LIQUIDITY, SOLVENCY, AND FINANCIAL HEALTH: DO THEY HAVE AN IMPACT ON U.S. AIRLINE COMPANIES’ PROFIT VOLATILITY?

Bert J. Zarb
Embry-Riddle Aeronautical University

ABSTRACT

Profits in the airline industry have been on a roller-coaster ride since deregulation in the
late seventies. Factors such as oil prices, passenger demand, ticket prices, ancillary charges, and
revenue management have been cited as causes of profit volatility. This study examines the effect
of liquidity, solvency, and financial health on U.S. airlines’ profit volatility. The operating ratio is
used as a measure of profit volatility. This measure has been used in several prior studies in the
transportation industry in general, and in the airline industry in particular especially as an
indicator of air carrier risk at the operating level. As is the case in any business, liquidity,
solvency and financial health are some of the quintessential metrics in financial analysis. This
study shows that liquidity, solvency, and financial health taken together impact U.S. airline
companies’ profit volatility. In particular, this study shows that the debt-to-equity ratio and the
operating profit margin are statistically significant in predicting airline profit volatility.

Keywords: Liquidity, solvency, financial health, profit volatility, airline industry