In the last 50 years, financial crisis forecasting has become a subject that is attracting more attention from researchers across the world. It is a reliable method to detect the risk of financial distress and is of major significance to managers, policymakers and investors. It has been extensively used in both industrial and academic areas (Tang and Co., 2020). Financial distress can be expensive. In the event of a bankruptcy filing, It has been calculated that the cost of financial distress can vary between 9.5 percent to 16.5 percent of the firm’s value. If you account for a further 28% loss in value, only 56% of the firm’s value is left to those who claim (Branch 2002). Financial distress can lead to the company incurring indirect costs like an erosion of relationships with stakeholders, and putting them in a disadvantage when competing in the market (Opler and Titman 1994; Beijer and Palsson 2021). In the event of receiving alerts from a forecasting of financial distress strategy, managers and executives can take preventive measures to limit the risk of losses (Kou and colleagues. 2021a).

The prediction of financial distress is crucial during times of stress like the ongoing coronavirus (COVID-19) pandemic (Kou and co. 2021b). Due to the vulnerability of air transport to external forces that affect air transportation, the industry was severely affected and has suffered huge loss (Agrawal 2020, Pongpirul et. al. 2020; Bock et al. 2020; Carrillo-Hidalgo et al. 2023). Based on the International Air Transport Association (IATA) report, the sector suffered net losses of $118 billion for 2020 as revenue passenger kilometers decreased by 66.3 percent in comparison to 2020 (IATA 2020). From the time of the pandemic, until October of 2020, more than 40 airlines declared the bankruptcy process (Abigail 2020) and more airlines are struggling to stay afloat.

Corporate responsibility and corporate sustainability are two terms that are frequently employed to describe sustainability in the business world. Corporate responsibility encompasses social, economic, environmental, and economic dimensions. It is a part of sustainability in the corporate world. Since the 2009 Global Financial Crisis, it has been proven that governance is a systemic issue and has been included in corporate accountability, which led to the development of a concept called ESG (Beijer as well as Palsson in 2021). In recent times, ESG disclosure has become increasingly crucial for institutional investors in making investments. In the industry of airlines, sustainability can be a valuable decision-making point for airlines as well as airports (Stevenson and Martinseva 2019) because it provides users with a transparent and transparent assessment. There are four notable areas for disclosure to the airline industry’s shareholders–greenhouse gas emissions, labor practices, competitive behavior, and accident and safety management. It is becoming more important to have sustainable disclosure by airlines, and requiring them to enhance their environmental and social reputation (Yowell 2021).

Certain scholars have suggested that firms with a greater degree of sustainability are more likely to be more resilient, have a lower downside chance, be more secure, and have a greater capacity to rebound during times of turmoil (Broadstock and Co. 2021; Hoepner et al. 2019; Hussain et al. 2021). It is suggested that efficient corporate governance management could help to minimize or even stop the most damaging elements of crises (Ferrero-Ferrero and co. 2013). A good corporate governance system includes high management participation, market influence, and boards that are independent, leading to more transparent decision-making processes. A company that is well-run is likely to have lower risks of failure by avoiding negative shocks, lower capital costs and a lower risk of default (Wang and co. 2015). Evidence suggests that in the years period of 2008 to 2009 during the Global Financial Crisis, firms located in the U.S. that had higher ESG scores had better performances in the financial markets than similar companies (Lins and others. 2017; Cornett et al. 2016). It is believed that a win-win scenario is possible by a company that engages in sustainable actions because it will improve its market position as well as earn higher long-term profits (Beijer as well as Palsson 2021). Corporate sustainability initiatives can boost the competitiveness of a company through the creation of opportunities to increase profits and increase the distinctiveness of a business against its rivals (Miles and Covin, 2000). Therefore, companies that have sustainable practices are more likely to thrive when faced with adversity (Mecaj as well as Bravo 2014). Airlines face challenges with sustainability due to their environmental impacts, which, in turn, leads to higher levels of carbon dioxide emissions. indicate more tail risks (Ilhan and others. 2020). To be prepared to be competitive in the coming years It is essential to incorporate a long-term strategy into the business plan of businesses to include sustainability-based initiatives (Karaman and Akman 2018; Song et al. 2018; Kou et al. 2022).

