ADMAS UNIVERSITY

Determinant of Ethiopian Airline Profitability- A case study in Ethiopian

Airlines

A thesis ssubmitted in partial fulfillment of the requirements for ma in master of

business administration (MBA), school of business& economics, admass university

By:
Eskezia Chanie

Advisor:
Tsega Adego (PhD)

June, 2023
Addis Ababa, Ethiopia
 Declaration

I, the undersigned, declare that this thesis is my original work and has not been presented for a
degree in any other university and that all sources of materials used for the thesis have been duly
acknowledged.

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This is to certify that the thesis is prepared by Eskezia Chanie , entitled; “Determinant of Ethiopian
Airline Profitability- A case study in Ethiopian Airlines” in partial fulfillment of the requirements
for the award of the degree of Masters of Business Administration in Financial Services, with the
regulation of the University and the accepted standard concerning to originality.

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 Abstract

This research aimed to assess the impact of various factors on the profitability of Ethiopian
Airlines. The findings revealed significant relationships between company size, company growth,
fuel cost, labor cost, and profitability. The results indicated that company size had a positive
influence on profitability, as larger airlines like Ethiopian Airlines can take advantage of economies
of scale and market advantages to enhance their financial performance. Similarly, company growth
was found to positively impact profitability, indicating that Ethiopian Airlines' growth trajectory
contributes to its overall profitability. In contrast, the analysis did not find a significant relationship
between leverage ratio and profitability, suggesting that leverage does not play a prominent role in
determining Ethiopian Airlines' profitability during the study period. Lease cost was also found to
have no significant impact on profitability, indicating that it is not a primary driver of Ethiopian
Airlines' financial performance. However, the research highlighted the significant negative impact
of fuel cost and labor cost on profitability. Effective management of fuel costs and labor-related
expenses is crucial for Ethiopian Airlines to navigate the challenges of fuel price fluctuations and
control operating costs, thereby maintaining its financial performance. In conclusion, this research
underscores the importance of company size, company growth, fuel cost, and labor cost in
determining Ethiopian Airlines' profitability. The findings provide valuable insights for the airline
to focus on strategies related to cost management, growth, and operational efficiency. Ethiopian
Airlines should prioritize growth initiatives while effectively managing fuel and labor costs.
Exploring opportunities for further cost optimization, benchmarking performance against industry
peers, and implementing best practices are also recommended to enhance profitability and ensure
sustainable success in the competitive aviation industry.

Key words: Profitability, Company size, Company growth, Leverage ratio, Lease cost

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 Acknowledgment

I would like to begin by expressing my utmost gratitude to God for His continuous presence and
guidance throughout every step of my journey in this work. His divine support has been instrumental
in enabling me to accomplish this thesis successfully.

I am filled with deep appreciation and respect for my advisor, Tsega Adego, who holds a PhD. Their
unwavering commitment and dedication to my academic and professional growth have been
invaluable. From the very inception of this thesis until its completion, Tsega has provided me with
constructive comments, enduring guidance, and professional advice that have greatly enriched my
research. Their expertise and mentorship have shaped my understanding, challenged my ideas, and
propelled me to new heights. I am truly grateful for their tireless efforts and commitment to my
academic development.

Furthermore, I would like to extend my sincere thanks to the statistics office of Ethiopian Airlines.
Their generous support and provision of crucial information and data have been vital in completing
this thesis. Their willingness to assist and collaborate with me in gathering the necessary resources is
greatly appreciated. Their contribution has significantly enhanced the quality and depth of my
research, and I am truly grateful for their assistance.

Finally, I would like to express my heartfelt appreciation to all my friends and colleagues who have
stood by me and encouraged me throughout this entire journey. Their unwavering support, words of
motivation, and belief in my abilities have been a source of strength and inspiration. Their presence
in my life has made this experience more fulfilling and enjoyable, and I am truly grateful for their
continued encouragement.

In conclusion, I am profoundly grateful to God, my advisor, Tsega Adego, the statistics office of
Ethiopian Airlines, and all my friends and colleagues for their unwavering support, guidance, and
encouragement throughout this thesis. Their contributions have been invaluable, and I am humbled
by their presence in my life.

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 Table of content

Contents
Abstract..................................................................................................................................................i
Acknowledgment..................................................................................................................................ii
List of figure.........................................................................................................................................vi
List of tables.........................................................................................................................................vi
List of graphs........................................................................................................................................vi
Chapter one............................................................................................................................................1
Introduction...........................................................................................................................................1
1.1. Background of the study.........................................................................................................1
1.2. Statements of the problems.....................................................................................................3
1.3. Research objective..................................................................................................................4
1.3.1. General objective....................................................................................................................4

1.3.2. Specific objectives..................................................................................................................4

1.4. Significance of the study........................................................................................................4

1.5. Scop of the study....................................................................................................................5
1.6. Limitation of the study............................................................................................................5
1.7. Organization of the study........................................................................................................6
Chapter two...........................................................................................................................................7
2. Literature review........................................................................................................................7
2.1. Introduction.............................................................................................................................7
2.2. Theoretical review..................................................................................................................7
2.2.1. Characteristics of an Airline Industry.....................................................................................7

2.2.2. Measures of Profitability in the in the Airlines Industry........................................................9

2.2.3. Determinants of Airlines Profitability..................................................................................10

2.2.3.1. Industry specific factors....................................................................................................10

2.2.3.2. Cost related factors............................................................................................................12

2.2.3.3. Macro-economic factors...................................................................................................13

2.2.3.4. Product/service/related factors..........................................................................................14

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 2.3. Empirical review...................................................................................................................15
2.4. Literature gap........................................................................................................................17
2.5. Conceptual framework..........................................................................................................18
Chapter three.......................................................................................................................................19
3. Research methodology.............................................................................................................19
3.1. Introduction...........................................................................................................................19
3.2. Research design....................................................................................................................19
3.3. Research approach................................................................................................................19
3.4. Source of data.......................................................................................................................19
3.5. Description of variables........................................................................................................20
3.5.1. Dependent variable...............................................................................................................20

