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2007 Annual Forum
View Abstract
Operating, Financial and Total Leverage Present to the U.S. National Air Carriers Since 1990
Brian Adams, University of Portland
Bahram Adrangi, University of Portland
Richard D. Gritta, University of Portland
In a prior study just published in the Journal of the Transportation Research Forum, the authors examined the extent of operating, financial and total leverage facing the major U.S airlines, those carriers with total revenues of $1.0 billion or more. The study found that the vast major of the carriers were highly leveraged at both the operating and financial levels and that this resulted in highly unstable profitability and increased the dangers of bankruptcy. The current study seeks to examine a sample of the next level of carriers-those with revenues less than $1.0 billion.
The U.S. airline industry has always been highly cyclical and somewhat fixed cost driven. The carriers are thus high in what financial analysts refer to as operating leverage. In addition, the many airlines have followed aggressive debt strategies; that is, they have chosen to use large amounts of long-term debt finance to purchase assets. This results in a high degree of financial leverage. In the past, the resulting combined leverage has created severe financial problems for the major carriers. The purpose of this paper is to examining the effects of this leverage on the next level of carriers. In doing so, comparisons will be made to the large carriers. If possible, the authors will use the same time horizon as in the published paper, although in some cases carriers are too new to have such a long history.