Indebtedness and bankruptcy costs in the airline industry

Abstract

Indebtedness and bankruptcy cost are fundamental concerns in corporate capital structure decision-making processes. This paper discusses which economic forces are most important to capital structure choices in the airline industry. The study uses multiple regression analysis models with selected capital structure variables to test trade-off theory postulates as they relate to the airline industry. The results do not appear to indicate any strong relations among the variables predicted by this theory of capital structure. Airlines are a capital-intensive, public-utility service industry demanding high-quality human resources and using high-technology equipment. These characteristics and the industry's market imperfections may be the reasons for this lack of fit with the theory. The results suggest that shareholders should invest more capital in the business and that large airlines have performance problems and should be split up into divisions, each addressing specific markets. These findings are at odds with trends towards consolidation seen in the airline industry.