3.5.2. Independent variables...........................................................................................................20

3.6. Data analysis.........................................................................................................................21

3.7. Model specification...............................................................Error! Bookmark not defined.
3.8. Ethical consideration.............................................................Error! Bookmark not defined.
Chapter four.........................................................................................................................................22
4. data analysis and interpretation................................................................................................22
4.1Introduction.................................................................................................................................22
4.2. Descriptive analysis..................................................................................................................22
4.2.1. Company Size (CS)...................................................................................................................22

4.2.2. Lease Cost (LSC)......................................................................................................................23

4.2.3. Leverage (LG)...........................................................................................................................25

4.2.4. Fuel Cost (FC)...........................................................................................................................26

4.2.5. Labour cost (LbC).....................................................................................................................27

4.2.6. Company size (CS)....................................................................................................................28

4.3. Inferential analysis....................................................................................................................29

4.3.1. Test for the Classical Linear Regression Model (CLRM) Assumptions..................................29

4.3.2. Determinants of profitability.....................................................................................................33

4.4. discussion..................................................................................................................................37
Chapter five.........................................................................................................................................43

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5. Summary of major findings, conclusion and recommendations..............................................43
5.1. Introduction...........................................................................................................................43
5.2. Summary of major findings..................................................................................................43
5.3. Conclusion............................................................................................................................44
5.4. Recommendations.................................................................................................................45
Reference…………………………………………………………………………………………….46

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List of figure

Fig. 1. Conceptual framework

Fig. 4.1. scatter plot

List of tables

Table 4.2. correlations

Table 4.5. analysis of variance

List of graphs

Graph 4.2. Lease Cost (LSC)

Graph 4.3. Leverage

Graph 4.4. Fuel Cost

Graph 4.5. Labour Cost

Graph 4.6. Company size

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 Chapter one

Introduction
1.1. Background of the study

In the last 15 years, the global airline industry has experienced significant transformations. Factors
such as deregulation, privatization, and changing patterns of demand have brought about notable
shifts in the business environment (Sterzenbach, Conrady, and Fichert, 2013). These changes have
led to increased price pressure, primarily driven by the emergence of low-cost carriers and escalating
fuel prices. Consequently, many airlines have encountered declining profitability, necessitating a
reassessment of their business models, particularly among independent full-service carriers.

In the past decade and a half, the airline industry has witnessed significant transformations and
challenges. Factors such as deregulation, privatization, and changing demand patterns have led to a
shift in the business environment, causing price pressure to rise (Iatrou & Oretti, 2007). To address
this, many airlines sought alliances to create synergies in terms of cost and revenue. This led to the
establishment of major airline alliances like Star Alliance, one world, and Sky Team, which
collectively accounted for a substantial share of total revenue passenger-kilometers flown (IATA,
2011).

The air transportation industry has become a crucial driver of global economic activity, facilitating
trade and creating employment opportunities. It is projected that the aviation sector currently
supports 58 million jobs and contributes $2.4 trillion to GDP, with estimates suggesting an increase
to 105 million jobs and $6 trillion in GDP by 2034 (IATA, 2014). The industry's technical and
service advancements have significantly contributed to enhancing the quality of life worldwide.

The air transport value chain includes various stakeholders such as airlines, airports, aircraft and
parts manufacturers, lessors, freight forwarders, maintenance providers, computer reservation
systems, travel agents, and other service providers. Among these, airlines play a pivotal role in
providing actual transport services (Wensveen, 2007).

The industry is influenced by numerous factors, including intense competition, fuel price volatility,
economic recessions, political changes and conflicts, financial pressures, technological
advancements, epidemics, and terrorism. Due to its global nature and international connectivity, the
industry is vulnerable to local, regional, and international events. Additionally, the airline industry is
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subject to extensive regulations due to the significant risks it entails and its economic importance.
Moreover, the increasing competition and operational costs necessitate enhanced efficiency in
airline operations to achieve profitability.

Airline managers are implementing various business strategies to ensure profitability and sustain
operations amidst the challenges faced by the industry. This necessitates continuous monitoring and
assessment of profitability determinants to take proactive measures and avoid significant financial
losses (Schefczyk, 1993). These actions include cost-cutting measures, outsourcing non-core
activities, route consolidation, and acquiring regional airlines to optimize resources and achieve
economies of scale (Morrell, 2007; Matei, 2012).

Furthermore, the airline industry has been engaging in collaborative actions to improve cost
efficiency, expand market share, and create synergies. These actions involve mergers and
acquisitions, commercial cooperation agreements, and the establishment of airline alliances
(Benjamin, 1994; Czipura & Jolly, 2007; Rajasekar & Fouts, 2009). Despite these efforts to cut
costs, implement structural and behavioral changes, and improve efficiency, profitability remains
low across the industry, except for a few airlines (IATA, 2014). This highlights the intense
competition and challenges faced by airlines in conducting their operations.

While there have been limited studies on the determinants of profitability in the airline industry, it is
crucial to consider return on equity (ROE) as a measure of profitability and analyze its relationship
with various determinants. The DuPont Analysis suggests that ROE is influenced by factors such as
profit margin, total assets turnover, and equity multiplier or leverage (Mubin et al., 2014). However,
most existing studies are limited in scope, focusing on national or regional contexts and often yield
results that do not align with the DuPont Analysis.

Moreover, the use of linear regression models to analyze the relationship between ROE and
determinants of profitability may be questionable, as this relationship can change based on the
airline's profitability or losses. For example, leverage may have a positive relationship with ROE
when the airline is profitable but a negative relationship when incurring losses. Conducting an
analysis of profitability determinants at a global level using a nonlinear regression model can
provide valuable insights to enhance profitability and formulate policies that improve the
performance of the airline industry and individual carriers.

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The Ethiopian air transportation sector has experienced significant development in recent decades,
with Ethiopian Airlines emerging as a leading carrier in Africa and beyond. With its operational
success, technological advancements, and significant market presence across the continent,
Ethiopian Airlines has become a major industry and a prominent institution in Africa
(https://corporate.ethiopianairlines.com).

