Airline Industry Performance Analysis

This assignment delves into the performance of airlines, analyzing their financial health, operational efficiency, and how they respond to market trends. It requires research on various companies within the industry, utilizing metrics like profitability, passenger load factor, and cost per available seat mile. The analysis culminates in a report that evaluates the strengths and weaknesses of different airline business models.

Running head: THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL
PERFORMANCE OF AIRLINES
The impact of capital structure on the Financial Performance of Airlines
Name of the Student:
Name of the University:
Author’s Note:

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Abstract
This paper has been constructed in order to have an idea about the capital structure that
is existent in the airline industry. The assessment of the capital structure is helpful for
understanding the financial performance of the airline industry. This research highlights the
process with the help of which the objectives of the research is constructed and the problem
that has to be assessed in this paper. This paper gathers data from the annual reports of the
airline companies and thereby understanding the financial performance of the companies. The
financial performance of the airline companies indicates the profitability of the firms and
thereby the processes they use in order to maintain competitive edge in the market. The
research indicates that financial performance has an impact on the capital structure of airline
industries and in that manner the companies constructs their plans and policies that aids in the
enhancement of the companies.
Table of Contents

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Chapter 1: Introduction..................................................................................................5
1.1 Aims and Objectives of the Research...................................................................6
Chapter 2: Literature review...........................................................................................7
2.0 Introduction...............................................................................................................7
2.1 Literature of Agency Theory:..............................................................................10
2.2 Leverage Literature:............................................................................................13
2.3 Dividends pay-out ratio literature:......................................................................14
2.4 Summary.............................................................................................................16
Chapter 3: Research Methodology................................................................................18
Introduction...............................................................................................................18
Research Onion.........................................................................................................18
Incorporation of the Research Methods....................................................................20
Research Philosophy.................................................................................................20
Research Approach...................................................................................................21
Research Design........................................................................................................23
Data Collection process and sample.........................................................................24
Data Analysis Plan and Reliability...........................................................................25
Limitations of the data sample..................................................................................25
Ethical Consideration................................................................................................26
Chapter 4: Data Analysis and Discussion.....................................................................27

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4.1 Descriptive Statistics...........................................................................................27
4.2 Correlation...........................................................................................................28
4.3 Hypothesis Testing..............................................................................................41
4.3.1 Hypothesis 1 Trade-off theory.....................................................................41
4.3.2 Hypothesis 2 Pecking order theory..............................................................43
4.3.3 Hypothesis 3 Agency cost theory.................................................................45
4.3.4 Summary of the testing hypothesis..............................................................46
Chapter 5: Conclusion and Future Work......................................................................47
5.1 Conclusion...........................................................................................................47
5.2 Future Research...................................................................................................48
5.3 Limitations of the Research................................................................................48
Reference List and Bibliography..................................................................................50

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Chapter 1: Introduction
Over time, it was acknowledged that there is a link between the firm’s capital structure
and its value. However, there is no certainty about the overall effect of debt on firm value.The
Myers’ question: “How do firms choose their capital structure?” has no answer yet.
The Modern theory of capital structure began with Modigliani and Miller (1958),
showing under what conditions capital structure is irrelevant. Over the last 10 years, a
significant effort of researchers has been dedicated to structures in which capital structure is
determined by agency costs. This are of research was covered by Jensen and Meckling
(1976), however, this research it was built on earlier work of Fama and Miller (1972).(The
Journal of Finance; The theory of capital structure).
This paper is based on the analysis of the impact of capital structure on airlines
financial performance.
Nowadays, modern society cannot be conceived without air transport and an efficient
transport system. “The International Air Transport Association (IATA) announced that it
expects the global airline industry to make a net profit in 2017 of $29.8 billion. On forecast
total revenues of $736 billion that represents a 4.1% net profit margin. This will be the third
consecutive year (and the third year in the industry’s history) in which airlines will make a
return on invested capital (7.9%) which is above the weighted average cost of capital (6.9%)”.
(iata.org, December 8,2016) Thereby, this could lead to industry manufacturers to improve
more the quality of the aircrafts airlines ’management. This study will be a source of
information for the airlines, when deciding on investments and choosing optimal capital
structure. Moreover, it will give an overview of the current state of the companies, to the
managers.

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It was not found any previous studies about capital structure in the airline industry,
and thought it would be interesting to test if the airline industry has the same influencing
factors as previous studies in general.. The volatility in fuel prices, adds to the normal
operational risk and it is desired to see if it influenced the capital structure choices. The airline
industry is also capital intensive because of the need for large investments in planes and other
fixed assets. The management have to choose from different financial sources when raising
capital for large investments.
1.1 Aims and Objectives of the Research
The aims and objectives of the research has been the focus with respect to which the
researcher would undergo with the paper. The researcher would look to highlight the aspects
that have been figured in the objectives and thereby creating a clear mind set for the
researcher in order to conclude the research. The objectives of the research has been given as
follows:
 Understand the impact of capital structure with respect to the financial performance of
the airline companies
 Discover the financial dependent and independent variables that has extensive impact
on the financial performance of the airline companies.

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Chapter 2: Literature review
2.0 Introduction
The current paper looks to illuminate in a detailed manner the effect of capital
structure on the financial performance of the airline industry. Furthermore, it the direct
impact of the leverage on the industry will be examined by taking help of the agency cost
theory and the free cash flow theory.
The fundamental objective of the research is to find a conclusion with respect to the
capital structure of the airline organizations that are listed. In specific, this paper will explore
the questions that have been given below:
Q1. Is the Free-cash theory effective on the airline industry?
Q2. Is a higher level of debt proportional with better firm performance?
Q3. Which are the dominant strategies for funding in the airline industry?
Q4. Are these strategies connected to a good financial performance?
There has been an examination on the performance, effectiveness and financial
strategies of the civil aviation in which are highlighted the key features of the aviation
industry, which are required to invest an extensive and large regulations. The aim of the
research was to compute the degree of indebtedness, which provides the business with the
optimum performance. The sample was undertaken by taking assistance of 35 organizations
from 22 countries that were functioning from 1993 to 1996 and the outcome indicated that
equity represented 40% of the overall funds that was employed in the aviation industry.

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The value of a firm is explained as the present value of the inflow and outflow of the
cash flows with respect to which the asset that has been considered is entitled to the overall
period of ownership. Rhou, Singal and Koh (2016) have stressed there are plenty more to
describe with respect to the value of the organization that are inclusive of the market value,
nominal value, liquidation value and the intrinsic value.
Liu et al.(2014) like other researchers look at the fact that the key aim of a firm is to
maximise their value. Lunardi et al.(2014) explains that the management of the companies
must concentrate on the determinant strategies in order to obtain an excess market value in
comparison to the accounting value.
The capital structure tries to explain the kind of the long-term financing and how the
organization finance themselves by looking to discover the optimal contribution of the debt
and the equity. The existence of an effective capital structure contributes in making vital
decisions to optimise the value of the firm by their managers.
The initial study regarding optimal capital structure was introduced by Modigliani and
Miller in the year 1958. In looking to recognise an optimal value of the financial leverage in
order to raise the value of the organization, it was discovered that there is a relationship of
independence among the two variables. As the overall asset value of the financial leverage is
the counterpart of the equity and debt, it is not precise to the value of the firm if the financial
resources are internal or external in nature. The way there are combined in the capital
structure does not manipulate the value of the organization. The idea behind the classical
theory is that in a perfect market and the absenteeism of taxation, the value of a firm is not
manipulated by how the firm id financed and conversely, in a world where tax deductibility of
the payment of interests predominates the value of the organization and the capital structure
of the firm have been correlated positively (Vomberg, Homburg and Bornemann 2015).

