Z SCORE ANALYSIS

Aadarsh Thakur, Aashish Chhiller, Anant Chaudhary, Apoorv Gaur, Nikhil

Chilwant

Kingfisher vs US Airways

Contents
Kingfisher Airlines..............................................................................................................2
US Airways.........................................................................................................................3
Sequence of events........................................................................................................4
STATEMENTS......................................................................................................................5
Cash Flow Statement......................................................................................................5
Balance Sheet: Kingfisher...............................................................................................6
Profit-Loss Statement......................................................................................................7
Balance Sheet: US Airways.............................................................................................8
Cash Flow and Profit Loss Statement..............................................................................9
RATIOS AND ALTMANS SCORE.........................................................................................10
Altman Z-Score (1968)..................................................................................................10
RATIO A (WORKING CAPITAL /TOTAL ASSETS)...............................................................11
RATIO B (Retained Earnings/Total Assets).....................................................................11
RATIO C (Earnings Before Interest & Tax/Total Assets)..................................................11
RATIO D (Market Value of Equity/Total Liabilities).........................................................11
RATIO E (Sales/Total Assets)..........................................................................................12
CALCULATIONS.................................................................................................................12
Kingfisher Airlines Z-Score............................................................................................12
US Airways Z-Score.......................................................................................................13
REFERENCES....................................................................................................................14

Z SCORE ANALYSIS
Kingfisher Airlines
Founded in 2003 and having started commercial operations in May05,
Kingfisher Airlines was a major player in the Indian domestic aviation
industry by 2007. At one point of time, Vijay Mallyas Kingfisher Airlines had
the second largest share in the Indian domestic air travel market. However,
the airline had been facing a severe financial crisis during the 2007-09
period, due to a variety of reasons. In February 2013, the Indian government
announced the withdrawal of domestic, international flight entitlements
given to Kingfisher Airlines. In hindsight, the important reasons for its failure
were:

Acquisition of Air Deccan: It was a really bad decision, with Kingfisher

Airlines reporting losses up to $10 billion for 3 successive years,

severely affecting its financial stability.
Huge Debt: The company spent excessively on interests, with nearly

20% of its revenue being spent on it, compared to around 6.5% for Jet
Airways. This was clearly unsustainable.
Low Operational Efficiency: The Kingfisher fleet was large and varied,
made up of lots of different planes. Some were on lease and some had
been purchased. However, their maintenance, upkeep and flying
schedules were not efficient, leading to large operational costs. This
further aggravated their already pathetic situation.

US Airways
Founded in 1937 and known as the worlds largest airline after merging with
American Airlines, US Airways went through bankruptcy phase during 20022004. In August 2002, it filed for bankruptcy when it was 6th largest airline.
Airline industry was already under pressure as it lost $1.4 billion in Q2 of
2002 and $11 billion in 2001. Many small carriers filed bankruptcy while
many others were on their way. However, US Airways was the first one from
the larger players in the industry to do so. In hindsight, the important
reasons behind this were:

9/11 attack: US airways had business concentrated in East coast area.

After attack, airports were shut down leading to loss of revenue. US

airways reported loss of $2 billion that year. Effects continued till Q2 of
2002 when loss of $248 million was reported.
Inefficient operations: Organization was in need of strong

restructuring and reactions in costs with cuts in wages and staff. Huge
losses were reported from areas where they had small presence.
Inefficient routing was another factor contributing to this.
Failed merger: In 2000, UAL corp. was interested in buying US
Airways. Negotiations delayed due to objections due to labour unions,

customers and ant trust regulators. Finally, it had to withdraw from

offer and had to face losses due to stalled operation and penalty of $50
million.

Sequence of events
24th May
2000

UAL corp. offers deal for merger

27th July 2001 UAL withdrew purchase offer

11th
September
2001

Attack on World Trade Centre. Govt. orders to shut

down airports.

11th August
2002

Files for Chapter 11 bankruptcy

2003

Starts looking for financing and merger partners

13th
September
2004

2nd bankruptcy announced

Now, having familiarized ourselves with both the airlines and their prime
causes for failure, we will try and assess their financial vulnerabilities during
their times of crisis using the Altman-Z score. Our aim is to understand and
test Altman-Z score as an important financial and regulatory tool, by
applying them to famous bankruptcy cases and judging its performance.

STATEMENTS
Cash Flow Statement

Balance Sheet: Kingfisher

Profit-Loss Statement

Balance Sheet: US Airways

Cash Flow and Profit Loss Statement

RATIOS AND ALTMANS SCORE

Altman Z-Score (1968)
It is a credit-strength test that gauges a publicly traded manufacturing
company's likelihood of bankruptcy. It is based on five financial ratios that
can be calculated from data found on a company's annual report The Altman
Z-score is calculated as follows:

Z Score=1.2 A+ 1.4 B+ 3.3C +0.6 D+1.0 E

Where :
A=Working Capital/Total Assets
B=Retained Earnings/Total Assets
C=Earnings Before InterestTax /Total Assets
D=Market Value of Equity / Total Liabilities
E=Sales/Total Assets

Hence, required ratios are calculated for the companies Kingfisher Airlines
and US Airways. Comparisons for each ratio are found out and the results are
tabulated here. Here, year 1 and 2 for Kingfisher Airlines are 2010 and 2011
respectively, while that for US Airways are 2002 and 2003 respectively.