1.2. Statements of the problems

The contribution of air transportation to a country's development is significant (Temesgen, 2006). It
plays a vital role in both domestic and international trade, as well as in the tourism and investment
sectors, creating job opportunities and improving the standard of living for the population. Many
countries, including Ethiopia, have established their own airlines, whether government-owned or
privately owned, recognizing the crucial importance of air transportation. However, the growth of
airlines has faced challenges in recent years, resulting in decreased profitability due to factors such
as rising fuel prices, unfavorable economic conditions, and increased labor costs.

Several researchers have studied the factors that impact airline profitability, including load factor,
fleet size, fuel costs, labor costs, productivity, and other variables, focusing on both US domestic
airlines and international airlines (Thoren, 2002; Antoniou, 1992). Despite efforts made by African
governments to improve profitability, efficiency, and productivity in the airline industry, the
financial performance of airlines in the continent has been relatively weak compared to the industry
as a whole. This can be attributed to operational inefficiencies, high regulatory costs and taxes, low
credit ratings, limited capitalization, and higher levels of liquidity risk (Raphael, 2013).

Furthermore, Fikre (2015) examined the determinants of profitability for three airlines in Sub-
Saharan Africa, finding that internal factors had a greater impact on profitability than external
factors. Profitability is a leading indicator that measures the overall performance of airlines and
helps them understand the scale and scope of their operations, enabling them to take appropriate
actions to remain competitive in the market. However, the factors that determine profitability can
vary across different regions and airlines (Kuribel, 2015).

In the case of Ethiopian Airlines, while there is existing research on profitability in the banking and
insurance industries in Ethiopia, empirical studies on the factors affecting Ethiopian airline
profitability are limited and scarce. Kirubel (2015) studied the factors affecting Ethiopian Airlines
profitability based on income statement and management accounting data, but did not consider

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balance sheet variables or basic internal factors. Eyob (2014) analyzed Ethiopian Airlines'
profitability for a specific period but did not provide a comprehensive understanding. Therefore,
there is a research gap in identifying the determinants of Ethiopian airline profitability.

Consequently, it is important to study the factors that have a greater influence on individual airlines,
allowing stakeholders to gain a better understanding of a specific airline's performance. This study
aims to fill the literature gap by investigating the factors that affect Ethiopian Airlines' profitability.
The findings will have theoretical value by adding knowledge on the factors influencing profitability
in the context of Ethiopian airlines. Moreover, it holds practical significance by enabling
stakeholders to focus on the most important determinants of profitability. Overall, this study seeks to
establish the factors that determine Ethiopian Airlines' profitability.

1.3. Research objective

1.3.1. General objective

The main aim of this study was to identify the factors that determine the profitability of Ethiopian
Airlines

1.3.2. Specific objectives

 To examine the impact of company size on the profitability of Ethiopian Airlines during the
study period.
 To investigate the influence of company growth on the profitability of Ethiopian Airlines for
the study period.
 To analyze the effects of leverage ratio on the profitability of Ethiopian Airlines throughout
the study period.
 To evaluate the impact of lease cost on the profitability of Ethiopian Airlines during the
study period.
 To assess the effect of fuel cost on the profitability of Ethiopian Airlines for the study period.
 To examine the influence of labor cost on the profitability of Ethiopian Airlines during the
study period.
1.4. Significance of the study

In a competitive free market, the profitability of a firm is crucial for its survival. Therefore,
understanding the factors that determine profitability is essential for firms in making decisions and
strategic plans. This study aims to investigate the determinants of profitability specifically for
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Ethiopian airlines, which is a significant sector contributing to economic development and
employment growth in Ethiopia.

By examining the associations between profitability and its determinants, this study adds to the
existing literature and extends the knowledge applicable to the global airline industry. The findings
will be valuable to equity owners, investors, governments, board of directors, airline managers, and
debtors in making informed decisions to improve airline profitability and maximize returns.
Furthermore, the study can serve as a basis for further research and the expansion of knowledge in
this area by academics.

The study concludes by identifying the factors that affect Ethiopian airlines' profitability. It enhances
the understanding of scholars, government authorities, the Ministry of Transport, and academicians
by highlighting the impact of demand and supply side factors on profitability. Moreover, it provides
Ethiopian airlines' managers, board of directors, and government bodies with insights into the
factors that have a significant influence on profitability in both the short and long term, aiding in
their decision-making processes. Ultimately, the study sends a signal to stakeholders to take
corrective actions as necessary.

1.5. Scop of the study

The scope of this study was limited in terms of coverage and methodology. In terms of coverage, the
study focused specifically on the financial performance of Ethiopian Airlines. It aimed to identify
the determinants of Ethiopian Airlines' profitability from 1992 to 2021. This time period was chosen
because sufficient data was available for analysis.

1.6. Limitation of the study

Several limitations were identified for this study. Firstly, the study focused on four categories of
independent variables: macro-economic factors, product/service-related factors, airline-specific
factors, and cost-related factors. Secondly, the sample size used in the study may be considered
small, and other researchers may choose to use a larger sample size. The study is specific to
Ethiopian Airlines, and the results may not be applicable to other airlines operating in different
environments outside of Ethiopia. Therefore, caution should be exercised when interpreting these
results for other airlines. Lastly, the study relied on secondary data that had already been compiled
by the Ethiopian Airlines statistics office and published annual financial statements of the company.

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 1.7. Organization of the study

The study consists of five subsequent chapters. The first chapter provides an introduction, including
the statement of the problem, research objectives, significance of the study, and scope of the study.
The second chapter presents a review of relevant literature, both theoretical and empirical. The third
chapter discusses the research design and methodology. The fourth chapter involves the analysis,
discussion, and presentation of the research findings. Finally, the fifth chapter summarizes the
study's conclusions, recommendations based on the findings, and includes a list of references used
and relevant appendices.

