DALLAS TheStreet) -- Bankruptcy has reshaped the airline business so dramatically that today, despite historically high fuel prices and a slowing economy, only AMR Corp. ( AMR - Get Report), the parent company of American Airlines, is viewed as a potential bankruptcy candidate. Still, it is not at all clear that American will seek bankruptcy protection. In fact, American is the only major network carrier that has never filed, its CEO is morally opposed to the concept and it's easy to make the case that
American is addressing its financial problems.
However, applying the Altman Z-Score, a formula developed by New York University professor Edward Altman in 1968, puts American at the top of the list of potenital industry bankruptcy candidates. In fact, according to the Altman Z-Score formula, each of the nine largest U.S. airlines remains a bankruptcy candidate, despite all the improvements in the industry. The Altman Z-Score measures several aspects of a company's financial health to forecast the probability of it going bankrupt. Since its inception, the formula has been 72% accurate in predicting corporate bankruptcies two years prior to the filing. On a general basis, companies with a Z-Score higher than 3 are considered safe, while those with a score of 1.8 or lower are considered distressed. Anything in between is a gray area. Using Edgar Online's I-Metrix, TheStreet found that all nine of the largest U.S. airlines have a score below 3, and four of the nine are residing in the danger zone, with a score lower than 1. The Z-score compiles four or five common business ratios, weighted by coefficients, which were selected by identifying companies that previously sought Chapter 7 bankruptcy protection. The ratios include working capital/total assets; retained earnings/total assets; earnings before interest and taxes/total assets; market value/book value of total liabilities and sales/total assets. While the formula isn't the only indicator of the financial health -- and is by no means a guaranteed barometer of a company's bankruptcy risk -- it may be a metric worth considering for those airlines that fall below the safety zone. Those whose Z-Score is declining year-over-year may also raise a red flag.
It's always interesting to speculate on the possibility of bankruptcies in the airline business. In the past decade, the speculation proved accurate as four major carriers filed. Today, though, the combination of restructuring, reduced capacity and the implementation of fees, which have added billions of dollars in new annual revenue, has transformed U.S. airlines from a basket case of an industry into one that seems capable of profitably surviving an economic slowdown, even in the face of historically high fuel prices. At a recent investor conference, Delta ( DAL - Get Report) President Ed Bastian declared that
the airline industry has remade itself. "We believe that we truly are in remarkable times in the airline industry from both a financial and investment perspective," Bastian said. "Usually, when someone tells you that this time is different, it's a good time to hold your wallet," Bastian added. "But we really believe that this time is different." Taking this into account, here are the nine largest airlines and their Z-scores, based on performance for the trailing twelve months, as compiled by I-Metrix, from the least risky to the most risky.