SKY’S THE LIMIT? ACCRUAL AND CASH-BASED DETERMINANTS OF U.S. AND EUROPEAN AIRLINE MARKET VALUATION

Abstract

ABSTRACT The airline industries in both the United States and Europe share many commonalities. Both industries are precariously exposed to a plethora of extraneous demand shocks such as terrorist attacks, global pandemics, and fuel price hikes, as well as more recent issues such as surging post-pandemic passenger demand exacerbated by dire staff shortages. Such risk determinants are juxtaposed against a need for robust liquidity and solvency positions to fund an array of short and long-term cash disbursements. Amidst such industry uncertainties, accurate valuation is imperative to viability, growth and sustainability. This study investigated and compared the accrual and cash-based effects of operating income, operating cash flows and firm size on the market value of publicly-traded U.S. and European airlines. We find a statistically significant relationship between these metrics and airline market valuation. This study is both warranted and timely as airlines face ongoing issues related to surging post-pandemic demand for air travel, extensive airline and airport chaos on both sides of the Atlantic related to staffing shortages and collective bargaining, and continuing uncertainty surrounding fuel prices and fluctuating pandemic numbers. Keywords Airlines, Market Valuation, Cash Flows, Operating Income, Firm Size