The impact of COVID-19 pandemic on air transport: the case of Virgin Australia airlines

Abstract This research study scrutinized the financial signs that were overlooked or were failed to be controlled by Virgin Australia from 2012 through 2019. Empirical research was done based on secondary data retrieved from the annual reports of the company. The annual reports of the company were analyzed in a multi-dimensional manner using financial analysis tools and instruments. The finds of this research demonstrate that it was not merely the Covid-19 pandemic, which pushed the world’s oldest airlines into bankruptcy but there existed numerous critical issues within the company. Virgin Australia’s financial statements revealed fifteen alarming indicators which were overlooked by the company. Right from operating revenue, operating expenses, profit margins, to current and liquid ratio all eleven indicators were hugely adverse since last eight years continuously. The outbreak of the Covid-19 pandemic forced lockdown across nations and the aviation industry was the worst hit amid the global turmoil. This proved fatal for Australia’s second-largest carrier which was already ailing from financial distress for the last several years and thus the company had to file bankruptcy.


Introduction
Air transportation provides 65.5 million jobs across the world, generates economic activities worth USD 2.7 trillion and air travel constitutes 35% of global trade by value (IATA, 2018).In 2019 approximately 4.5 billion people were carried across the globe by airline companies, connecting cities and businesses across the world (Air Transport Action Group, 2020).Thus, the global aviation industry plays a central role in the global economy.The Outbreak of COVID-19 pandemic (WHO, 2020) forced countries across the world to impose lockdowns, the travels were banned and the Australia had around 12,000 creditors, comprising banks, aircraft financiers, landlords and, 9,000 employees (The Guardian, 2020).The creditors of the grounded airlines had poured almost USD 2bn into high-risk debt issued by the company face steep losses (The Guardian, 2020).When this company filed for bankruptcy on April 21, 2020, it took everyone by surprise.
Thus, the current study is taken up an in-depth analysis of the performance of Virgin Australia from 2012 to 2019.The present study is expected to look for answers to the following research questions: Was Covid-19 the main reason behind the bankruptcy of Virgin Australia?Were there other reasons as well that led to the bankruptcy of Virgin Australia?If yes, what were the major causes of the bankruptcy of Virgin Australia?Did Virgin Australia have significant indicators of bankruptcy in the previous years or was there a recent development that led to bankruptcy?

Significance of the study
The basic aim of this study was to get a deep understanding of the failure of businesses and the core reasons which forced an organization to file bankruptcy.This study intends to investigate factors that lead to bankruptcy, and which need to be monitored very closely to project and avoid future risk.The prime aim of this study was to discover the financial indicators or signals that were overlooked or were left unchecked by Virgin Australia from 2012 through 2019.This will also give insights for strategy formulation and implementation for future security and to ensure survival and growth.The finding of the study will be extremely beneficial to all businesses and all the major stakeholders at large, who are directly impacted by the failure of the business.
Previous literature has presented non-financial as well financial factors that lead a company towards bankruptcy (Ropega, 2011).In this paper, we have mined all the financial data available in Virgin Australia from 2012 through 2019 and tried to investigate the indicators that were ignored by Virgin Australia, which eventually resulted in the company's financial distress and bankruptcy.Our finds will contribute to the existing literature in numerous ways and our results will be of extreme interest to all forms of business enterprises especially aviation companies, investors, market analysts, government, and the public at large.We have examined the large spectrum of financial indicators and their implication on Virgin Australia's future standing.This study offers proof to investors' info set on the events of this company from 2012 till 2019.
The design of this paper is as follows, introduction carrying research questions, implications of the study, review of the literature followed by research methodology.Then comes the finding of the study and discussion on the results, after which is conclusion and references.