RATIO A (WORKING CAPITAL /TOTAL ASSETS)

Airlines

Year 1

Year 2

Kingfisher Airlines

0.19

0.06

US Airways

0.0671

0.0883

RATIO B (Retained Earnings/Total Assets)

Airlines

Year 1

Year 2

Kingfisher Airlines

-0.54

-0.46

US Airways

0.1786

0.1226

RATIO C (Earnings Before Interest & Tax/Total Assets)

Airlines

Year 1

Year 2

Kingfisher Airlines

0.03

0.083

US Airways

0.1492

0.0354

RATIO D (Market Value of Equity/Total Liabilities)

Airlines

Year 1

Year 2

Kingfisher Airlines

0.0896

0.02556

US Airways

0.0474

0.0851

RATIO E (Sales/Total Assets)

Airlines

Year 1

Year 2

Kingfisher Airlines

1.25

1.55

US Airways

1.423

1.39

CALCULATIONS
Kingfisher Airlines Z-Score
Z Score for year 2010=1.2 A +1.4 B+3.3 C+0.6 D+1.0 E=0.375
Z Score for year 2011=1.2 A+1.4 B+3.3 C+ 0.6 D+ 1.0 E=0.634
The score comprises of 5 ratios. As is clear from the low Z score values
(below 1.8) the company is doomed and is most likely to become bankrupt
within two years.
Ratio A, Working Capital to Total Assets ratio was very low in the years 2010
and 2011 because of there being more liabilities and less assets. As can be
seen the ratio decreased from 2010 to 2011. The ratio is a measure of the
efficiency in the matter of management of working capital and maintaining
good financial health.
Ratio B, which is the Retained Earnings to Total Assets ratio was also
negative for Kingfisher Airlines in both the years. This shows that there were
no retained earnings and instead there were retained losses. Higher this ratio
greater is the financial stability. Unfortunately for Kingfisher Airlines even this
ratio is abysmally small. This shows that the total assets were financed by
debt.
Ratio C, which is the EBIT to the TA ratio signifies the operational success or
the earning power. The ratio is very small and as can be seen the EBIT does
not increase as much while the total assets increases.

Ratio D, which is the Market Value of Equity to Total Liabilities ratio signifies
the proportion of the total fund to the debt. If debt is more, an obligation to
pay is created increasing the risk of the shareholders. Thus if the ratio is less
than 1 it would lead to enhanced risk in times of bad performance. As can be
seen the value is much less than one.
Ratio E, which is the Sales to the TA ratio signifies the ability of the asset to
generate sales. This value should be as high as possible. This value is fine
according to the ratios.

US Airways Z-Score
Z Score for year 2002=1.2 A +1.4 B+ 3.3C +0.6 D+1.0 E=2.27
Z Score for year 2003=1.2 A +1.4 B+3.3 C+0.6 D+1.0 E=1.82

Unlike the case for Kingfisher airlines, the scenario for US airways was very
different. High operating costs prompted the company to merge with another
airline to keep up. In 2000, US airways was planned to be acquired by United
Airlines; but this deal went sour because of antitrust regulations and fear of a
monopoly creation which forced the federal government to block the deal.
Both airlines lost money because of stalled negotiations. 9/11 was a disaster
which finally forced the airline into a Chapter 11 bankruptcy, which called for
financial reorganization, and wasnt an operation ceasing or assets
liquidating bankruptcy. So, there is not much to be predicted about this case
by a Z-score, since this was largely affected by outside factors (9/11, failed
acquisition plans) and was not as big a loss-generating company like
Kingfisher. And this is evident by Z-scores falling in the uncertain region in
2002, and then getting close to the bankruptcy level of 1.8 in 2003 which
suggest that the company was doing okay but was hit hard by the 9/11
attacks.
Looking at the ratios, we can see that ratio A and B are fine which means
that the overall financial health of the company was not all bad and was

stable enough. But ratio C takes a sudden fall in 2003 which means that the
earning power greatly reduced after its failed merger and terrorist attacks.
Ratio D is again less than 1 which indicates huge risk in times of bad
performance. As can be seen, the company could not face sudden external
unmitigatable events. Ratio E is again fine and in no way suggests that US
Airways is going down.

REFERENCES
1. http://theubgroup.com/PDF/Kingfisher_Annual_Report_2011_12.pdf
2. http://theubgroup.com/PDF/Fly%20Kingfisher/annual
%20report/Kingfisher_Annual_Report_2010_2011.pdf
3. http://en.wikipedia.org/wiki/US_Airways
4. http://en.wikipedia.org/wiki/Kingfisher_Airlines
5. http://en.wikipedia.org/wiki/Altman_Z-score
6. http://www.capitaline.com/user/framepage.asp?id=1
7. http://ijrcm.org.in/download.php?name=ijrcm-4-Ivol-2_issue-8_art18.pdf&path=uploaddata/ijrcm-4-Ivol-2_issue-8_art-18.pdf
8. Annual Report US Airways 2002
9. Annual Report US Airways 2003