Financial structure and performance of commercial airlines in Kenya

Abstract

In Kenya, the air transport industry is estimated to have contributed about $1.9 billion to Kenya’s GDP. The domestic commercial airlines performance has been inconsistent over the years. 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 kshs 8 billion in 2018 compared to kshs 7.1 billion in 2017, leasing cost increased to Kshs. 16 billion in 2018 up from kshs. 14.1 billion in 2017 and kshs 13.3 billion in 2016, debt financing hit a record high of kshs 23 billion in 2018 while retained earnings declined in the same period. This is in contrast to the airlines in Europe and America which experienced increased profitability and reduced financial cost during the same period. Evidence elsewhere has linked financial structure to 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 performance of domestic commercial airlines in Kenya. This was a quantitative study which adopted an explanatory research design. The sample was 11 domestic commercial airlines in Kenya firms listed at the African Airlines Association (AFRAA) which were actively registered over the years, 2012 to 2019. 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 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 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 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 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 concluded that lease financing does not have a significant effect on performance of domestic commercial airlines in Kenya. The domestic commercial airlines in Kenya use lease agreements to acquire more aircrafts so as to avoid technological obsolescence, gain tax benefits and conserve its capital but it has become too costly that it hampers on performance. Further, the study concluded share financing is used by the domestic commercial airlines in Kenya so as to gain more capital and avoid debts thus improving on its financial performance. The study recommends the management of domestic commercial airlines in Kenya to adopt the use of lease finances, share financing, debt finance and retained earnings. The management should acquire aircrafts through lease finances so as to protect the airlines from technological obsolesce. They should also use the debt finances for investments only and not for the recurrent expenses so that they don’t sink into more debts.