Relationship between Financial Structure and Financial Performance of Flag Carriers in Africa

Kristine Wambui Maina

doi:10.47191/afmj/v6i10.04

Abstract

While airline profitability has remained a challenge over several years, the weakest performance identified by IATA reports was from airlines in Africa and Latin America. The main objective of this study was to determine the effect of leverage, liquidity, and asset tangibility on firm profitability of flag carriers in Africa. Stratified random sampling technique adopted reduced the working population of 23 firms to 4 firms namely Kenya Airways, Ethiopian Airways, Air Mauritius and South African Airways. Data was collected from each airline’s website over a thirteen-year period between 2005–2017. The findings were that leverage had a significant effect that was either positive or negative depending on whether debt is financed by equity or by assets implying that airline managers should endeavour to target cost-efficient sources of capital. Liquidity and asset tangibility were observed to have no significant effect and had little to no explanatory power on financial performance in the selected African airlines. The study recommends implementing a collaborative effort using a tri-partite debt covenant between airline managers, lenders of capital and government. African governments and local lenders should step in to support their Flag carriers by reducing the gaps and costs associated with acquisition of debt and other sources of capital. Airline managers on their part should manage resources efficiently and be held accountable with periodic audits to ensure they are invested in sustainable levels of their airline’s profitability.

Highlights

An effective financial structure is said to depend upon the decision by any business organization to use an appropriate balance of debt and equity to finance its obligations
The study findings showed that highly levered firms had higher return on equity values than low leveraged firms
Descriptive research design will be used because the study sought to determine the causal relationship between financial structure and financial performance of the targeted firms (Dunlock, 1993)

Summary

Introduction

An effective financial structure is said to depend upon the decision by any business organization to use an appropriate balance of debt and equity to finance its obligations. Finance managers must evaluate how to efficiently, if at all, include shareholders’ capital, or debt from third parties in the organization’s financial structure. The gravity of this decision arises from the fact that there is a cost of capital and risk associated with each option that is acute to the long-run profitability of the company (Abeywardhana, 2017). The study findings revealed that the extent of indebtedness in an airline’s financial structure had an inverse relationship with its profitability depending on the fleet, firm size, and intangible assets. Another study which targeted 29 listed airports in 20 countries for a 29-year period between 1989 and 2017 established that total and long-term debt have an inverse relationship with return on assets but positively correlated with return on equity (Özcan, 2019)

Objectives

Methods

Results