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 Chapter two

2. Literature review
2.1. Introduction

The literature review can be divided into three main sections: theoretical, empirical, and conceptual.
The theoretical literature focuses on examining the characteristics of the airline industry and the
factors that influence airline profitability. It also introduces concepts related to the transportation
sector. The empirical literature review presents previous studies that have explored the determinants
of profitability in the airline industry. Lastly, the conceptual literature presents interconnected
concepts that contribute to explaining the research problem.

2.2. Theoretical review

2.2.1. Characteristics of an Airline Industry

The airline industry stands out from other industries due to several distinct factors:

i) Capital-intensive nature and high fixed costs:

The airline industry requires a significant amount of capital compared to labor, making it capital
intensive. Additionally, the industry faces high fixed costs that can pose risks when economies of
scale are not achieved or sales decline. This uniqueness is exemplified by the higher frequency of
bankruptcies and the prevalence of mergers and acquisitions in the airline industry (source:
https://www.mbaskool.com/business-articles/marketing/207-ten-reasons-why-airline-industry-is-
unique.html).

ii) Low profitability:

Airlines often experience low profitability due to various factors such as rising fuel costs, increased
taxes, labor strikes, and challenges in raising fares to match input cost increases. However, some
companies have managed to achieve above-average profits through unique business models that
challenge conventional full-service providers.

iii) Vulnerability to the state of the economy:

The airline industry heavily relies on the global economic situation. During economic slowdowns or
recessions, travelers opt for cheaper alternatives like trains or road transport, resulting in reduced
tourism and business travel, as well as empty seats on flights. This leads to liquidity crises for
7
airlines, further exacerbated by the impact of global crises on fuel prices. Domestic airlines are also
heavily influenced by the state of the national economy, with prosperity driving growth and
economic downturns causing a decline in air travel.

iv) Nationalization of Airlines:

Many countries have national airlines owned and operated by governments. Governments
sometimes nationalize private airlines to establish a national carrier, recognizing the strategic
importance of the airline industry during crises and wars. Consequently, airlines are susceptible to
government interventions and bailouts, adding to the industry's uniqueness.

v) High barrier to entry and regulations in the markets

Typically, airlines are highly regulated due to political, economic, and safety concerns. In such
regulated markets, new airlines find it difficult to come up and establish themselves. Also, due to
restrictive practices, new airlines find it difficult to obtain slots at airports (MBASkool, 2021).

vi) Low switching costs for customers

It is very hard for airlines to develop a loyal customer base, particularly in markets like Africa. This
is why all major airlines have been enthusiastically running Frequent Flyer Programs and other
customer loyalty schemes. For a flyer, it is just a click of a button to go book on a competitor's
flight. And airline customers are often very sensitive about service. Once the flight is delayed or
service is unsatisfactory, they can make a resolve of not flying by that airline again. This is because
the high competition in the airline market has given the flyers too many options and almost no
switching costs. The customers also gain because of the prevailing price wars (MBASkool, 2021).

vii) Being central to globalization

Due to its central role, the airline industry has grown with and can be identified with globalization. It
facilitates global trade, international business, tourism, and hence helps the economic growth of all
nations. It is hard to imagine if today's world would be as much globalized, or localized, without
fast, efficient, and convenient airlines. Tourism and the hospitality sector are ones that stand out
with being enabled because of airlines. Tourists from all over the world travel long distances in less
time to reach exotic destinations, often in developing countries, and hence help these emerging
economies. With time, these locations also get developed, and their own citizens go on to visit other

8
parts of the world, thereby completing a cycle. And their preferred mode of travel is again airlines.
So airlines and tourism have a symbiotic relationship, one helping the other (MBASkool, 2021).

viii) unprecedented safety concerns

Because of the nature of air travel, the risks are high, and in case of accidents, the human casualty
mounts. So the airline industry has to maintain strict safety standards and can't be relaxed even for a
moment. In many accidents, the reason is found to be human error, which makes the case for
stringent norms very strong. The airlines have to maintain a very high personal checking system to
avoid the repeat of terror activities. For example, the hijacking of aircraft has been a common tactic
used by terrorist groups, and they even try to bomb or blast the planes. Apart from accidents and
terror threats, the air route has also been used by criminals, smugglers, and traffickers for their
activities, and hence safety and security are always a concern for airlines (MBASkool, 2021).

ix) Alliances and optimization

If we look at the competition in the US market, which was deregulated quite early, we would realize
how smaller players have found it too hard to survive competing against big airlines. For example,
Midway Airlines was a small carrier that tried to compete against US Airways and Eastern Airlines,
and it failed miserably. Ultimately, it had to file for bankruptcy. It is said that Southwest survived
because it avoided the markets dominated by big players like American, Emirates, and United. In
such a competition, and due to the inherent risks unique to the airline industry, a new phenomenon
came into being which is hardly seen in many other industries. It is 'alliances' (Star Alliance, 2011).

x) A Highly Perishable Product

Perishability of services implies that service capacity cannot be stored, saved, returned, or resold
once rendered to a customer. An airline deals in a highly perishable product.

2.2.2. Measures of Profitability in the in the Airlines Industry

i) Return on Equity (ROE):

Return on Equity (ROE) is a widely used financial ratio that measures a company's net profit after
interest and tax as a percentage of average shareholder equity. It indicates how effectively
management utilizes a company's assets to generate profits. ROE is often decomposed using the
DuPont formula, which breaks it down into net profit margin, asset turnover, and financial leverage.

ii) Operating Ratio:

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Operating ratio, also known as operating cost ratio or operating expense ratio, is calculated by
dividing operating expenses by net sales for a specific period. It is expressed as a percentage and
serves as a measure of operational efficiency. The operating ratio helps assess whether the cost
component within the sales figure is within the normal range. A low operating ratio indicates a high
net profit ratio (more operating profit), while a high operating ratio suggests lower profitability.

iii) Net Profit Margin:

Net Profit Margin, also referred to as Profit Margin or Net Profit Margin Ratio, is a financial ratio
used to determine the percentage of profit a company generates from its total revenue. It measures
the amount of net profit obtained per dollar of revenue earned. The net profit margin is calculated by
dividing net profit (or net income) by total revenue and is expressed as a percentage. It represents
the portion of revenue remaining after deducting all expenses.

iv) Return on Invested Capital (Capital Employed):

Return on Invested Capital (ROIC) is a profitability ratio that assesses how efficiently a company
utilizes its capital to generate profits. It measures the return (expressed as a percentage) that
investors earn from the capital they have invested in the company. ROIC considers long-term debt,
common shares, and preferred shares as components of invested capital. It is also known as Return
on Capital or Return on Total Capital and provides insights into a company's financial performance.