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However, opposing to this theory, numerous financial professionals have argued that
the effect of leverage of a firm would lead to the rise in debt in the capital structure and in that
manner would increase the value of the business up to a certain level, but over that threshold
extra gain of leverage would raise the overall cost of capital and the covertly reduces the
market value of the firm.
In the year 1963, the same authors incorporated the theory that taxation has an effect
in the value of the organization from the viewpoint of the deductibility of the interest rate.
Under these scenario, the arbitrage of debt-to-equity will be inclusive of the options of
indebtedness as the tax savings are essential to give out the growth opportunities for the firm.
Graham, Leary and Roberts (2015) cited that indebtedness is applicable not only to the
fiscal savings that have a positive effect on the value of the firm but even rise in the financial
risk. By emphasising on the leverage, it is seen that a firm will be more exposed to the risk of
bankruptcy. The leverage therefore correlates positively with the level of fixed asset and are
correlated negatively with the size of the organization. It is observed that organizations with a
high level of asset are less revealed the bankruptcy risk and are able to attract more and more
external resources for the purpose of finance, by taking into account the level of securitization
of the fixed assets. It has even been highlighted that renowned organizations experienced in
the development of a diversified portfolio of the activities are less exposed to the bankruptcy
risk.
The researchers Ogbul and Emeni (2012) assessing 124 organizations that are listed on
the Nigerian Stock Exchange for the year 2007 have noted that long-term debts are a key
determinant of the value of the organisation. Hence, the companies are recommended to resort
to the longer-term debt rather than the equity to finance their own activities as this would raise
the value of the firm.

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Lee, Seo and Sharma (2013) have explained the viewpoint of the effect of financial
leverage on the value of the organization by considering the arbitrage among the cost of debt
and return on investment. As long as the cost of debt is lower than the investment return, the
leverage will have a positive effect on the value of the firm. When the cost of debt becomes
more than the return on investment, the leverage will get a negative implication of the value
of the firm.
The classic theories on the financial leverage have been deepened and refined
gradually in the direction of the modern ones. Jensen, in the year 1986 discovered the modern
theories on the financial leverage. In this scenario, leverage is looked upon as the viewpoint of
the informational asymmetry among the shareholders and the managers.
The managers are not accessible of the idea of contracting as much external financial
resources as this will raise the likelihood of bankruptcy and will soon face the probability of
losing control over the organisation.
Contrary to the reluctance of the managers to stress on leverage, the shareholders are
less interested as the leverage can be exploited by them as a process to exercise control over
the managers and lower the informational asymmetry cost. Under the stress of a high level of
indebtedness, the managers will incorporate the effective financial strategies, which will make
sure the stability of the firm. Revealing an increased risk of bankruptcy will be an extra
mobile farsightedness and the exercise of the corporate governance. There are other theories
that would be explained in this paper are Trade-off theory, Pecking Order Theory, Asymmetry
of information etc.

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2.1 Literature of Agency Theory:
The concept of agency theory finds use in a variety of fields including economics,
finance, marketing, and legal as well as social sciences. The fiscal structure of the costs is
determined by the agency costs. These costs are connected to the conflicts of interest between
various groups including managers. These individuals have a claim on the firm’s resources.
Authors who have initiated and developed the agency theory believe that maximisation
of utilities are possible in case the manager makes suitable operating decisions. The equity
costs are generated due to a variety of reasons. In case the manager or the owner sells equity
claims on the firms which are identical to the one he owns or in case of the divergence
between the manager’s interest and that of the shareholders outside the agency costs are
generated (Manuela Jr and Rhoades 2014). The latter happens as the manager then bears only
a fraction of the costs of any sort of non-pecuniary benefits which he takes out by maximising
his own sort of utility.
There are basically two kinds of conflicts in a firm. Firstly it can be said that there is a
conflict between the shareholders and the managers as the latter hold less than a hundred
percent of the residual claim. Thus on occasion of the profit enhancement functions the
managers cannot capture the entire gain from these. However the entire cost of the services is
borne by them. It may happen that managers invest less amount of effort in the management
of the resources and might be able to transfer the firm resources on their own. The manager
bears the total price of refraining from these activities but it happens that only a part of the
profit is captured (Lawton 2017). This might result in over indulgence of these interests which
are relative to the level responsible for maximisation of the firm value. It has also been seen
that the inefficiency reduces a major part of the equity owned by the manager. The manager’s
absolute investment of the firm being constant, the fraction of the firm financed by debt

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increases the manager’s equity share. The loss is also mitigated from the conflict between the
managers and shareholders.
Debt reduces the amount of free cash flow as it commits the firm to pay out cash. The
reduction of the conflict between the mangers and shareholders comprises the advantage of
debt financing. It has also been suggested that the conflict between debt holders and the
shareholders comes about due to debt contract. It also gives shareholders the incentive to
invest sub optimally. In case an investment yields large amount of returns much above the
face value of the debt the majority of the gain is captured by the shareholders. In case the
investment fails the consequences are borne by the debt holders (Dai et al. 2013). The conflict
between debt holders and shareholders is exacerbates by the debt. Shareholders benefit from
the investments in the risky projects at the debt holder’s expense. The shareholders are
protected by the limited liability.
In case the benefits of the debt holders cause the reduction of the returns to the
shareholders, an incentive to reject the positive net present projects is created. The magnitude
of the agency costs across different firms is variable. It depends upon the manager’s taste and
the ease with which they can exercise their own preferences as opposed to the value
maximisation in the decision making.
Debt finance creates a motivation for the managers so that they can work harder and
ensure that better investment decisions are made by them. The debt is also functional as a
disciplining tool as the creditors are allowed by the default to force the firm into liquidation. It
can be said that the debt is an effective tool for showing substitution for dividends. This
consideration of the debt in connection to proper management of the finance is important.

