The Relationship Between Capital Structure and Profitability Amongst Airline Firms in Africa

Abstract

Airline firms in Africa have over the years exhibited difficulties in staying in operation and in over 700 firms that have been registered , only about 45 are currently active and in operation . Even amongst those in operation, achieving profitability is seemingly difficult and most of these firms are in debt and rely heavily on government subsidies or debt from private sector players, a key example being our flag carrier, Kenya Airways. Several factors come into play but key among them is the sources of financing used, inherent in the capital structure. The study looked at the uses and importance of leverage in influencing financial performance of these firms. The study adopted an ex-post facto design and used published financial reports to analyze levels of debt inherent in their capital structure. The study period was 2012 to 2016. Data obtained was analyzed using inferential statistics, regression and correlation analysis methodology. Leverage ratios were regressed against reported performance results. It was found that return on employed capital was improved when the firms applied leverage to a certain extent, and excessive use of leverage was found to be associated with negative equity and firm value in severe cases. Debt to capital employed was found to be statistically significant whereas interest cover ratio and debt to equity ratio were not as statistically significant. The regression model was found to be significant. The study recommends that there be industry standards on use of leverage for airline firms so that only a healthy range of leverage is employed. The major limitation to this study was availability of publicly accessible published financials. Airline firms, especially state owned did not publish annual financials and therefore only firms whose equity was majorly owned by common stock holders upheld the practice of publishing annual reports. The study recommends that future researchers study more of the performance measures and contrast them with leverage to strengthen the business case for regulated debt usage in the industry.