2.2.3. Determinants of Airlines Profitability

2.2.3.1. Industry specific factors
a. Size, Scale, and Reach of Operations

The size, scale, and reach of an airline's operations can be assessed by factors such as the number of
passengers carried, routes operated, and fleet size. A larger fleet allows for economies of scale,
reduces maintenance impact, and enables more frequent flights. Having more routes minimizes the
impact of poor performance on a single route and can result in less competition, especially in
underserved markets. Studies suggest a positive relationship between firm size and profitability, as
larger companies can benefit from economies of scale, diversify assets, and better withstand
competition. However, some studies propose a diminishing rate of profitability as companies grow,
citing conflicts of interest between management and owners and the potential deviation from the
main objective of wealth maximization.

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b. Route Length

The length of a route is another determinant of profitability. Longer flights generally have lower unit
costs due to shared miscellaneous costs and relatively higher fuel consumption during take-off and
landing. Shorter flights face higher demand elasticity as alternative transportation options are
practical, forcing airlines to lower ticket prices to remain competitive.

c. Load Factor of an Airline

The load factor, which measures the capacity utilization of an airline, is an important factor for
profitability. It represents the percentage of occupied seats on an aircraft. Higher load factors
indicate a higher likelihood of profitability since the marginal cost of filling an empty seat is
minimal. Achieving high load factors is crucial, and identifying factors that influence load factors is
of interest. Factors such as fare pricing, competition, and the optimization of seat occupancy affect
load factors.

d. Financial Leverage

Financial leverage, measured by the ratio of total assets to equity, plays a significant role in a firm's
financial performance. Studies have shown a negative relationship between return on equity and
financial leverage. The financial structure, or capital structure, of a firm, involving the proportion of
debt and equity, influences its profitability. Debt can be helpful by increasing capacity and
performance, but it can also result in a negative impact on profitability due to debt repayment
obligations and limited investment opportunities. The relationship between leverage and profitability
can also be analyzed through the risk-return trade-off, where higher leverage leads to greater
financial distress costs and profit variability.

e. Ability to Generate Ancillary Revenue (Yield)

In an industry with increased competition and lower fares, airlines need additional sources of
revenue to enhance profitability. Generating ancillary revenue through services, add-ons, and
partnerships is crucial for maintaining profitability.

f. Employee Productivity

Employee productivity is essential in the labor-intensive airline industry. Measures such as revenue
per employee and available seat kilometer per employee are commonly used to assess productivity.

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However, due to wage differences between countries, revenue per employee may not accurately
reflect financial efficiency. The ratio of revenue to salary and wage expenses provides a better
measure of financial efficiency and employee productivity. Studies in other industries have shown a
positive association between productivity and profitability, emphasizing the importance of operating
at full capacity and improving efficiency in airline operations.

2.2.3.2. Cost related factors

a. The ability to minimize labor costs

in the airline industry is achieved through various strategies such as reducing wages and benefits,
optimizing employee productivity, renegotiating wage levels and employment conditions,
establishing low-cost subsidiaries, franchising routes to cheaper airlines, and relocating jobs. These
measures help minimize labor expenses and increase overall efficiency in the industry.

b. To optimize fuel expenditure, airlines can take several steps.

This includes purchasing fuel-efficient aircraft, entering into forward contracts for fuel purchase,
installing more efficient engines on existing aircraft, reducing short-haul flights, and increasing load
factors. Fuel costs constitute a significant portion of airlines' expenses, and any reduction in fuel
costs or consumption directly contributes to higher profits. Hence, airlines employ various strategies
to minimize fuel costs and enhance profitability.

c. Aircraft leasing has become a vital source of funding for the airline industry.

When airlines are unable to generate sufficient cash to finance aircraft acquisitions, they often resort
to selling and leasing back their aircraft to financial or operating lessors. This transaction allows
airlines to use the appreciated value of aircraft to finance additional acquisitions, remove older
aircraft from their balance sheets while values are still high, invest in other airlines, or finance their
internal operations. Leasing options include dry leases (excluding additional services) and can
further be categorized into finance leases (with purchase options or longer lease periods) and
operating leases (shorter lease periods without residual ownership risk).

d. Miscellaneous costs, including maintenance expenses,

can be minimized by bulk aircraft purchases, outsourcing maintenance, implementing cost-saving

strategies, minimizing airport fees (such as landing, parking, and overflying costs), and availing
discounts. Developing in-house systems for the industry also helps reduce costs, such as negotiating
12
agreements to minimize expenses associated with ticket reservations. The effectiveness of these
measures often depends on the scale of airline operations.

2.2.3.3. Macro-economic factors

Macroeconomic variables are influential factors that regulate the overall economy, encompassing
interest rates, economic output, employment and unemployment rates, population size, exchange
rates, inflation, government budget balances and finance, international trade balances and finance,
and productivity (Olukayode and Akinwande, 2009; Muchiri, 2012).

a. Exchange rate fluctuation:

Exchange rate fluctuation refers to the variability in exchange rates between different currencies,
indicating the value of one currency in relation to another (Eleftherioss, 2007; O'Sullivan, 2003).
Fluctuations in exchange rates can significantly impact airlines in several ways. Firstly, changes in
exchange rates affect the flow of passengers, with inbound visitors likely to decrease when a
country's exchange rate rises, while outbound travel may increase. This can result in a net gain or
loss of passengers for the country's airlines. Secondly, exchange rate changes affect airlines through
their capital structure, depending on the currencies in which they have borrowed and their
investments. Additionally, changes in exchange rates affect input prices relative to competitors'
prices, which can have a negative impact on airlines in countries with an appreciated exchange rate
(Lafrance et al., 1998; Campbell, 2014).

