Exploring the impact of working capital in the U.S. aviation industry for profitability and shareholder value

Abstract

This study examines how working capital impacts profitability, shareholder value, and the relationship between COVID-19 and airline size for the top ten U.S. commercial airlines from 2010 to 2021. Working capital is the short-financing indicator crucial for airline management facing economic uncertainty. This research applied dynamic panel data regression using the Hausmann-Taylor panel regression and the general method of moments to avoid heteroskedasticity, endogeneity, and unbiasedness. The cash conversion cycle, the current ratio, the quick ratio, and working capital are explanatory variables. Revenue growth rates, earnings-per-share, and return-on-assets are the explained variables for profitability and shareholder values. The authors find that the previous year's activities, days in inventory (DII), days-sales-outstanding (DSO), and COVID-19 as dummy variables impact profitability and shareholder value. The DII, DSO, and days-payable-outstanding of the large airline companies are more prominent than those of small airlines. The value of this study is that it is the first to explore working capital and its impact on profitability and shareholder with its determinants in the airline service industry, including the pandemic period.