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The Effect of Macroeconomic Variables on Financial Performance of Aviation Industry in Kenya

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The Effect of Macroeconomic Variables on Financial Performance of Aviation Industry in Kenya THE EFFECT OF MACROECONOMIC VARIABLES ON FINANCIAL PERFORMANCE OF AVIATION INDUSTRY IN KENYA BY FRANCIS KUNG’U MWANGI D63/72683/2012 A RESEARCH PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF DEGREE OF MASTER OF SCIENCE IN FINANCE, UNIVERSITY OF NAIROBI OCTOBER, 2013 DECLARATION This research project report is my original work and has not been submitted for examination in any other University. Signature: …………………………………….. Date: ……………………... FRANCIS KUNG’U MWANGI D63/72683/2012 This research project has been submitted for examination with my approval as the University Supervisor. Signature: …………………………………….. Date: ……………………... MR CYRUS MWANGI IRAYA LECTURER DEPARTMENT OF FINANCE AND ACCOUNTING UNIVERSITY OF NAIROBI ii ACKNOWLEDGEMENTS I would like to extend my deepest gratitude to the Almighty God and our Lord Jesus Christ for giving me wisdom and courage to successfully complete this project. I owe profound gratitude to my supervisor Mr. Cyrus Mwangi Iraya, for his constructive comments, suggestions and encouragement that made the completion of this research project possible. I am grateful and may God bless you. I wish to express my heartfelt thanks to my wife and son for their sacrifices, support and tolerance throughout my studies. Finally, I wish to express my gratitude to all those who, in one way or another, contributed towards completion of this project especially my fellow colleagues at work and students. iii DEDICATION This project is dedicated to my wife Phyllis Muthoni, my son Allan Mwangi, my father Samuel Mwangi and to my mother Gladys Nyambura. iv ABSTRACT The purpose of this study was to determine the effects of macroeconomic variables on financial performance of aviation industry in Kenya. The financial performance measures of companies in aviation industry used was the Return on Assets (ROA) which was regressed against the macroeconomic variables including real exchange rate (USD/Ksh), GDP growth rate, the change in money supply (M3), average annual lending interest rates as computed by CBK and inflation rate measured by annual percentage changes in the consumer price index (CPI). The study used descriptive correlation research design. The population of this study comprised of 109 valid airline companies licensed to operate within Kenya as at June 2013, the Kenya Civil Aviation Authority, and the Kenya Airport Authority. The study employed annual secondary data which was obtained from the Central Bank of Kenya, Kenya National Bureau of Statistics and published annual financial statements from companies selected in the sample. The period of study was five years from 2008 to 2012.The companies which responded were 21 out of a sample of 32 thus the overall response rate was 65.63%.The data was analyzed using descriptive analysis, correlation analysis and multiple regression analysis using SPSS. The results revealed that return on assets of companies in aviation industry had weak positive insignificant correlation with gross domestic products growth rate (0.102) and annual change in money supply M3 (0.122). The study also found that ROA had weak negative insignificant correlation with exchange rate (-0.082), annual average lending rate (-0.041) and annual average inflation (-0.172). Further the study indicated that the macroeconomic variables influenced the ROA with an adjusted R2 of 0.019. This means that 1.9% of variation in the dependent variable in the regression model was due to independent variables while 98.1% are due to error term, chance or unexplained. The F- Statistics of 1.499 was significant at 0.208. The study recommends that Kenya Civil Aviation Authority being the regulator of the aviation industry to initiates policies measures that will control the exchange rate in Kenya in collaboration with CBK. Lower exchange rates would be more appropriate for companies in the aviation industry in Kenya to perform better. The study further recommends that there is need for the Kenya Civil Aviation Authority to initiate policies that will ensure lower inflation rate in the sector and create an aviation investment bank that will provide a low average lending interest rates to the sector. The study also recommends that there is need for the Government to control the broad money supply in Kenya as there is some evidence to suggest that higher money supply may lead to better performance of companies in the aviation industry in Kenya. The results however clearly indicate that there are other variables that affect the financial performance of aviation industry in Kenya this is due to the statistical insignificance between ROA and macroeconomic variables. The study therefore recommends the need for further studies on these variables, taking longer period into account. v TABLE OF CONTENTS DECLARATION................................................................................................................ ii ACKNOWLEDGEMENTS ............................................................................................. iii DEDICATION................................................................................................................... iv ABSTRACT ........................................................................................................................ v TABLE OF CONTENTS ................................................................................................. vi LIST OF TABLES ............................................................................................................ ix ABBREVIATIONS ............................................................................................................ x CHAPTER ONE: INTRODUCTION .............................................................................. 1 1.1 Background of the Study ......................................................................................... 1 1.1.1 Macroeconomic Variables ....................................................................................... 2 1.1.2 Financial Performance ............................................................................................. 7 1.1.3 Effects of Macroeconomic Variables on Financial Performance ............................ 9 1.1.4 Aviation Industry in Kenya .................................................................................... 11 1.2 Research Problem .................................................................................................. 15 1.3 Research Objective ................................................................................................ 17 1.4 Value of the Study ................................................................................................. 17 CHAPTER TWO: LITERATURE REVIEW ............................................................... 18 2.1 Introduction ............................................................................................................ 18 2.2 Theoretical Framework .......................................................................................... 18 2.2.1 The Portfolio Theory.............................................................................................. 18 2.2.2 Market-Power Hypotheses ..................................................................................... 19 2.2.3 Macroeconomist Hypothesis .................................................................................. 21 2.2.4 Structure-Conduct Performance Theory ................................................................ 22 vi 2.4 Summary of Literature Review .............................................................................. 29 CHAPTER THREE: RESEARCH METHODOLOGY .............................................. 31 3.1 Introduction ............................................................................................................ 31 3.2 Research Design..................................................................................................... 31 3.3 Population .............................................................................................................. 32 3.4 Sample and Sampling Method ............................................................................... 32 3.4 Data Collection Technique .................................................................................... 33 3.5 Data Analysis ......................................................................................................... 34 3.5.1 Analytical Model ................................................................................................... 34 CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSIONS ............... 36 4.1 Introduction ............................................................................................................ 36 4.2 Descriptive Analysis Results ................................................................................. 36 4.3 Correlation Analysis Results .................................................................................. 39 4.4 Regression Analysis Results .................................................................................. 41 4.4.1 ROA and Exchange Rate ....................................................................................... 42 4.4.2 ROA and Money Supply (M3) .............................................................................. 42 4.4.3 ROA and Annual Average Lending Interest Rate ................................................. 42 4.4.4 ROA and Annual Average Inflation .....................................................................
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