b. Inflation:

Inflation is measured by changes in the consumer price index (CPI) and plays a significant role in
the performance of the aviation industry. High inflation rates are associated with higher loan interest
rates and income levels. Anticipated inflation has a positive effect, while unanticipated inflation has
a negative effect on profitability. Performance is assessed based on the achievement of an
organization's goals within a specific timeframe (Bashir, 2003; Illo, 2012). Previous studies have
indicated a negative relationship between equity returns and inflation, with expected inflation having
a nearly one-to-one positive effect on nominal stock returns. This suggests that stocks can serve as a
hedge against inflation, as companies' revenues and earnings are expected to grow at the same rate
as inflation (Linter, 1975; Bodie, 1976; Reilly, 1997; Fisher, 1930; Boudoukh and Richardson,
1993).

13
c. Economic growth:

Gross domestic product (GDP) is a widely used macroeconomic indicator that reflects the total
economic activity within an economy. The growth rate of GDP impacts the demand for aviation
industry services. Economic conditions and the market environment influence the asset and liability
composition in aviation industry companies. The growth and profitability of the aviation industry are
constrained by the economy's growth rate. Economic growth can enhance profitability by increasing
the demand for aviation services (Kosmidou et al., 2005; Hassan and Bashir, 2003). Airline
performance is closely tied to economic growth, and trends in economic indicators can be correlated
with passenger and freight volumes. The volume of passengers carried by airlines is measured by
revenue passenger kilometers (RPK), while freight traffic is measured by freight ton kilometers
(FTK). These indicators are affected by business confidence and demand for goods. Economic
factors significantly influence the airline industry, and changes in the global economy can impact the
industry (Hermann, 2012; Oosthuizen, 2013; Pratap, 2016; Davis, 2013; Demydyuk, 2011).

2.2.3.4. Product/service/related factors

a. Quality of Management

Effective quality management programs lead to improved processes and outcomes, resulting in
higher customer satisfaction and increased profitability. Such programs foster a culture of teamwork
at all levels of the organization, enhancing productivity and recognizing human resources as a
valuable asset. By minimizing failure costs and reducing processing times, quality management
initiatives can lead to cost savings (source:
https://www.cgma.org/resources/tools/essential-tools/quality-management-tools.html).

The significance of management in adhering to a plan and differentiating an airline from its
competitors cannot be overstated. A study on the US aviation industry suggests that industry
management has not been sufficiently proactive. In pursuit of market share during growth periods,
cost controls may be overlooked, and responses may be delayed during challenging times. In a free
market, stronger airlines can drive weaker ones out of the industry, consolidating their own positions
(Pierre Co.).

b. Flight Delay

14
In our study, we consider four service variables: On-Time Flight, Mishandled Baggage, Ticket
Oversales, and Consumer Complaints. On-Time Flight refers to the percentage of flights that arrive
at the airport within 15 minutes of their scheduled time, including cancelled and diverted flights.
Mishandled Baggage measures the incidents of lost, damaged, delayed, or pilfered baggage per 1000
passengers each month. Tickets oversales represent the number of passengers denied boarding per
10,000 enplanements, encompassing both voluntary and involuntary cases of overbooking.
Consumer Complaints quantify the number of complaints filed per 100,000 passengers, covering
various categories such as flight problems, baggage, reservations, boarding, customer service,
refunds, disability, frequent flyer programs, fares, discrimination, and advertising.

Flight delay is a factor that significantly impacts the profitability of the airline industry. When a
flight departs or arrives more than 15 minutes later than its scheduled time, it is considered a delayed
flight. Multiple factors contribute to flight delays, including an excess of actual arrivals compared to
scheduled arrivals, limited availability of gates, and unexpectedly high demand exceeding planned
capacity (Wang et al., 2010). Flight disruptions can occur due to controllable factors (mechanical
issues) and uncontrollable factors (weather conditions). While flight delays have negative
implications for passengers, they also result in additional costs for airlines, including crew expenses,
fuel, and other associated costs. A comprehensive study estimated that flight delays cost airlines
$8.3 billion in 2007 (Peterson et al., 2013). However, delays can generate increased revenue for
airports. Airlines are legally responsible for accommodating passengers and their crews in hotels
during extended flight delays, further impacting their costs and profitability. Therefore, airline
management should prioritize minimizing flight delays to maintain profitability.

2.3. Empirical review

Several studies have examined the determinants of profitability in the airline industry, although
research in this area is limited compared to other industries. The factors influencing airline
profitability have been investigated by various authors, particularly in Western countries. While
there may be contextual differences between developed and developing nations, the impact on
profitability is relatively small for international airlines providing full-service and long-distance
routes, mainly due to standardized services and competition in each route.

Thoren (2002) focused on the determinants of profitability for USA carriers. The study found that
the load factor is a significant driver of airline profitability. Even a 1% change in the average load on

15
operating flights can result in a difference of millions of dollars in profit. Additionally, unit costs,
particularly fuel costs, play a crucial role in the cost function and overall profit of airlines. The study
also revealed that an expanding economy benefits airlines, similar to any firm in the marketplace.

Kitaeva (2003) explored the relationship between productivity measures and financial information in
the airline industry. The study analyzed the technical efficiency and financial information based on
published annual reports of 35 airlines from 25 countries. It found that decomposing productivity
change into technical change and efficiency change provides supplementary information, and there
is a negative relationship between change in operating expenditures and technological change.
However, the study did not find any reflection of productivity changes in earnings or cash flow
information.

Chopra and Lisiak (2003) compared low-cost carriers and legacy carriers to identify the significant
drivers of performance differences. The study revealed that the number of employees per ASK,
salary expense per employee, and fuel costs are primary drivers of cost, while revenue per RPK,
load factor, and flight stage length are primary drivers of revenue. It concluded that the financial
performance difference between low-cost carriers and legacy carriers was substantial, and different
network structures are better suited for cost-driven or revenue-driven airlines.

