Assessing the financial performance of airlines in the Asia-Pacific region

Carol C Huang

doi:10.21511/imfi.18(2).2021.19

Abstract

In recent years, the aviation industry in the Asia-Pacific region has experienced rapid growth. Despite facing thin and volatile profit margins, the region’s airlines continue to expand their capacity by using high financial leverage, raising concerns of whether they are utilizing such financial leverage effectively and how it affects their stock performance. Using the global Malmquist productivity index and the conditional value-at-risk measure, this study investigates the financial performance of 22 Asia-Pacific-based airlines during 2016–2019. The empirical results reveal that only three full-service airlines were able to maintain continued improvement in financial efficiency during the sample period. The excessive use of financial leverage among low-cost carriers is documented. To assess the sources of financial inefficiency, this study decomposed the global Malmquist productivity index into two components: efficiency change and technical change. The results show that while there was a trend toward efficiency catch-up among the carriers, the number of airlines that demonstrated sufficient technical change declined significantly, indicating the need to implement technological innovation to deliver better financial outcomes. Regarding the airline’s stock return performance, airlines that achieved continuously superior performance in deploying financial resources also saw the lowest downside risk in their stock returns, reinforcing the importance of devoting more attention to indebtedness and the effectiveness with which financial resources are used. The findings of this study offer suggestions to airlines in managing their capital structure and enhancing their financial stability.

Highlights

The airline business is subject to many regulations due to its vital role in supporting a country’s economic development and national security
The objective of this study is to analyze the financial performance of airlines in the Asia-Pacific region in 2016–2019 using the global Malmquist productivity index and the conditional value-at-risk (CVaR) measure
This study investigated the financial performance of Asia-Pacific airlines in the 2016–2019 period, focusing on whether financial leverage was efficiently used

Summary

Introduction

The airline business is subject to many regulations due to its vital role in supporting a country’s economic development and national security. To promote sustainable growth in the industry, in 1978, the U.S enacted the Airline Deregulation Act, which relaxed restrictions in areas such as airfare setting, route and service designs, and the entry of new airlines. As more airlines entered air transportation markets, the competition in the industry intensified, promoting an increased level of consumer welfare through improved service quality, lower airfares, and expanded connectivity. The Asia-Pacific market has experienced the fastest growth in recent years due to the region’s efforts to further deregulate its air market, its booming middle-class population, and the rising average incomes in this region.

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