Literature review
Financial distress is a situation in which the winding-up of the value of a company's assets is far less than the total claims of the creditor (Chen, Weston, & Altman, 1995).The word bankruptcy was coined from two Latin words 'bancusis' and 'ruptus', which meant a place of business that is unfortunate or shattered (Beraho, 2010).During the 16th century, bankruptcy was regarded as a criminal offense, but today bankruptcy is regarded as the basis of prevention and corporate re-structuring (Beraho, 2010).Jones and Hensher (2005) said that bankruptcy could perpetuate economic and social costs on the economy.Ward (2007) said bankruptcy is a legal event rather than an economic event.Bankruptcy occurs when a company's total liabilities exceed the value of its total assets (Altman & Hotchkiss, 2006); thus, the company's total net worth is negative and it leads to either re-organizing of the company under court's supervision or total selling out of the remaining assets (Altman & Hotchkiss, 2006).
There are numerous causes why a company may fail.One of the major reasons can be management failure, though there are many other contributing causes (Altman & Hotchkiss, 2006;Hofer et al., 2009).Altman and Hotchkiss listed reasons for the failure of the aviation sector: (a) the sector operates at very low margins and thus suffer the constant threat of failure (Hofer et al., 2009;Guzhva, 2008;Vasigh et al., 2008); (b) the deregulation of the aviation sector removed the protective cover of government guidelines and its artificial price control mechanism (Chung & Szenberg, 1996;Altman & Hotchkiss, 2006;Vasigh et al., 2008); (c) the next reason is overcapacity.During the 1990s, the rise in demand for air transport due to the growing economy resulted in aviation companies adding on to their existing capacities (Hellermann, 2006); however, events such as September 11, 2001, attack at world trade towers, and the economic downturn has forced aviation companies to reduce capacity (Hofer et al., 2009;Becker & Dill, 2007;Guzhva, 2008;Bisignani, 2006;Hellermann, 2006;Vasigh et al., 2008).Capacities though are difficult to alter as they must be adjusted in relatively large increments (Hellermann, 2006); (d) another prominent reason for the failure of aviation companies is because the companies are highly leveraged and have huge fixed and labor costs (Vasigh et al., 2008;Bisignani, 2006).According to Pourmansouri et al. (2022) high mortality rates and other complications generated by COVID-19 pandemic determined a severe decrease in labor supply, with a negative impact on production.
Laitinen & Gin Chong, 1999 found that incessant corrosion of sales revenue resulted in bankruptcy.This showed a lack of finance due to poor management.Walters (1957) stated one reason for bankruptcy is that company has no cash balances to meet its short-term obligations.Svirina (2010) and Giannopoulos & Sigbjornsen (2019) concluded that cash and cash equivalents are one of the strong factors that trigger bankruptcy.Dance and Made (2019), said that return on investments directly helps to measure overall profitability, and thus negative Return on Investments indicates that the company is financially distressed.Philosophov et al. (2006) stated that a very strong cause for companies to declare bankruptcy is their inability to pay off their debt on time.
Research on financial distress has resulted in the development of numerous models since the 1960s (McKee, 2007), but there is no consensus on which is the best method (Ribbink et al., 2009;Ward, 2007).Some models tend to work better in certain industries, and most of the models need to be adjusted to a specific industry (Kroeze, 2005).One financial bankruptcy model discoursed in literature is the Altman Z-score model developed by Altman in a dissertation in 1967 and published in the Journal of Finance in 1968.This ground-breaking work has been reformed over the last 40 years by Altman himself (Altman & Hotchkiss, 2006) and several others (Kroeze, 2005;Chung & Szenberg, 1996;Scaggs & Crawford, 1986;Ribbink et al., 2009) and tested on numerous companies.

Research methodology
An extensive study of research articles was explored from 2000 to 2021 on the four databases which included-Scopus, Web of Science, Google Scholar, and EBSCO.The keywords used for the search were: insolvency, financial distress, the bankruptcy of businesses, and insolvency in the aviation industry.The criteria used for inclusion were papers published in English; Papers published since 2000; on topics such as insolvency, financial distress, the bankruptcy of businesses, and insolvency in the aviation industry.The studies which were excluded included the following: non-English language papers; papers published before 2000; editorials; letters; and news articles.
The secondary data of Virgin Australia Financial Statements from the year 2012 to 2019 was analyzed.The prime aim of this research is to identify the alarming indicators from a financial view point that financially distressed companies can manage and control for restructuring the business beforehand filing for bankruptcy.The annual reports of Virgin Australia Airlines available on the company's official website where downloaded.Using the data available in the annual reports of Virgin We have also conducted the Ratio Analysis including profitability analysis, efficiency analysis, liquidity analysis, and solvency analysis of Virgin Australia from 2012 to 2019.After offering a thorough analysis of the company's financial statements, we identified the key financial indicators that trigger financial distress and that pushed Virgin Australia to file for bankruptcy.(2012,2013,2014,2015,2016,2017,2018,2019).
Insignificance freight revenue, exceeded Net Operating Expenditure in comparison with total revenue, negative movement of Net Income are majorly effected company and led to the bankruptcy.4).Negligibility of current and non-current asset, negative slope of retained earnings, and low trend of total equity are also led to the downfall of company.
Late 2014 downfall of Passenger Revenue, increase in the Airport charges, navigation, and station and Labour and staff-related expenses are also one of the factors led to the collapse of the company.