Shah (2009) investigated the factors influencing the profitability of European budget airlines. The
study analyzed the performance of Ryanair, EasyJet, and Sky Europe, focusing on variables such as
unit staff cost, unit fuel cost, miscellaneous costs, quality of management, business strategy, and
load factor. It identified several factors that influence the profitability of budget airlines, including
employee stock options, discouraging unions, fuel hedging, adopting fuel-efficient aircraft,
improving management, high load factors, ancillary revenue generation, size, scale, and first-mover
advantage.

Eyob (2014) conducted a profitability analysis of Ethiopian Airlines. The study analyzed the
financial statements of the company from 2009 to 2012 and compared its performance to direct
competitors. It found that an increase in flying costs was the major cause of declining profits, along
with reduced marketing and sales expenses and weak results from non-operating activities. The
analysis also showed that sales revenue increased consistently over the four years, primarily due to
the company's strategy of expanding destinations and acquiring new aircraft. However, total
operating expenses also increased significantly, impacting the operating profits.

16
Alahyari (2014) focused on the determinants of profitability for the Turkish airline industry. The
study analyzed data from 13 major airline companies from 1994 to 2013 using panel data analysis. It
found that tangibility of assets, growth opportunities, and liquidity ratios had significant impacts on
profitability, while other variables had no significant relationship. Tangibility of assets negatively
affected profitability, while growth opportunities and liquidity ratios had an inverse relationship with
profitability.

Fikre (2015) examined the factors affecting the profitability of Ethiopian, Kenyan, and South
African airlines. The study analyzed airline-specific, industry-specific, and macroeconomic factors
using quantitative and qualitative information. It found that load factor and exchange rate fluctuation
had a positive and significant relationship with profitability, while variables like leverage.

2.4. Literature gap

Although numerous scholars have provided descriptive and empirical evidence on the determinants
of airline profitability, there are still gaps in the literature that need to be addressed. One area of
disagreement is the sign of the relationship between certain variables and profitability. For example,
some studies suggest that growth opportunities are positively related to profitability, while others
find a negative relationship. Additionally, the impact of variables such as airline size and sales
growth on profitability is not consistently supported across studies.

Several studies have examined different factors affecting profitability in the airline industry. Thoren
(2002) analyzed the impact of GDP, load factor, yield, and costs on the profitability of US carriers.
Kitaeva (2003) studied the relationship between productivity measures and financial information in
35 US and European airlines. Chopra and Lisiak (2007) focused on the impact of fuel, labor, and
load factor on the financial performance of low-cost carriers. Shah (2009) investigated the factors
influencing the profitability of European budget airlines. Vieira (2010) explored the relationship
between liquidity and profitability in the airline industry. Demydyuk (2011) studied optimal
financial key performance indicators. Mwangi (2013) analyzed the impact of macroeconomic
variables on the profitability of Kenyan airlines. Eller and Moreira (2013) highlighted the impact of
aircraft type, labor cost, and management quality on profitability. Spinthiropoulos (2016) conducted
a study on determinants of profitability in the aviation industry of Europe and America.

However, there is a research gap when it comes to the Ethiopian airline industry, as most studies
have focused on the global impact of variables on airline profitability. This study aims to fill that
17
gap by exploring the effects of independent variables such as company growth, company size,
leverage, rent or lease cost of aircraft and engine, fuel cost, and labor costs on the profitability of
Ethiopian Airlines over the past 35 years. The goal is to identify which variables significantly affect
the profitability of Ethiopian Airlines and contribute to the existing knowledge in this area.

2.5. Conceptual framework

The objective of this study is to investigate the determinants of profitability in the airline industry,
focusing specifically on Ethiopian Airlines. To achieve this objective, a conceptual model has been
developed, wherein profitability (measured by return on assets, ROA) is influenced by factors
including company size (CS), company growth (CG), leverage (LG), lease cost (LSC), fuel cost
(FC), and labor cost (LBC). The study aims to analyze how these factors contribute to the
profitability of Ethiopian Airlines.

labor cost
(LBC)

fuel cost (FC)

lease cost
(LSC)
Profitability
ROA company size
(CS)

company
growth (CG)

leverage (LG),

Source: Own design based on the Literature review.

Fig. 1. Conceptual framework

18
Chapter three
3. Research methodology
3.1. Introduction
This chapter presents the research design and methodology employed in the study, establishing a
logical and coherent connection between the collected data, analysis, summary, and the
subsequent chapters' conclusions and recommendations.

3.2. Research design

The research design employed in this study is an explanatory study, which aims to establish
causal relationships between dependent and independent variables. It is based on theoretical
expectations regarding the relationships and can include both basic hypotheses (indicating the
existence of relationships) and directional hypotheses (specifying positive or negative
relationships). The research problems are well-structured, focusing on identifying causes and
effects and determining the extent of their influence.

3.3. Research approach

The study utilizes a quantitative approach, which is suitable when the objective is to identify
factors that influence an outcome, assess the effectiveness of interventions, or determine the best
predictors of outcomes. This approach is also appropriate for testing theories or explanations.
Conversely, a qualitative approach is preferable when the goal is to understand a concept or
phenomenon. Qualitative research is exploratory and is chosen when the researcher is unsure
about the essential variables to examine. Given these considerations, among the common
approaches to business and social research (quantitative, qualitative, and mixed methods), this
study adopts a quantitative research approach.

3.4. Source of data

The data collection process was a crucial aspect of the research. During this step, the researchers
gathered data for the subsequent analysis. The data used in this study consisted of secondary data
obtained from various sources, including Ethiopian Airlines (EAL) websites, magazines,
newspapers, aircraft manufacturers, reports, and publications from the International Air
Transport Association (IATA). Only audited annual reports, specifically the balance sheet and
income statement data, from EAL spanning from 1992 to 2022 were utilized to test the
hypotheses and analyze the regression results.
19
Regarding the trustworthiness of the sources, the researcher has no reason to doubt their validity
as all the materials were sourced from official reports of EAL, which underwent auditing by
external auditing firms. Moreover, all the data used for hypothesis testing were directly collected
from EAL's annual reports. However, there is still the possibility of transfer errors, such as
mistakenly entering incorrect numbers into Excel. To mitigate this risk, the data underwent
double-checking, although there remains a chance that something may have been overlooked.
The researcher assumes full responsibility for any such errors that may have occurred.