While research has explored the connection between the sustainability of corporates and the performance of firms in varying depth, there is no consensus that was reached. Therefore, scientists are encouraged to continue to study this connection. Only a few studies have been conducted (Al-Hadi and colleagues. 2017; Harymawan et al., 2021 Beijer and Palsson, 2021; Kaur, 2021) have studied the relationship between sustainability and financial distress. This is especially relevant for the aviation industry, which is why we add to this literature by offering new insights into the connection between sustainability and financial stress in this sector. Certain authors have suggested that a lack of positive approach to sustainability can lead to negative consequences, like losing reputation as well as media and political pressure and penalties, possible fines or even a boycott of customers (Al-Hadi and others. 2017). The likelihood of financial crisis could be reduced by implementing positive corporate sustainability initiatives (Al-Hadi and co. 2017; Cooper and Uzun 2018; Chollet and Sandwidi 2018).

The business of passenger airlines has been severely affected by the COVID-19 virus. According to a report issued by IATA for 2021, the international market for passenger travel is down from the levels in 2019 because of restrictions on travel for 2021. Asia-Pacific stands out for maintaining the highest international travel stringency and has the weakest industry-wide revenue (passenger/kilometers) compared with the rest of the world (IATA 2021). This causes a great deal of anxiety regarding this aspect of the Asia-Pacific airline industry. In order to understand the impact on ESG performances on financial condition that airlines face, we seek to answer 2 research inquiries: “What is the impact of an ESG score on the likelihood of financial distress in the airline industry?” and “In this relationship, is there any moderating role of being an APAC airline?” The aim of this study is twofold. In the first place, using Altman’s method in order to study the impact on ESG ratings on disclosures and the risk of financial distress for airlines. In addition, we want to investigate the role of moderating that APAC airline companies in the relation between financial distress and sustainability threat, which has been new in the field of research. To accomplish both of these goals, we contribute to the literature by providing evidence-based proof of the impact of ESG on financial distress in the industry. In addition, to our best knowledge, it was the only study that considers APAC as a moderator in relation to ESG and financial distress in the aviation industry.

The remainder of the paper is organized according to the following. The first ” Literature review and hypothesis development” section provides a review of relevant literature, while research-based hypotheses are discussed. The method is described in the ” Methodology” section, which includes sample data, the variables that were used as well as an outline of the model proposed. ” Empirical results and discussions” section gives results from the empirical analysis and discussions. The section ” Conclusions and implications” and ” Limitations and future research” discuss the findings, implications, and limitations.

A literature review, and hypothesis formulation

Financial crisis in the industry of airline

A few study define financial stress as the situation which a company is in when it has no liquidity and is able to meet its financial obligations without difficulty (Lee and co. 2011; Wu et al. 2008; Baldwin and Mason 1983; Mahtani and Garg 2018). The first signs of a firm that is financially distressed are the violation of debt covenants and diminished or zero dividends (Almeida and Philippon 2007). Financial distress and, eventually bankruptcy are extremely detrimental to the stakeholders (e.g., the suppliers, customers, debtors, and employees). Thus, it is crucial for companies to anticipate and avoid financial trouble (Kou and co. 2014).

A lot of literature has utilized the Altman Z-score as a measure of the risk of financial distress in analyzing the connection between a company’s financial risk and its sustainability (Kristanti and Herwany, 2017; Kaur 2021; Beijer and Palsson 2021; Harymawan and al. 2021; Al-Hadi et al. 2017; Boubaker et al. 2020 Cooper Uzun and Uzun 2019, Chan as well. 2017). The Z-score was first introduced in the work of Altman in 1968 to help predict the probability of a bankruptcy (Altman 1968). It was a revolutionary model that utilizes a multivariate discriminant (MDA) method. In addition, the original model was said to be able to forecast the bankruptcy of 95% of publicly traded manufacturing firms a year prior to their failure. Then, Altman presented a Z-score model that replaced market value with equity book value to ensure that the model is suitable for privately traded firms. Altman also presented an altered model of the Z’-score model called Z”-score. In it, he removed the ratio between total assets and sales and claimed that the model can be utilized to predict bankruptcy for firms operating in the service sector. The model was applied to 31 European businesses and three companies from outside Europe, and the model demonstrated excellent performance in a global context (Altman and others. 2017).