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

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