Financial Structure and Financial Performance of Domestic Commercial Airlines in Kenya

Abstract

In Kenya, the air transport industry is estimated to have contributed about $1.9 billion to Kenya’s GDP. As much as there is fluctuating growth in domestic commercial airlines, the profitability of the airlines has been on the decline as it recorded a net loss of $80 million in 2018 compared to $ 71 million in 2017, leasing cost increased to $160 million in 2018 up from $141 million in 2017 and $133 million in 2016, debt financing hit a record high of $230 million in 2018 while retained earnings declined in the same period. Evidence elsewhere has linked financial structure to financial performance. However, there is little or no empirical evidence to establish such a relationship in the context of domestic airlines in Kenya. This formed the basis for this study. The general objective of the study was to assess the effect of financial structure on financial performance of domestic commercial airlines in Kenya. The specific objectives were to examine the effect of lease financing, share financing, debt financing and retained earnings on financial performance of domestic commercial airlines in Kenya. This was a quantitative study which adopted an explanatory research design. Data was analysed using Panel Data Regression analysis. Lease financing had a p-value of (p=0.425>0.05) and (p=0.377>0.05) indicating that it had an insignificant effect on the financial performance of domestic commercial airlines in Kenya thus the null hypothesis was accepted. However, share financing had a p-value of (p=0.027<0.05) and (p=0.005<0.05) indicating that it had significant effect on the financial performance of domestic commercial airlines in Kenya thus the null hypothesis was rejected. Also, debt financing had a p-value of (p=0.042<0.05) and (p=0.035<0.001) indicating that it had significant effect on the financial performance of domestic commercial airlines in Kenya thus the null hypothesis was rejected. Retained earnings had a p-value of (p=0.000<0.05) and (p=0.000<0.05) indicating that it had significant effect on the financial performance of domestic commercial airlines in Kenya thus the null hypothesis was rejected. The study found that lease financing, share financing, debt financing and retained earnings explained 86.6% and 65.9% of the variance in Net profit margin and ROA respectively of domestic commercial airlines. The study recommends that since the retained earnings affects financial performance, the management of domestic commercial airlines in Kenya should adopt more use of retained earnings. The benefit of using retained earnings is that it is readily available and reduces additional expenses related to issuance of equity thus improving on net profit margin and Return on Assets of the airlines.