amsterdam. Among these alliances, the Star Alliance is biggest, Sky Team is the second and Oneworld is the third alliances in terms of passengers carried in 2019.
Key Terms in this Chapter
Current Ratio: A liquidity ratio that measures a company's ability to pay obligations due within one year by using its current assets.
Capacity Utilization: The relationship between output that is actually produced with the existing equipment and the potential output which could be produced if capacity was fully used.
Employee Productivity: Amount of output produced by an employee in a specific period of time.
Return of Equity: A measure of financial efficiency calculated by net income earned over total shareholders ‘equity.
Financial Structure: The mix of debt and equity to finance a company’s assets.
Quick Ratio: It shows a company's capacity to pay its current liabilities without needing to sell its inventory or obtain additional financing.
Interest Coverage Ratio: It is used to determine how easily a company can pay interest expenses on its outstanding debt.
Current Liability: A company's debts or obligations due to be paid to creditors within one year.
Harmonic Index: A comprehensive performance measurement developed in this study to rank airline companies.
Collection Period: The length of time a business needs to collect its accounts receivables.
Abnormal Returns: The difference in between actual returns and expected returns.
Operational Efficiency: A metric that measures the efficiency of profit earned as a function of operating costs.
Turnover: It is an accounting concept that shows how quickly a business conducts its operations.
Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
Working Capital: It shows a company’s short-term financial health that is the difference of current assets and current liabilities.
Going Public: The process of selling shares that were formerly held privately and are now available to new investors for the first time.
Debt Ratio: Amount of debt used by a company to finance its assets.
Performance Indicators: A type of performance measurement to evaluate the success of an organization or a particular activity.
Return on Assets: It shows how much profit a company is able to generate utilizing its assets.
Available Seat Kilometers/Miles: The number of seats available multiplied by the number of miles or kilometers traveled by an aircraft.
Market Performance: The relationship between the current market price and the acquisition cost of an asset.
Profitability: A measurement of financial efficiency computed by net income over total revenues or sales.
Foreign Ownership: Investment in a business in a country by individuals who are not citizens of that country or by companies whose headquarters are not in that country.
Fixed Assets: Long-term tangible properties a firm owns and uses in its operations to generate income.
Return on Sales: It is a measure of how efficiently a company turns its sales into profits and calculated by dividing operating profit by net sales.
Operating Assets: The assets a company uses to support its business operations and generate revenues.
EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization.
Solvency: It is the ability of a company to meet its long-term debts and other financial obligations.
Net Worth: The difference between total debt and total assets a company owns.
Net Profit Margin: It measures how much net income is generated as a percentage of total revenues.
Gross Profit Margin: A company’s net sales mines cost of goods sold divided by its net sales.
State Ownership: It is also called government ownership that is the ownership of an industry, asset, or enterprise by the state.
Revenue Passenger Kilometers/Miles: It shows the number of kilometers/miles traveled by paying passengers and calculated as the number of revenue passengers multiplied by the total distance traveled.
Biggest Airlines: The airlines owning the highest value of total assets as of year 2020 applied in this study.
Accounts Payables: An amount of money owed by a business to its suppliers shown as a liability on a company's balance sheet.
Cash Ratio: A liquidity measure showing a company's ability to cover its short-term obligations using only cash and cash equivalents.