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The debt recipients are given the right to take the firm to the bankruptcy to the court if
they do not maintain the commitment in order to make the principle as also the interest
payments. In situation where the debt is utilised without the retention of the proceeds of the
issue the managers are requested to pay future cash flow to the holders of debt. The managers
also provide the recipients with the right to take the firm to bankruptcy in case they do not
maintain the commitments to make the interest and the principle payments. It can thus be said
that the agency costs of free cash flow is reduced by the cash flow available for expense at
managers’ discretion.
2.2 Leverage Literature:
This particular section helps review the determinants of the capital structure by
different relevant literatures. The study by Titman and Wessels is considered to be the leading
studies in the developed markets. A factor analytic approach was utilised for the estimation of
the impact of unobservable attributes on the choice related to corporate debt ratios. The study
confirms the factors, collateral values of the assets, non-debt tax shields, the growth as well as
the uniqueness of the business, the classification of the industry, the size of the firm as well as
its profitability. It has been found that there is a negative relationship between the debt levels
as well as the uniqueness of the business.
In order to find the variability on the capital structure of the Jordanian corporations of
65 firms a multivariate regression approach was used with financial leverage as the dependent
variable. It was measured in three ways. Firstly the long term debt over total assets, secondly
the short term debt over total assets and finally the short plus long term debt on total assets.
The standard deviation of the earnings variability as well as the size of the firms is a
significant factor in the determination of the capital structure of the firm as well as the
insignificant relationship between the fiscal leverage and the earning variability of the firm

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(Vasigh, Erfani and Sherman 2014). Such a type of industry is not a significant factor in the
determination of the capital structure of the firm. International evidence about the
determinants of the capital structure is available. Regression analysis was utilised with the
firm’s leverage as the dependent variable.
The independent variables were the tangible assets, market to book ratio, firm size and
firm profitability. It was found that in market bases, firms with a lot of fixed assets are not
highly levered. They supported that a positive relationship existed between the leverage
relationship and the market to book ratio as well as the profitability. The determinants of the
target capital structure of the firms as well as the role of the adjustment process were
investigated using a sample of 390 firms. The multiple regression approach was used to
measure the debts by total debts to total assets. In his model, Ozkanused the mode, non-debt
shield, firm size, liquidity, firm profitability as well as firm growth as independent variables
(Rhou, Singal and Koh 2016). It was determined by him that profit, liquidity, non-debt tax
shield as well as the growth opportunities have a negative impact on the capital structure.
Panel data of two random samples were utilised in the investigation, one for small and one for
medium sized enterprises. According to the study there are existent differences as well as
similarities in the determinants of capital structure. It can be said that there is a positive
relationship between the profit margins and short term debt ratios?
2.3 Dividends pay-out ratio literature:
The Dividend pay-out ratios vary between the different firms and the agency cost
theory would be impacted by the dividend pay-out policy. The dividends policy will help in
rationalise in appealing the transaction cost and agency cost associated with external finance.
Evidence had been collected in view of the agency costs influence the dividends pay-out ratio.

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It was found that the firms have distributed lower dividend pay-out ratios in situations where
they have higher revenue of growth. This growth also leads to higher expenditures of
investment.
On the other hand it has also been seen that the firms have distributed higher amounts
of dividend pay-outs on the occasion when insiders have held a lower portion of equity or a
greater number of shareholders owning the outside equity. There has been collected evidence
that the dividend payments are part of optimum monitoring and bonding package reducing the
agency costs (Adler and Liebert 2014). On situations when the agency cost declines when the
dividend pay-out does and in cases when the transaction cost of the external finances
increases, then the minimisation of these costs leads to a unique optimum for each particular
firm.
Based on an agency cost perspective ideas promoting the monitoring of shareholders-
regulator conflict have been emphasized. It can be said that it is a monitoring role of
dividends .It has been observed that the utilities of the firms have a discipline of monitoring
mechanism for the control of the agency cost. Regulators can set into motion the managerial
incentive structure which potentially conflicts with the shareholder interests. The regulation
controls some of the agency costs at the time of exacerbating others. The regulator process
will impact the conflict between the shareholders and the managers by mitigation of the
managers’ power to appropriate the shareholders’ wealth (Chechet and Olayiwola 2014). The
role of the dividend policy in determination of share prices was also studied along with the
determinations of pay-out ratios and factors affecting the stability of the dividends.
The findings suggested that the dividend policy reduced the agency theory which is
not limited. The cost of the dividend pay-out policy may be below the costs paid by other
firms. Basically the utilities might maintain high debt ratio which would maintain the equity

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agency costs. For the time period from 1980 to 1990 the dividend policy behaviour of the
eight emerging markets were compared along with the dividend policies in the US. The
sample included the firms from all over the world. It has been found that the present dividends
are less sensitive to past dividends compared to the firm samples for the US.
These results indicate that the institutional framework in the emerging markets make
divided policy a weak technique for the signalling the future earnings as well as reduction of
the agency costs compared to the sample of firms operating in the US.
It has been determined that the role of the dividend policy in the determination of the
share prices as well as that of the pay-out ratios and also the factors that influence the stability
of the dividends for a sample of the Egyptian firms found that the retentions were more
important than in case of the firms possessing dividends with actively traded shares. The
accounting book value is more important than the dividends and the earnings for non-actively
traded firms (Cui et al. 2016).
After combination of the actively traded and non-traded firms they found that the
dividends are much more important than the earnings. In case of the determination of the pay-
out ratios there is a negative relationship between the leverage ratios along with the market
ratio the firm size as well as the tangibility. This is considered in connection to the pay-out
ratios in actively traded firms.
Finally it can be said that for the whole sample the leverage has a positive relationship
with the pay-out ratios when the firm size is negatively related to the pay-out ratios. The
stepwise logistic regression analysis shows that the decreasing dividend is related to the lack
of liquidity and the overall profitability. In addition to this the increasing the dividends is
related to the higher overall over-all profitability.

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2.4 Summary
The relevant literature regarding the reviews of the agency cost theory is associated
with the financial policies. A theoretical background is also provided on the conflicts of
interests arising between the principal that is the stakeholders and the agents or the managers.
The determinants of leverage and the dividend pay-out policy are also discussed. The
description of the data and the methodology of the data are also mentioned. Thus it is
extremely essential for this analysis.

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Chapter 3: Research Methodology
Introduction
The research methodology with respect to any thesis concentrates on the path and the
procedure that would be followed by the researcher in order to gather the required information
and select the effective tools and equipment that would bring out precise and authentic data.
The data that is gathered needs to be evaluated precisely in order to have an idea whether it
would meet the research objectives and the aims of the research. It is seen that research
methodology plays a fundamental role in the construction of a thesis and therefore significant
amount of focus needs to be given so that analysis of the precise data can be undertaken. This
section of the paper would mainly discuss the research philosophy that is possessed by the
researcher so that their ideologies and attitudes would be followed by the researcher. The
research design along with the method that would be used is even explained in order to have a
clear idea about the process that would be undertaken for the assessment of the data (Mackey
and Gass 2015). It is seen that ethical consideration, the kind of data and the data collection
process would even be explained in this section of the paper.
Research Onion
During the establishment of the methodology of the research, the research onion has
an immense part thusly helping in the use of new tools and machineries in a manner that is
less demanding. Besides, the use of research onion gives suitable significant outcomes to the
researcher. The research onion takes assistance of five research factors that would be