Discussion
It is apparent that from the above analysis of Virgin Australia that the company suffered from serious drop in its operating revenues, while the company's net operating expenses continuously went on rising hence the company's net income after taxes were in negative.It is also evident that that company's profitability ratios were negative, the company was not able to make efficient use of its assets and the company's liquidity ratio was extremely poor.3).It is thus evident that the company was unable to increase its operating revenue, especially freight revenue which was the main cause for the company's financial distress.This finding agrees with previous research by Laitinen and Gin Chong (1999) who found that continuous decline of sales revenue can lead to bankruptcy.Virgin Australia's net operating expenditure was USD 102.59,USD107.58,USD 101.13,USD 105.13,USD102.45,USD 100.96,USD 102.31,USD 100.96 and USD 102.32 in 2013 through 2019 when the company's total revenue was 100 that resulted in negative returns from 2013 through 2019 (Table 3).The company's navigation and station operations went on increased by 18%, 37%, 47%, 53%, 59% and 66% from 2014 through 2019 (Table 5, Figure 1).Also, it was noticed that the company's Labour and staff-related expenses increased by 16%, 24%, 33%, 38%, 45%, 48%, and 60% from 2013 through 2019 (Table 5, Figure 1).So the company had enough alarms which went unnoticed and it eventually left no choice for the company but to call it a day.While the warning sign from ratio analysis of Virgin Australia from 2012 to 2019 are as follows.Virgin Australia's Profit Margin Ratio was one of the prime reasons for bankruptcy.The company's profit margin ratio was 0.58%, À2.44%, À8.22%, À1.98%, À4.48%, À3.68%, À12.05%, À5.41% from 2012 through 2019 (Table 6, Figure 2).These were not only meager but also negative.This was in congruence with the findings of Dance and Made (2019), which said that negative financial returns indicate that the company will be facing bankruptcy.Virgin Australia's Return on Assets moved between 0.57%, À2.33% À7.77%, À1.79%, À3.80%, À3%, À10.42%, À4.98% from 2012 through 2019 (Table 6, Figure 2).The company's negligible and negative returns on assets were found to be one major reason for financial distress and this agreed with the findings of Dance and Made (2019), which said that negative financial returns indicate that the company will be facing bankruptcy.Virgin Australia's Return can be major cause for bankruptcy.The company's return on equity was 2.45%, À9.96%, À33.89%, À9.07%, À23.41%, À15.03%, À48.96%, À36.80% from 2012 through 2019 (Table 6, Figure 2).These finding resonated with the findings of Dance and Made (2019).Virgin Australia's Assets Turnover Ratio was another cause for financial distress.The company's Assets Turnover Ratio was 0.98 times, 0.95 times, 0.91 times, 0.85 times, 0.81 times, 0.86 times, 0.92 from 2012 through 2019 (Table 7, Figure 3).Norita (2016) said if the company is overcapitalized and failed to utilize its existing assets efficiently it would gradually result in bankruptcy.The same was found in the case of Virgin Australia.Virgin Australia's current ratio and quick ratios never touched the standard of 2:1 and 1:1 respectively.The company's current ratio was 0.65, 0.54, 0.64, 0.69, 0.62, 0.76, 0.78, 0.67 was 2012 through 2019 (Table 8, Figure 4).Virgin Australia's Quick Ratio was extremely poor from 2012 to 2019.The company's quick ratio was 0.64, 0.52, 0.62, 0.67, 0.60, 0.74, 0.76, 0.65 from 2012 through 2019.Sharma and Mahajan (1980) said that a company's lack of liquidity leads to bankruptcy.And the same was found in the case of Virgin Australia.Virgin Australia's Interest Coverage Ratio was 0.88, À1.59, À3.13, À0.53, À1.42, À0.66, À0.28, À0.71 from 2012 through 2019 (Table 9, Figure 5).One of the prime causes of bankruptcy is the inability to pay the debt and repay service debt on time (Philosophov et al., 2006).

Conclusion, limitations, and future research direction
Though it apparently seemed that Virgin Australia called off due to the Covid-19 pandemic, but the quantitative analysis done for the financial statements of the Virgin Australia discloses that the reality is that the company had been experiencing adverse conditions way back since 2012 and the pandemic only further aggravated the that resulted in untimely closure.The empirical research clearly reveals several crucial warning signals which should be the cause of concern for all the companies and which need to be monitored incessantly by top management of all companies to avoid financial distress and insolvency.Like in any other paper, this paper also has some limitations which are as follows this paper is a detailed case analysis of a single company, a comparative analysis with other similar companies would give an improved understanding of the crucial issues that need to be kept under regular check to avoid financial distress and insolvency.Inter sector, intra sector as well as inter-country analysis can also be very insightful for researchers.This paper has not made use of any statistical tools or analytics software in the current research however use of python and machine learning in predicting insolvency can be taken up by scholars in their research.

