This study was undertaken with the sole intention and purpose of establishing whether there is a significant relationship between levels of profitability and four main components of the financial structure of domestic commercial airlines in Kenya. The researcher undertook to establish how share capital finance, lease finance, debt finance and retained earnings related with the profit levels of domestic commercial airlines in Kenya, measure the strength and magnitude of the variables’ relationships while establishing if the relationships are significant and negative/positive. Three theories founded the basis of literature review in this study, i.e. agency theory, the pecking order financing model and the trade-off theory of capital structure. The study adopted a causal-effect research design. The study targeted eleven commercial domestic airline companies registered by AFRAA’s approval that were in operations between 2012 and 2021. Annual average secondary data was collected using a secondary data collection sheet, and the data covered a period from 2012 to 2021. This study used numerical financial data that was retrieved from respective airlines’ annual and audited financial statements posted on their respective airlines’ websites. The data was obtained from the airlines’ audited annual financial statements from respective company’s website. Both inferential and descriptive statistics were used. Data were analyzed using STATA version 15 alongside Microsoft Excel. Various diagnostics tests including normality, multi-collinearity, heteroscedasticity, serial correlation, stationarity and Hausman tests were performed prior to running the regression analysis. Analysis of the collected data showed that there was a positive correlation between share capital finance and net profit margin, (r = 0.4226; P< 0.05), positive correlation between lease finance and profitability (r = 0.4520; P< 0.05), debt finance and net profit margin were positively correlated (r = 0.5231; P< 0.05), and lastly, retained earnings and net profit margin were positively correlated (r = 0.4905; P< 0.05). Data analysis by use of simple linear regression analysis found that there was a significant relationship between share capital finance and profitability (β = 0.3778; P< 0.05), the relationship between lease finance and profitability was significant, (β = 0.4066; P< 0.05), the relationship between debt finance and profitability was significant, (β = 0.3758; P< 0.05), and lastly, the relationship between retained earnings and profitability was also significant, (β = 0.4458; P< 0.05). When study applied multiple linear regression analysis method, results indicated a significant relationship between share capital finance (β = 0.402; P< 0.05), lease finance (β = 0.737; P< 0.05), debt finance (β = 0.904; P< 0.05), and retained earnings (β = 0.244; P< 0.05) with the Net Profit Margin, i.e. profitability of domestic commercial airlines in Kenya. This research concluded that at bivariate level, retained earnings was the most significant variable among the four variables under study. However, at multivariate level, debt finance was the most significant variable among the four variables under study followed by lease finance, share capital finance and lastly retained earnings. This study recommended a greater need for efficient and effective policies which a firm can use and apply to determine and monitor its financial structure. The study further recommended to the domestic commercial airlines in Kenya to have a good and performing financial management team that will make the correct decisions about financing mix and the resultant relevant policies, while matching various sources of funds to the goals and objectives of the firms. Further, in order to reduce the risks and costs associated to debt finance, local airline companies should make more use of shareholders’ sources of funds as the preferred option of financing, compared to borrowing. However, if it becomes mandatory for the firms to borrow, commercial airlines must first borrow in short term rather than long term.

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Statistics for Effects of Financial Profitability on Profitability of Domestic Commercial Airlines in Kenya

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