CASH FLOWS AND OPERATING LOSS IN A PARASTATAL – A STUDY OF AIR NAMIBIA FOR THE PERIOD FROM 01 APRIL 2006 TO 31 MARCH 2011 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN ACCOUNTING AND FINANCE OF THE UNIVERSITY OF NAMIBIA BY JEREMIA TILENI HISHITONGO STUDENT NUMBER 200106635 NOVEMBER 2013 SUPERVISOR: PROF. K. R. SHARMA ABSTRACT The purpose of this study was to study the cash flows and operating loss in a parastatal – Air Namibia (Pty) Ltd for the period 01 April 2006 to 31 March 2011. This problem was chosen by the researcher to investigate the root causes of operational loss and cash flow problem faced by the parastatal. The study revealed that the Air Namibia (Pty) Ltd had been incurring losses for all financial years starting from 01 April 2006 to 31 March 2011. The airline’s direct operating expenses exceeded the sales revenues prohibiting the airline to breakeven. The airline needed funds to finance its operations and to be able to remain afloat. If it was not the government bailout, the national airline would have been closed and liquidated. The airline experienced going concern problem, because its liabilities exceeded the assets. Air Namibia (Pty) Ltd was the worst performing airline and was the only airline that made operational losses throughout the study period. Air Namibia (Pty) Ltd is 100 per cent owned by the government, contrasting Kenya Airways, for example, which is privately owned. The operational decisions taken by Kenya Airways are more of profit oriented, while the ones for Air Namibia (Pty) Ltd are more of social oriented and i politically influenced. Kenya Airways only flies to routes which are profitable and eliminated those routes which were not profitable, while Air Namibia (Pty) Ltd would fly routes depending on the social needs irrespective whether it is profitable or not. The researcher concluded that if the management and the shareholder, which is the government, do not come up with a strategic plan that will turn around the airline operations in order to move from loss making to profitable one, the airline might continue to struggle and incur huge losses and require government bailouts in foreseeable future. ii TABLE OF CONTENTS HEADINGS PAGE Abstract………………………………………..................................................... i-ii Table of contents………...……………………………….................................... iii-viii List of Tables......................................................................................................... ix-xi List of figures........................................................................................................ xii Acknowledgements………………………………………… ............................... xiii Dedication ……………………………………………….................................... xiv Declaration..……………………………………………….................................. xv CHAPTER ONE…………………………………………................................. 1-21 1.1 Background……………........................................................................... 1-16 1.2 Statement of the Problem…………………………................................... 16-18 1.3 Objectives of the Study……………………………................................. 18 1.4 Hypotheses of the study……………………………................................ 18 1.5 Significance of the study...……………………….................................... 18-20 1.6 Limitations of the study……………………………................................. 20 1.7 Conclusion................................................................................................. 21 CHAPTER TWO ...................................………............................................ 22-64 2.1 Introduction...…………………………………........................................ 22 2.2 Literature Review...................................................................................... 22-61 iii a) Role and functions of parastatals............................................................... 24-29 b) Parastatals in aviation................................................................................ 30-32 c) Air Namibia (Pty) Ltd an aviation parastatal............................................ 32-36 d) Corporate governance in parastatals.......................................................... 36-38 e) Performance of parastatals......................................................................... 38-39 f) Privatisation of parastatals......................................................................... 39-43 g) Factors impacting performance of airlines................................................. 43-55 h) Factors impacting performance of Air Namibia (Pty) Ltd........................ 55-56 i) Airlines bailout.......................................................................................... 56-57 j) Profitability of airlines............................................................................... 57-60 k) Cash flows of airlines................................................................................. 60-61 2.3 Gap in existing research............................................................................. 61 2.4 Conclusion................................................................................................. 62-64 CHAPTER THREE RESEARCH METHODOLOGY.................................. 65-78 3.1 Introduction.................…………………………..................................... 65-67 3.2 Research Design……………………………………............................... 67-70 3.3 Population .......................……………………......................................... 70-71 3.4 Sample...................................................................................................... 71-73 3.5 Research instruments………………………………................................ 73 3.6 Procedure.................................................................................................. 74 3.7 Data analysis and Interpretation............................................................... 74-75 iv 3.8 Validity and Reliability............................................................................. 75-76 3.9 Research Ethics......................................................................................... 76-77 3.10 Conclusion................................................................................................ 78 CHAPTER FOUR ANALYSIS AND DISCUSSION......................... 79-181 4.1 Introduction............................................................................................... 79-82 4.2 Data Analysis.............………………………............................................ 82-83 4.3 Ratio Analysis............................................................................................. 83-84 4.4 Profitability Analysis………………………….......................................... 84-119 4.4.1 Earnings before Interest, Tax, Depreciation and Amortization...... 85-87 4.4.2 Earnings before Interest and Tax.................................................... 87-89 4.4.3 Earnings before Tax..........................……...................................... 89-90 4.4.4 Earnings after Tax........................................................................... 91-92 4.4.5 Other Comprehensive Income......................................................... 92-94 4.4.6 Gross Profit (Loss) Margin.............................................................. 95-96 4.4.7 Operating Profit Margin.................................................................. 97-98 4.4.8 Return to Total Assets.................................................................... 98-100 4.4.9 Other Comprehensive Income to Earnings before Interest & Tax 100-101 4.4.10 Income from Investments to Investments...................................... 101-103 4.4.11 Net Profit (Loss) Margin................................................................ 103-105 4.4.12 DuPont Model.......................................................................... ..... 106-112 v 4.4.13 Internal Benchmark Analysis of Income Statement Items of Air Namibia (Pty) Ltd................................................................ 113-116 4.4.14 External Benchmark Analysis..................................................... 116-119 4.5 Relating Profitability with Efficiency.................................................... 119-135 4.5.1 Total Assets Turnover................................................................. 119-121 4.5.2 Inventory Turnover..................................................................... 121-122 4.5.3 Receivables Turnover.................................................................. 123-125 4.5.4 Payables Turnover...................................................................... 125-127 4.5.5 Earnings per Passenger Travelled.............................................. 128-129 4.5.6 Earnings per Kilometer Travelled............................................... 129-130 4.5.7 Earnings per Passenger per Kilometer Travelled........................ 131 4.5.8 Average Passengers Travelled to Capacity................................. 132-135 4.6 Relating Cost Factors with Profitability.................................................. 135-148 4.6.1 Operating Ratio........................................................................... 135-136 4.6.2 Interest to Earnings Ratio............................................................ 136-138 4.6.3 Tax to Earnings Ratio................................................................. 138-139 4.6.4 Ground Staff Costs to Operating Cost Ratio............................... 139-140 4.6.5