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supportive to the researcher who will complete the evaluation with a particular objective to
assemble the outcomes with the help of a well-defined assessment of the information that has
been gathered. The five layers of the onion are associated with the technique that will be used
for the paper that has been considered and the components that are exploited for the
construction of the thesis. This technique improves the fruitful utilization of time in gathering
knowledge about the research onion. The research onion explains the process that must be
used keeping in mind the end result to construct the approach of the assessment that would be
proficient (Taylor, Bogdan and DeVault 2015). In the midst of this time when the procedure is
observed expressly, each layer of the onion explains a development that is productive in
nature with the help of which the methodology of the research can be constructed. The
sufficiency of the onion is existent in the flexibility for each kind of research processes and
can be utilized in the middle of different sorts of scenarios.
The research onion will be constructed in regards to this thesis thereby recollecting
and maintaining a specific objective and aim in order to gather data with respect to the
strategy and the policies with the support of which researcher requires comprehending, the
strategy that can be most precise and authentic for finishing the paper. During the primary
establishment of the methodology, the philosophy of the research needs an explanation. This
constructs the underlying stage for a suitable approach for the research, which is completed in
the second stage. It is observed that in the third stage, the method of the research is a
significant device that requires to be constructed by reviewing a definitive objective to take
possession of the method that ought to be undertaken and in this manner concluding the thesis
accurately. The fourth stage investigates the format of the thesis and it is seen that a
productive design of the research can complete the thesis according to the objectives of the
research that have been discussed earlier in accordance to the thesis (Glesne 2015). The fifth
stage combines the data gathering process and the assessment of the same. The advantages of

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the research onion therefore enhance the construction of the steps which is under the specific
techniques for the accumulation of the data that can be ascertained and explains each and
every change with the help of a precise research thesis.
Incorporation of the Research Methods
The implementation of the procedure of the research thesis is an essential element that
ought to be exhibited by the researcher by making sure to complete the thesis feasibly. It has
been viewed that there are different processes that can be utilized by the researcher with a
specific and end goal to commence the research process. In any scenario, it is under the
researcher’s sensibility to comprehend which technique would be ideal for this thesis topic
that is under the consideration in this thesis. The researcher needs to choose the technique by
analysing each and every aspect that are in the nearby environment with a specific end goal to
ensure that utilization of techniques that are ineffective that would result to faulty outcomes
that would imply that the research thesis has been ineffective.
Furthermore, in comprehending the research thesis, the researcher has in this manner
has exploited of a solitary efficient mechanism known as the quantitative process.
Quantitative strategy has been utilized as this thesis looks to comprehend the impact of capital
structure on the financial performance of airline industries which has been a specific industrial
sector (Brinkmann 2014). The careful assessment of the data gathered from the secondary
data and the aspects that have an impact the collection and influence on the secondary data
has restricted the researcher to exploit the quantitative technique as it would enhance the
quality and preciseness of the thesis.

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Research Philosophy
Research philosophy engages the researchers to see the elements of the research
regarding the impact of capital structure on the financial performance of airline industries.
The research philosophy comprises of four particular kinds namely pragmatism, positivism,
realism and interpretivism. As explained by Flick (2015), the research philosophy has an
activity course, which utilises the axiology, rationality, and epistemology. Positivism
philosophy relies on the vicinity of the reality by using processes that have been
demonstrated. In any situation, interpretivism philosophy is reliant on obtaining knowledge
about the experiences of the consumers and the individuals. In spite of gaining knowledge
about the data that might be common, Vaioleti (2016) argued that positivism thoughts forces
the researcher to scrutinise the information by making utilization of quantitative philosophies.
The current thesis hopes to comprehend the impact of capital structure in the financial
performance of airline industries. In accordance to the present circumstances, it highlights that
the researcher has looked to focus on the principle factors and the significant impacts faced by
the airline industries due to the capital structure in their financial performance. Hence, the
researcher has exploited the positivism philosophy by relating the models and the theories
with the review of the literature in the present situation. As the current thesis concentrates on
the impact of capital structure in the financial performance of airline industries, positivism
philosophy is the most suitable one for dissecting the impact of capital structure in the
financial performance of airline industries. The researcher has not related the other
philosophies, as they are not appropriate of giving precise outcomes that would be in
accordance with the topic of the thesis.

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Research Approach
Research approach is one of the essential techniques in the construction of the research
for attaining the objectives of the research that have been given in concluding the research in
accordance to the statement of the problem. In this circumstance, Silverman (2016) cited that
the research approach urges the researcher to see observe the developments for undertaking
the assessment of the research to construct authentic results. The research approach comprises
of the inductive approach and deductive approach. As referred to by Smith (2015), inductive
approach urges the researcher to design a new and innovative model and framework in
suggesting the results of the thesis. In regards to the fact that what may be suitable.
Panneerselvam (2014) is of the view that deductive approach focuses on assessing the models
and the thoughts that can be found with the help of different sources in recognising the
impacts by taking help of the gathered information.
As the current thesis focuses on understanding the impact of capital structure in the
financial performance of airline industries, the researcher in this manner has incorporated the
deductive approach to conclude and manage the thesis. This is in regard to the fact that the
researcher has used quantitative strategy for the analysis in order to attain the end result of the
thesis. The quantitative technique is incorporated by analysing the information received from
the secondary sources that have been chosen for the completion of the section associated the
data analysis. In addition, the positivism philosophy is obviously observed with evaluation
quantitative information, in which the information accumulated and has been surveyed with
the help of the previous patterns and dynamic models and the aspects that have not been
revealed. On this manner, deductive approach has been found as the key approach for
concluding the precise result for the thesis.

23THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
The researcher, in this thesis, has not related the inductive approach as this strategy
does not consider the quantitative and the assessment of the data that is subjective in nature.
Besides, the researcher has not endeavoured to develop any new theory or model keeping in
mind the end goal to obtain the result of the thesis. Legitimately, inductive approach cannot
be related for the gathering of the research goals, since secondary data has not been given
need.
Research Design
Research design helps the researcher an opportunity of arranging the research towards
reaching a specific target with respect to the objectives of the research. As explained by Gast
and Ledford (2014), the research design motivates the researcher to give the explanation by
forcing the results that have been highlighted so that the thesis of the research would operate
and work in accordance to the pre-determined goals. The research design comprises of three
types namely exploratory research design, descriptive research design and explanatory
research design. Explanatory research design helps in depicting the relationship that is
contingent and obtains the final commodity by evaluating the possible future deferred results
of the mechanisms that are utilised.
Exploratory research design in a specific manner is generally incorporated with the
intention that is related to the problem statement. It basically focuses on the small fragments
of knowledge of the exploration issues that confront research problems. On the other hand,
descriptive research design views and portrays the aspects and the issues that are going up
against the thesis. It specifically assists the researcher to diversify their base of information.
The current thesis has focused on finding the impact of capital structure on the
financial performance of the airline industries by considering the distinctive determinants to
plan the path in which the focused aims and objectives can be reached. In this way, the current

24THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
thesis paper additionally has a point by point explanation of the segments in discovering the
factors that affect the financial performance of the airline industries (Reynoldset al. 2014).
Therefore, the research focuses on examining the impact of capital structure on the financial
performance of the airline industries. In association with this, the researcher has concentrated
on establishing an unpredictable aspect of the contemplations for confining the problems
towards the completing the theory. With this respect, the researcher has associated the
descriptive research design for coordinating the general research. The other research designs
cannot be associated with the current topic as they are unable to portray the purposes and the
issues for the research in an effective way.
Data Collection process and sample
The gathered data sample is the base of this paper and the researcher therefore
allocated a brief discussion about about the process with the help of which the data was
collected and how the researcher selected the companies that needs to be included.
In order to gather the data for this paper, the research has used the annual report of the airline
industries along with the three key rating agency’s web page and the database of the same.
The researcher has chosen the DataStream as it comprises of the widespread time series data
that is inclusive of the range and depth to provide information that is required to perform the
planned analysis. The DataStream provided us a data for a period of 50 years from more than
175 countries and from 60 global markets.
The financial data such as the sales, EBIT etc was discovered after searching the
annual reports of the organizations. These reports were available in the official websites of
organization and the websites that are experienced in publishing annual reports. The market
values of the equity are gathered by making use of the DataStream application, while on the

25THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
other hand the credit ratings are discovered by searching in the web pages of the three three
key credit rating agencies. The data about the ownership strategy and structure are seen in the
annual reports.
Due to various reasons, the researcher has not been able to gather all the data related to
the organization within a specified time period. The possible factors may be due to the
presence of mergers, bankruptcies etc that occurred during the specified time period. This
paper is associated with respect to the selected explanatory variables that can be proven
crucially to have an impact on the leverage of the airline organizations. It is seen that a ten
year period is an adequate time span to manufacture a picture that is acceptable for the
selected organizations with respect to their economic fluctuations. The airline industries have
faced various ups and downs.
This paper has included all the large and medium airline organizations that have their
financial reports available in the online webpages. There are various renowned organizations
that could not be included due to insufficient information. There are various organizations that
are not included since the paper mainly concentrates on the firms that are traded in an
exchange. There are certain airlines that are owned by the government and hence there are no
data that is available on their market value. This would especially impact the leverage to the
market framework as the market values are a part of the dependent variables.
Data Analysis Plan and Reliability
The information that has been gathered has been assessed by taking assistance of the
numerous investigative processes. In these methods, Bauer (2014) explained that convincing
the assurance with respect to the presentation model is crucial for attaining effective and
precise completion of the thesis.

26THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
Limitations of the data sample
The sample size that has been taken into consideration comprises of 35 airlines and
that can be debated as small especially with the absence of certain variables for certain
airlines. This could make the outcome of the assessment less vigorous and therefore the
researcher would be careful during the conclusion of the paper. Hence, asking for a high
degree of significance at least 5% when examining the estimated coefficients.
The sample consists of airlines from 22 countries and airlines from USA are most
frequently represented countries. There is an existent of accounting problems as the time
period has created an issue as the accounting practice may vary from year to year among
various countries. This can stand out as a potential problem when completing the research as
the researcher may experience using the variables that do not have certain information. The
researcher has even looked to normalise the information by looking in the notes of the annual
reports and then putting the data together in the selected variables with the help of which
making them comprise of equivalent data. One variable that is more subjective and would
require additional discussion and explanation is the interest bearing debt. The researcher has
chosen the interest bearing debt that is long term in nature and the long –term financial leases.
By undertaking these corrective measures, it is believed to reduce the potential negative
impacts of the accounting difference.
Ethical Consideration
The researcher in way looking to make the thesis fair and true has looked to gather all
the information in an ethical way and has stuck with the codes of ethics that have been put
forth in the international scenario. The researcher has limited the use of any measures that

27THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
deems to be unethical and hence looked to gain the data as well as the sources of the data after
an effective examination of the background and the authenticity of the outcomes.
Chapter 4: Data Analysis and Discussion
This part of the paper explains the statistics focusing on the data sample and in the
latter section explains the analytical outcome of the data that has been gathered.
4.1 Descriptive Statistics
The descriptive statistics has been one of the key mechanisms with the help of
extensive assessment can be made for the data that has been gathered from various secondary
sources. The most of the data has been collected from the annual report of the airline
companies that have been taken into consideration. This paper has taken a total of 20 airline
organizations from all over the world. The data collected from all over the world would
provide an idea to the researcher with respect to what impact capital structure has on the
financial performance of the airline companies from all over the globe. The table in this
section provides extensive details of the descriptive statistics with respect to the variables that
have been exploited in this paper. The Return on Asset, the Return on Equity, Return on
Capital Employed along with the Gross Profit Margin Debt-Equity Ratio and Financial
Leverage has been taken into consideration. This provides an idea about the how the airline

28THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
industry has been performing during the year 2016. The mean for Return on Asset comes
close to 5.97 while the Return on Equity is 22.56. The Return on Capital Employed is found
to be 11.22 and the GPM has been 48.75. The debt to equity ratio has come to 1.11 and the
financial leverage has come to 3.84. This explains that airline companies has been performing
moderately overall.
The standard error for the all the aspects that have been explained has come to 0.79 for
ROA, 3.33 for ROE and 1.39 for ROCE. The GPM is 3.96 and the Debt to Equity has come to
0.28 and the financial leverage has been 0.61. Hence, the standard error has been low. The
median shows that for ROA the value comes to 5.59, for ROE the value is 21.02 and for
ROCE the value is 12.48. The GPM value is 54.12 and the Debt to Equity has a value of 0.82
and the financial leverage comes to 3.2. The standard deviation for ROA has been 3.46 and
the ROE has been 14.52. The ROCE in this aspect has been found to be 6.08 and the GPM
value has been 17.29. The Debt to equity has been 1.25 and the financial leverage is 2.699.
The explanation of the values has determined that airline companies have significant
impact on their operational activities due to the changes in their capital structure and even in
the financial performance of the airline organizations.
Table 1: Descriptive Statistics
Particulars
ROA_
2016
ROE_
2016 ROCE GPM
Debt Equity
Ratio
Financial
Leverage
Mean 5.9726316 22.5647
11.228
4 48.756316 1.11 3.843157895
Standard Error 0.7947642 3.33141
1.3956
6 3.9667604 0.288964677 0.619291735
Median 5.59 21.02 12.48 54.12 0.82 3.2
Standard
Deviation 3.464297 14.5213
6.0835
3 17.290708 1.259567827 2.699430089
Sample Variance 12.001354 210.868
37.009
3 298.96857 1.586511111 7.286922807
Range 13.65 57.93 22.32 55.68 5.86 12.58

29THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
Minimum -0.33 -1.11 0.22 22.91 0.08 1.37
Maximum 13.32 56.82 22.54 78.59 5.94 13.95
4.2 Correlation
Correlation is explained as a statistics that helps in measuring the degree to which the
variables move in relation to one another. The correlation is utilised in the scenario of
portfolio management with the help of which an idea can be attained with respect to their
positive or negative impact. The perfect correlation explains that the correlation coefficient
has been one. The existence of a positive correlation explains that all the variables are moving
in the same direction and are closely related to each other. On the other hand, a negative
correlation explains that the variables are moving in opposite direction and does not have any
relation among each other. The correlation is concerned with explaining the strength in the
association among the variables that have been taken into consideration. In this research
paper, the correlation coefficient assessment has been undertaken in order to discover the
relationship among the impact of capital structure and the financial performance of the airline
industries. Therefore, it tries to explain the extent of relationship that is existent among the
financial performance variables and the capital structure.
The next table explains the relationship among the performance variables like the
ROA, ROE, GPM, the debt equity ratio and the financial leverage. There exists a strong as
well as weak relationship among the variables that have been considered.
Table 2: Correlation
ROA_201
6 ROE_2016 ROCE GPM
Debt Equity
Ratio
Financial
Leverage
ROA_2016 1
ROE_2016 0.6477119 1
ROCE 0.7968805
0.7274796
4 1

30THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
GPM 0.2994801
0.4804892
3
0.5303
6 1
Debt Equity
Ratio -0.133351
0.5633834
7 -0.0183
0.2496
6 1
Financial
Leverage -0.09262
0.6250544
6
0.0882
1
0.2213
1 0.93810381 1
By looking at the above table it can be said that ROA has a positive correlation with
ROE, GPM but on the other hand has a negative relationship with Debt to Equity ratio and the
financial leverage. ROE on the other hand has a strong and positive relationship all the
variables that have been considered in this paper. ROCE has a positive relationship with
GPM, but has a negative relationship with Debt to Equity and the financial leverage. GPM has
a positive relationship with the Dent to Equity and the financial leverage. Debt to equity even
has a positive relationship with the financial leverage. Therefore, it can be said that there can
capital structure can have a significant impact on the financial performance of the airline
companies that have been performing in the global environment.
Table 3: Correlation
Correlations
Financial
Leverage
Return on
Assets
Return on
Equity
Return on
Capital
Employe
d
Gross
Profit
Margin
Debt
Equity
Ratio
Pearson
Correlat
ion
Financi
al
Levera
ge
1.000 -.093 .625 .088 .221 .938
Return -.093 1.000 .648 .797 .299 -.133

31THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
on
Assets
Return
on
Equity
.625 .648 1.000 .727 .480 .563
Return
on
Capital
Emplo
yed
.088 .797 .727 1.000 .530 -.018
Gross
Profit
Margin
.221 .299 .480 .530 1.000 .250
Debt
Equity
Ratio
.938 -.133 .563 -.018 .250 1.000
Sig. (1-
tailed)
Financi
al
Levera
ge
.353 .002 .360 .181 .000
Return
on
Assets
.353 .001 .000 .106 .293
Return
on
Equity
.002 .001 .000 .019 .006

32THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
Return
on
Capital
Emplo
yed
.360 .000 .000 .010 .470
Gross
Profit
Margin
.181 .106 .019 .010 .151
Debt
Equity
Ratio
.000 .293 .006 .470 .151
N Financi
al
Levera
ge
19 19 19 19 19 19
Return
on
Assets
19 19 19 19 19 19
Return
on
Equity
19 19 19 19 19 19
Return
on
Capital
Emplo
19 19 19 19 19 19

33THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
yed
Gross
Profit
Margin
19 19 19 19 19 19
Debt
Equity
Ratio
19 19 19 19 19 19
The Pearson correlation explains that financial leverage has a negative correlation with
the return on assets but has positive relationship with the other concerned variables Return on
assets even has a negative relationship with the financial leverage and debt to equity but has
positive relationship with the other remaining variables. ROE on the other hand has positive
relationship with all the other variables. ROCE even has positive correlation with the other
variables as well. Gross Profit Margin when assessed even has positive correlation and
thereby suggesting that all move in the same direction. The debt to equity has a negative
relationship with return on asset and the return on capital employed and has positive
correlation with all the other remaining variables. This suggests that there exists a possibility
that changes in these variables can have an impact on the financial performance of the airline
industries.
Table 4: Anova
Model Sum of Squares df Mean
Square
F Sig.
1 Regressio
n
121.340 5 24.268 32.113 .000b
Residual 9.824 13 .756

34THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
Total 131.165 18
The regression value implies that there exists a mean square of 24.268 and the F value
of 32.113. The sum of squares for the regression value has been 121.340. The sum of squares
for the residual has been 9.824 and mean square for the same comes to .756. This implies that
the values that have been generated explains that the financial variables does have an impact
on the capital structure and the financial performance of the airline companies.
Model Unstandardized
Coefficients
Standa
rdized
Coeffi
cients
t Sig. Correlations Collinearity
Statistics
B Std.
Error
Beta Zero-
order
Partial Part Tole
ranc
e
VIF
1 (Con
stant
)
2.300 .713 3.224 .007
Retu
rn on
Asse
ts
-.268 .128 -.344 -2.097 .056 -.093 -.503 -.159 .214 4.68
1
Retu
rn on
Equi
ty
.080 .049 .429 1.641 .125 .625 .414 .125 .084 11.8
52

35THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
Retu
rn on
Capi
tal
Emp
loye
d
.056 .083 .126 .674 .512 .088 .184 .051 .164 6.10
0
Gros
s
Profi
t
Mar
gin
-.019 .015 -.119 -1.237 .238 .221 -.325 -.094 .623 1.60
6
Debt
Equi
ty
Rati
o
1.463 .393 .683 3.725 .003 .938 .719 .283 .172 5.82
9
The dependent variable in this table has been found to be the financial leverage. The B
value for return on Assets has been -.268 while for Return on Equity has been .080. The
ROCE has a B value of .056 while the Gross Profit margin and Debt Equity Ratio has a value
of -.019 and 1.463. The standard error for the same variable has been found to be .713 for
Return on Assets, .128 for Return on Equity, .049 for ROCE, .015 for gross profit margin
and .393 for debt equity ratio. The beta value for the standardized coefficients has a return on
asset of -.344, return on equity summing to .429, ROCE being .126 and the gross profit

36THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
margin being negative having a value of -.119. The debt to equity has a value of .683. These
values explain that capital structure is affected by the financial variables that have been taken
into consideration. This shows that airline industries has to look into the numerous variables
that are related to the operational activities and thereby improve the financial position in the
economy. The colllinearity statistics has tolerance value of .214 for return on assets, .084 for
return on equity, .164 for ROCE, .623 for gross profit margin and debt equity ratio of .172.
Model Debt Equity
Ratio
Return on
Capital
Employed
Gross Profit
Margin
Return on
Assets
Return on
Equity
1 Correlation
s
Debt
Equity
Ratio
1.000 .569 -.193 .591 -.898
Return
on
Capital
Employe
d
.569 1.000 -.431 -.101 -.629
Gross
Profit
Margin
-.193 -.431 1.000 .103 .083
Return
on
Assets
.591 -.101 .103 1.000 -.606
Return
on
-.898 -.629 .083 -.606 1.000

37THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
Equity
Covariance
s
Debt
Equity
Ratio
.154 .019 -.001 .030 -.017
Return
on
Capital
Employe
d
.019 .007 -.001 -.001 -.003
Gross
Profit
Margin
-.001 -.001 .000 .000 6.022E-05
Return
on
Assets
.030 -.001 .000 .016 -.004
Return
on
Equity
-.017 -.003 6.022E-05 -.004 .002
In this table financial leverage has been considered as the dependent variables. The
correlation for the debt to equity with respect to the return on capital employed has been .569
and with gross profit margin has been -.193. The relation with debt to equity and return on
asset has been .591 and with return on equity has been -.898. The relation between return on
capital employed and debt to equity has been .569 and with gross profit margin has been
-.431. The relation with return on asset has been -.101 and with return on equity has been
-.629. The relationship with gross profit margin and debt to equity has been -.193 and return

38THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
on capital employed has been -.431. The correlation to gross profit margin to the return on
assets has been .103 and with return on equity has been .083. The correlation for return on
assets and debt to equity has been .591 and with return on capital employed has been -.101.
The value with respect to gross profit margin has been .103 and for return on equity has been
-.606. The relation for return on equity and debt to equity is -.898 and with return on capital
employed has been -.629. The gross profit margin has a value of .083 and return on asset has
-.606. Now when assessing the covariance of debt to equity with debt to equity comes to .154
and with return on capital employed has been .019. The gross profit margin has a value of
-.001 and for return on asset has been .030. The return on equity has a value of -.017. By
looking at the covariance relation with respect to return on capital employed it is observed
that debt to equity has a value of .154 and return on capital employed has been .007. The
gross profit margin has been -.001 and return on asset has the same value as well that comes
to -.001. The return on equity has a value of -.003.
Table 5: Collinearity Diagnostics
Model Eigenvalue Condi
tion
Index
Variance Proportions
(Cons
tant)
Retur
n on
Assets
Retur
n on
Equit
y
Retur
n on
Capita
l
Empl
oyed
Gross
Profit
Margi
n
Debt
Equit
y
Ratio
1 1 5.126 1.000 .00 .00 .00 .00 .00 .00
2 .561 3.023 .00 .01 .00 .01 .00 .13
3 .203 5.031 .15 .03 .03 .01 .07 .00

39THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
4 .066 8.822 .29 .19 .00 .08 .36 .01
5 .031 12.90
9
.35 .44 .01 .39 .55 .00
6 .014 19.38
9
.20 .34 .96 .51 .03 .85
By looking at the table for collinearity diagnostics, it can be said that the Eigen value
for the models 1 to 6 has been 5.126, .561, .203, .066, .031 and .014 respectively. The
condition index has been 1.000 for model 1, 3.023 for model 2, 5.031 for model 3, 8.822 for
model 4, 12.909 for model 5 and 19.389 for model 6. The values with respect to the variance
proportion for the return on asset, return on equity, return on capital employed, gross profit
margin and debt to equity has all been positive and each one one of them has been close to the
value of 0. None of the figures has been close to one implying that the variables are inter-
related to each other but are not pretty much closely related. The figures explain that financial
performance of the airline companies does have an impact on the capital structure framework
for the organization.
Table 6: Residual Statistics
Minimum Maximum Mean Std.
Deviation
N
Predicte
d Value
1.5685 13.6279 3.8432 2.59637 19
Std.
Predicte
d Value
-.876 3.769 .000 1.000 19
Standar .307 .819 .468 .143 19

40THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
d Error
of
Predicte
d Value
Adjuste
d
Predicte
d Value
.8017 11.0816 3.6107 2.18416 19
Residua
l
-2.77302 .67588 .00000 .73877 19
Std.
Residua
l
-3.190 .777 .000 .850 19
Stud.
Residua
l
-3.418 1.106 .074 .973 19
Deleted
Residua
l
-3.18356 2.86844 .23244 1.16068 19
Stud.
Deleted
Residua
l
-10.313 1.116 -.294 2.472 19
Mahal.
Distanc
1.301 15.032 4.737 3.871 19

41THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
e
Cook's
Distanc
e
.001 1.611 .143 .381 19
Centere
d
Leverag
e Value
.072 .835 .263 .215 19
The predicted values indicate that it has a mean of 3.8432 and standard deviation of
2.596. The standard predicted value has been .000 for mean and 1.000 for standard deviation.
The mean for standard error of the predicted value is .468 and .143 for standard deviation.
The adjusted predicted value has a mean of 3.61 and 2.184 for standard deviation. The mean
for the residual value has been .0000 and .73877 as the standard deviation. The Mahal
Distance has a mean of 4.737 and standard deviation of 3.871. The Cook’s Distance has a
figure of .143 for the mean and .381 for the standard deviation. The dependent variable has
been taken as the financial leverage. This explains that capital structure does gets affected
with respect to the financial performance of the airline companies.
4.3 Hypothesis Testing
In this section of the analysis, the researcher has looked to examine which of the three
explained theories is the most precise and accurate one in their predictions according to the
anticipated coefficients. For this intention, the paper has selected five of the most accepted
and acknowledged variables in the theory of capital structure.

42THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
4.3.1 Hypothesis 1 Trade-off theory
H1.1-CVA
H0: There is a positive relationship among CVA and leverage
H1: There is a negative relationship among CVA and leverage
It is seen that tangibility of the asset has a positive relationship for both the book and
the market framework in this paper. In the market framework, the researcher can reject H1
with a 5% level of significance. In the book model it can be observed from the outcome that a
positive relation in a least of 99.9% of the time. This is in respect to the trade-off theory
estimations.
H1.2-Size
H0: There is a positive relationship among size and leverage
H1: There is a negative relationship among size and leverage
A positive relationship for both the market and the book leverage has been obtained
with respect to size. In the model of the market H1 can be rejected with 1% significance.
Therefore, there is 99% probability that H1 is not satisfied. In the book model it can be
observed from the results that there will not be a positive relationship in at least 95% of the
time and the book model is infinite.
H1.3-Profitability
H0: There is a positive relationship among profitability and leverage
H1: There is a negative relationship among profitability and leverage

43THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
Profitability has a negative relationship for book and market model. Therefore one
cannot reject H1 for any of the model. The market model not in accordance with the trade-off
theory as it is negative at least 99.9% of the time while the book framework is indefinite.
H1.4-Financial Strength
H0: There is a negative relationship among risk proxy and leverage
H1: There is a positive/no relationship among risk proxy and leverage
There is a negative relationship between leverage and risk for both frameworks. When
a firm provides lower returns (EBIT/Total Assets) than the aggregate return gathered from the
entire sample, it can be classified that the industry being more unsafe than the general
company. The perception behind this is that organizations with lower level of returns than
aggregate will, in the long run, have more issues functioning in a market with complex
competition than the most profitable organizations. The book model provides indefinite
outcomes; H1 can be rejected for the market framework. The results are in line with the trade-
off theory.
H1.5-Growth
H0: There is a negative relationship among growth and leverage
H1: There is a positive/no relationship among growth and leverage
There have been indefinite outcomes in the book model while there is a possibility of
99.9 percent that there is a negative symbol on the variable growth in the market framework.
This is in accordance with the trade-off theory.
4.3.2 Hypothesis 2 Pecking order theory
H2.1 CVA
H0: There is a negative relationship among CVA and leverage

44THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
H1: There is a positive relationship among CVA and leverage
Asset tangibility has an optimistic relationship for book and market model in this data.
In the market framework H1 cannot be rejected with 5% significance. Therefore, there is a
probability of 95% that H1 can be satisfied. In the book framework it can be seen from the
outcomes that there is a positive relationship in at last 99.9% of the time. This is not in line
with the Pecking order theory.
H2.2-Size
H0: There is a positive relationship among size and leverage
H1: There is a negative relationship among size and leverage
A positive relationship for both the market and the book leverage has been obtained
with respect to size. In the model of the market H1 cannot be rejected with 1% significance.
Therefore, there is 99% probability that H1 is satisfied. In the book model it can be observed
that there are indefinite outcomes. The market model is not in accordance with the pecking
order theory while on the other hand the book framework is indefinite.
H2.3-Profitability
H0: There is a negative relationship among profitability and leverage
H1: There is a positive relationship among profitability and leverage
Profitability has a negative relationship for book and market model. In the model
associated with the market it is seen that there is a positive sign on the profitability variable at
least 99.9% of the time. In the book model it is seen that there is indefinite outcomes and one
cannot reject any of the above discussed hypothesis. The market model is in accordance with
the pecking order theory while on the other hand the book model in indefinite.

45THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
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H2.4-Financial Strength
H0: There is a negative relationship among risk proxy and leverage
H1: There is a positive/no relationship among risk proxy and leverage
There is a negative relationship between leverage and risk for both frameworks. The
book framework gives out indefinite results and H1 can be rejected for the market framework.
The results are in accordance with the pecking order theory.
H2.5-Growth
H0: There is a relationship among growth and leverage
H1: There is no relationship among growth and leverage
There have been indefinite outcomes in the book model while there is a possibility of
99.9 percent that there is a negative symbol on the variable growth in the market framework.
This is in accordance with the pecking order theory as it may assist both a negative and
positive symbol.
4.3.3 Hypothesis 3 Agency cost theory
H3.1-Profitability
H0: There is a positive relationship among profitability and leverage
H1: There is a negative relationship among profitability and leverage
Profitability has a negative relationship for book and market model. In the book model
it is seen that there is indefinite outcomes and one cannot reject any of the above discussed
hypothesis. The market model is not in accordance with the agency cost theory while on the
other hand the book model in indefinite.
H3.2-Financial Strength
H0: There is a relationship among risk proxy and leverage

46THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
H1: There is no relationship among risk proxy and leverage
There is a negative relationship between leverage and risk for both frameworks. The
book framework gives out indefinite results and H1 cannot be rejected for the market
framework. The results are in accordance with the agency cost theory as it may assist both
negative and positive symbol.
H3.3-Growth
H0: There is a negative relationship among growth and leverage
H1: There is no/positive relationship among growth and leverage
There have been indefinite outcomes in the book model while there is a possibility of
99.9 percent that there is a negative symbol on the variable growth in the market framework.
This is in accordance with the agency cost theory as it may assist both a negative and positive
symbol.
Table 4: Summary of predicted and estimated signs for the five chosen
variables
Factor
Theories Results
T
rade -
off
Peck
ing Order
Ag
ency Cost
F
E(book)
FE(
market)
Firm Size + - +
CVA + -
Profitabili
ty + - + -
Financial
Strength - - +
Growth
Opportunities - - -

47THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
4.3.4 Summary of the testing hypothesis
It is seen that none of the depicted models are capable of explaining all of the gathered
results. This is in accordance with the past researches, which explains that none of the theories
are superior. Trade-off theory can explain the symbols for three out of the five coefficients
and on the other hand pecking-order theory could only explain two out of the five. The agency
cost theory was able to explain two out of the three coefficients.
Chapter 5: Conclusion and Future Work
5.1 Conclusion
In this final section of this paper a brief explanation of the most interesting results and
findings and in that manner discovers a solution to the issues that was required to be
addressed.
The findings that have been discovered show that FE regression framework has an
adjusted R-squared of 18.5% for the book model and 31.1% for the market framework. This

48THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
explains that the market model has an effective estimating value of the debt level with respect
to the book model.
In the market model it is seen that six out of the seven coefficients are crucially
different from zero and on the other hand only one of the coefficients is vital in the book
model. This can be discussed by the amplification that the market framework is more outward
looking than the book model, which states that the stakeholders comply their decision on the
future anticipations rather than the historical values.
The key signs from the FE regression match up effectively to the past researches and
there has not been any observation in the airline industry with distinct differences.
The paper has discovered a negative relationship among the debt ratio and the fuel
variable. This may explain the airline industries with an increased level of energy rigorous
consumption have more operational risk due to the volatility in the prices due to the energy.
Therefore, they have a decreased degree of optimal debt.
It is seen that none of the described frameworks have been able to describe all the
gathered outcomes and this is in accordance to the past researches which explains that none of
the theories are advanced. The trade-off theory could be able to explain the symbol for three
out of the five models. The agency cost theory was able to explain two out of the three
coefficients.
5.2 Future Research
It has been interesting for the researcher to discover whether the debt ratio of the
energy intensive company would reduce with their increased utilisation of the energy to sales.
The theoretical model on the other hand debates that this would raise the operational risk and
hence would reduce the level of optimal debt.

49THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
The other further research can be to interview or undertake survey of the Chief
Financial Officers from the selected airline industries with respect to the variables that have
been taken into consideration. The further research can be undertaken in order to understand
whether the CFOs focus on the same variables when they undertake their financial decisions
with respect to the ones that have been discussed in this paper. Further researches can be
undertaken in order to have an idea that whether target of the debt ratio they have can
influence their financial decisions. This can be helpful for attaining certain interesting
solutions and answers and a new concept with respect to the decisions related to the capital
structure.
5.3 Limitations of the Research
There exists various limitations and restrictions in all the researches and these
limitations have an impact on the completion of the research. With respect to this topic, it has
been observed that time limitation has made the researchers complete the paper with the data
that could be gathered within the timeframe. The shortage of time restricted the researcher to
take a sample of 20 airline companies. If the research would have been done with more airline
company samples then the answers that would have been gathered would have been more
effective and precise thereby making an understanding about the impact of capital structure on
the financial performance of the airline industries.

50THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF
AIRLINES
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