The bankruptcy spotlight has shifted from AMR (AMR) to Pinnacle Airlines Corp. (PNCL) after it announced a wide-ranging initiative to decrease costs and improve liquidity. Predicting business failure is difficult, and may be approached from several angles. This article applies the P-Score, an industry-specific logistic regression model.
In order to obtain an airline’s P-Score, we first obtain
W = –1.98X1 – 4.95X2 – 1.96X3 – 0.14X4 – 2.38X5
X1 = operating revenue ÷ total assets
X2 = retained earnings ÷ total assets
X3 = shareholder’s equity ÷ total debt obligation
X4 = liquid assets ÷ current maturities of total debt obligations
X5 = EBIT ÷ operating revenue
The P-Score, or probability of bankruptcy, is then given by
P = 1 ÷ [1 + e–W]
According to the model, there is a 24% chance that Pinnacle declares bankruptcy, an 8 percentage point increase from the third quarter of 2010 (click on graph to enlarge).
It is important to note that the model does not take into account fundamental factors such as the revenue increase expected from the resetting of Delta Connection rates in January 2013. In other words, the model only captures the symptoms of an airline’s fundamental problems. Thus, a better approach consists of combining a quantitative method with fundamental analysis.