Effect Of Financial Structure On Financial Performance Of Local Airlines In Kenya

Abstract

The GDP contribution of the local airlines in Kenya has varied over time, with a 0.8% contribution in 2022, 0.6% contribution in 2021, 0.4% contribution in 2020, 0.3% contribution in 2019, and 2018 a 0.5% contribution (KNBS, 2022). In addition, the local airlines growth has been erratic, declining by 0.3% in 2022, 1.1% and 1.4% in 2021 and 2020, respectively. Even though the local airlines' growth in Kenya is erratic, their profitability has been declining as evidenced by the fact that the reported net loss was Kshs 9 billion in 2022 compared to Kshs 8.1 billion in 2021 and high debt financing of Kshs 24 billion. The main objective of this study was to determine the effect of financial structure on financial performance of local airlines operating in Kenya. The specific objectives that guided this study were to establish the overall effect of short-term debt, to determine the effect of long-term debt, to investigate the effect of retained earnings, to analyse the effect of equity capital and investigating the moderating effect of the firm size on the relationship between financial structure of the firm and its financial performance of local airlines operating in Kenya. This study was anchored on trade-off theory, capital structure irrelevant theory, pecking order theory, Modigliani and Miller theory, and resource based theory. The study adopted correlational research design that was based on a target population of twelve local airlines that operate in Kenya. The secondary data for this study was collected through the help of secondary data collection sheet from the published accounts of the local airlines in Kenya or from their websites. Data was descriptively and inferentially analysed using STATA version 16. It is evident from the result that there is a significant effect caused by the short term debt on the financial performance of the local airlines operating in Kenya (β =0.222, p=0.035<.05); While there is a negative significant effect when the airlines uses the long term debt to finance their operations (β =-0.390, p=0.001˂0.05) on financial performance; there is a positive significant effect when the firm uses their retained earnings as a means of funding their operations on its financial performance (β =0.482, p=0.000<.05) of the local airlines; on the other hand, there is a negative significant effect on the financial performance when the airlines are funded by their share capital (β =0-.578, p=0.044˂.05) on financial performance of the local airlines holding all other factors constant; the firm size is also a significant moderator of the relationship that exists between financial structure of the local airlines and their financial performance.