Analysis of the Consolidated Statement of Financial Position, Vertical Analysis of the Consolidated Statement of Comprehensive Income, Vertical Analysis of the Consolidated Statement of Financial Position, Trend Analysis of Crucial
Items in the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Financial Position.
Virgin Australia's Other Incomes dropped by 79.76% during 2013-2014 again dropped by 33.72% during 2015-2016, reduced by 83.04% during 2016-2017, and again dropped by 100% during 2017-2018 (Table 1).Virgin Australia's Net Income After Tax reduced by 530.26% during 2012-2013, dropped by 73.49% during 2014-2015, reduced by 17.31% during 2016-2017, and dropped by 51.72% during 2018-2019 (Table 1).The downfall of the Virgin Australia's Passenger Revenue, Freight Revenue, Loyalty Program Revenue, Net Income and Other Incomes are the major responsible factors for the downfall of the Virgin Australia.5.2.Horizontal analysis of consolidated statement of financial position of Virgin Australia from 2012-2019Horizontal Analysis of Consolidated Statement of Financial Position is a comparative analysis of items mentioned in the consolidated statement of financial position from financial year 2012 to 2019.The aim is to assess the increase and decrease in the value of each item in the previous financial year.Major observations:Source: Author Creation, Using Virgin Australia's Annual Reports

Table 2 .
Horizontal analysis of consolidated statement of financial position of Virgin Australia from 2012-2019.
Source: Author Creation, Using Virgin Australia's Annual Reports Virgin Australia's Other Non-Current Assets dropped by 15.03% during 2014-2015, reduced by 27.31% during 2015-2016, dropped by 24.87% during 2016-2017, reduced by 9.15% during 2017-2018 and dropped by 19.38% during 2018-2019 (Table 2).Virgin Australia's Reserves reduced by 33.90% during 2015-2016, dropped by 49.83% during 2016-2017, reduced by 56.17% during 2018-2019 (Table 2).Virgin Australia's Equity Attributable to the Owners of the Company dropped by 158.32% during 2015-2016, reduced by 30.38% during 2017-2018, dropped by 45.97% during 2018-2019 (Table 2).Virgin Australia's Total Equity was reduced by 2.60% during 2014-2015, dropped by 11.95% during 2015-2016, reduced by 30.42% during 2017-2018, and dropped by 44.48% during 2018-2019 (Table2).The Virgin Australia's Financial Current and non-current Assets downfall ear after year, reduction in the reserve, fall of equity, Property, Plant and Equipment dropped are the bad signs for the decline of the company.5.3.Vertical analysis of consolidated income statement of Virgin Australia from 2012-2019Vertical analysis of consolidated income statement helps in assessing the proportion of each item to the total income earned to be able to monitor and control those items.Here vertical analysis is done for consolidated income statement of Virgin Australia from financial year 2012 to 2019.Virgin Australia's Freight Revenue was huge insignificant.It amounted to 2 cents in total revenue of USD 100 during FYE 2012, 39 cents during FYE 2013, it improved from 2015-2017 when it became USD 15.88, 14.89 and 15.75 and 15.16 respectively in FYE 2014, FYE2015, FYE2016, and FYE 2017.But the company's Freight Revenue again drastically came down from 2017 to 2019 when it became USD1.94 during FYE 2018 and USD 2.16 during FYE 2019 (Table 3).Virgin Australia's Net Operating Expenditure exceeded its total revenue from 2013 onwards.The company's Net Operating Expenditure was USD 102.59 on the total revenue of USD 100 during FYE 2013, it was USD 107.58 during FYE 2014, USD 101.13 during FYE 2015, it was USD 105.13 during FYE 2016, it was USD 102.45 during FYE 2017, it was USD 100.96 during FYE 2018, it was USD 102.31 during FYE 2019 (Table 3).Virgin Australia's Net Income After Tax was consistently negative ever since FYE 2013.The company's Net Income After Tax was negligible at 58 cents in total revenue of USD 100 during FYE 2012.Thereafter it became negative, as the company incurred a loss of 2.44 USD during FYE 2013, loss of 8.22 USD during FYE 2014, loss of 1.98 USD during FYE 2015, loss of 4.48 USD during FYE 2016, loss of 3.68 USD during FYE 2017, loss of 12.05 USD during FYE 2018 and loss of 5.41 USD during FYE 2019 (Table 3).

Table 3 .
Vertical analysis of consolidated income statement of Virgin Australia from 2012 to 2019.

Table 4 .
Vertical analysis of consolidated statement of financial position of Virgin Australia from 2012 to 2019.

Table 5 .
Trend analysis of selected indicators of Virgin Australia from 2012 to 2019 FYE Jun 30, 2012, taken as Base Year.
Australia from 2012Australia from  -2019Profitability analysis helps to assess the net profits in relation to net sales, net assets and total equity.It helps companies to further optimize these returns in future years.Here profit margin ratio, return on assets and return on equity were calculated for Virgin Australia from financial year 2012 to 2019.

Table 6 .
Profitability analysis of Virgin Australia from 2012 to 2019.
Australia from the financial year 2012 to 2019.

Table 9 .
Solvency analysis of Virgin Australia from 2012 to 2019.