Debt Policy and Financial Performance of Commercial Airline Companies in Kenya

Abstract

The air transportation sector is important for the development and economic progress of the country. It facilitates many segments of the economy such as tourism, manufacturing, horticulture and hotels. The airline industry contributes billions of shillings to the economy and provides employment to thousands of Kenyans. For example, in 2017 the airline industry in Kenya contributed Kshs. 300 billion to the economy. The airline sector supports 620,000 jobs directly and indirectly (International Air Transport Association (IATA), 2017).However, during the period 2013 -2019 the cumulative performance of the sector were losses of approximately Kshs. 30 billion. Researchers have attributed this poor performance to numerous factors key amongst them is the financing and financing costs. These challenges have led to the closure and/or collapse of a number of local airline companies. This research project investigated the effect of debt policy on the monetary performance of airline firms in Kenya. The main objective was achieved by using sub-objectives which were to establish the effect of debt limits, debt structuring, debt issuance, and debt risk management practices on the financial performance of commercial airline companies in Kenya. The study was anchored on the Modigliani and Miller Theory, Agency Cost Theory, and Pecking Order Theory. The descriptive research design was used to answer the research hypotheses. The target population for the study were all the forty-eight air line companies approved to operate in Kenya as at 31/12/2020 while the target respondents were the finance directors. Census sampling was used. The data was analysed using statistical packages for social sciences. The data analysis consisted of descriptive and inferential statistics. The results showed that the limits on debt had an inverse and insignificant effect statistically on the financial performance of commercial airline companies as deduced from a coefficient of -0.547 and critical level of 0.204. The study established that debt structuring had a positive and statistically insignificant effect on financial performance as suggested by the coefficient of 0.324 and significance level of 0.363. The study found that debt issuance and debt risk management policies had inverse and statistically significant effect on the financial performance of commercial airline companies in Kenya as implied by coefficients of -1.625 and -1.464 and p-values of 0.005 and 0.000 respectively. The study recommends that the management of the commercial airline firms review their debt policy so that it can be effective and yield positive effects on performance.