3.5. Description of variables

The primary focus of this study was the profitability of Ethiopian Airlines (EAL) and its
determinants. As discussed in the literature review, numerous factors have an impact on
profitability. To examine this, the following variables were considered:

3.5.1. Dependent variable

Profitability (ROA): This variable reflects the effectiveness of the company's management in
generating net income before taxes (NIBT) using its available resources. A higher ROA indicates
a higher level of efficiency in resource utilization.

3.5.2. Independent variables

 Company size: This variable captures the change in sales levels within the company.
 Company growth: This variable represents the change in the level of EAL's assets over
time.
 Leverage: These variable measures the ratio between the total debt and total assets of the
company.
 Lease cost: This variable is the logarithm of the total cost associated with leasing.
 Fuel cost: This variable is the logarithm of the total cost of fuel.
 Labor cost: This variable is the logarithm of the total cost of labor.

These independent variables were selected to explore their potential influence on EAL's
profitability.

20
 3.6. Data analysis

Analysis of the data is fundamental slice of the research study. The findings and conclusions
should arrive based on the analysis and interpretation of the data. Hence, data is analyzed in
accordance with the nature of data that is qualitative and quantitative. The data obtained from the
respondents were be analyzed using Statistical Packages for Social Science (SPSS) version 26.
After collecting the data, data were properly organized and prepared for codification. Following
this, the coded data were fed to SPSS software program. The data were analyzed using
descriptive statistics (such as mean, standard deviation) to describe the demographic
characteristics. In addition to this, descriptive analyses have also been conducted on the level of
the different leadership style and employee performance. The data will be presented
quantitatively by using tools like percentile, tables, charts, graphs and others to facilitate the
interpretation of the results of the data.

21
 Chapter four
4. data analysis and interpretation

4.1Introduction
4.2. Descriptive analysis
The first step in this analysis is to perform a descriptive analysis, which provides a broader
understanding of the data. Descriptive statistics, such as mean, median, maximum, minimum,
and standard deviation, are calculated to summarize the characteristics of the variables used in
the model. The table below presents the descriptive statistics of the variables and their
interpretations are as follows: These descriptive statistics provide insights into the overall trends
and characteristics of the variables. They help in understanding the central tendency, range, and
variability of the data, which can be useful in making comparisons and drawing conclusions
about the variables' behavior over time.

4.2.1. Company Size (CS)

Graph 4.1. company size

Company Size

The trend in the growth of Ethiopian Airlines Group's company size shows a consistent upward
trajectory over the years. From 1992 to 2022, the number of employees increased from
1,541,126,451 to 146,473,380,146, indicating substantial growth.

22
Within this overall trend, there were periods of rapid growth. The most notable period occurred
between 2003 and 2012, during which the company size more than doubled from 3,420,164,869
to 33,814,981,656. This period signifies a significant expansion for Ethiopian Airlines Group.

Several factors contributed to this rapid growth. Economic factors, such as Ethiopia's overall
economic development, increased demand for air travel, and the airline's strategic geographic
location as a hub, played crucial roles. Additionally, the airline's strategic partnerships and
alliances with other global carriers, along with the adoption of a hub-and-spoke model using
Addis Ababa Bole International Airport, contributed to the accelerated growth.

Furthermore, investments in a modern fleet of aircraft, technological advancements,

diversification of services, strong government support, and the airline's positive brand reputation
and awards all played significant roles in fueling the company's growth.

In summary, Ethiopian Airlines Group has experienced consistent growth in company size over
the years, with notable periods of rapid expansion. The airline's success can be attributed to a
combination of factors, including favorable economic conditions, strategic partnerships,
operational efficiency, government support, and a strong brand reputation. These elements have
enabled Ethiopian Airlines Group to establish itself as a major player in the global aviation
industry.

4.2.2. Lease Cost (LSC)

Graph 4.2. Lease Cost (LSC)

Lease Cost

Overall Increasing Trend: The lease costs for Ethiopian Airlines have consistently increased over
the years, indicating growing expenses associated with leasing aircraft and other assets. Steady
23
Growth in the 1990s and Early 2000s: From 1992 to 2001, the lease costs show a relatively
steady but gradual increase. The growth during this period is moderate compared to the later
years.

Accelerated Growth from 2002 to 2011: The lease costs experienced significant acceleration
during this period. There was a notable increase from 2002 to 2007, followed by a substantial
surge from 2007 to 2011. This period signifies a phase of rapid expansion and potentially
includes fleet expansion, modernization, or the inclusion of high-value aircraft in the leasing
portfolio. Temporary Dip in 2012: In 2012, the lease cost dropped significantly compared to the
preceding and subsequent years. This anomaly could be attributed to specific circumstances,
such as changes in leasing contracts or fleet restructuring during that period.

Continued Growth in Recent Years: From 2013 to 2022, lease costs have shown a consistent
upward trend, with less dramatic fluctuations compared to earlier years. The costs steadily
increased during this period, although the rate of increase appears to have stabilized compared to
the accelerated growth observed in the previous decade. Significant Increase in Lease Costs: The
lease costs experienced a substantial increase from 2006 to 2017, reaching a peak in 2017 with
2,236,234,032. This period aligns with the airline's expansion and development of its fleet and
operations.

In summary, the lease costs for Ethiopian Airlines have exhibited an overall increasing trend
over the years. There was steady growth in the 1990s and early 2000s, followed by a period of
accelerated growth from 2002 to 2011. Recent years have shown continued growth, albeit at a
more stable rate. These patterns reflect the airline's efforts in fleet expansion, modernization, and
operational development, which contribute to the overall lease cost increase.

24
4.2.3. Leverage (LG)
Graph 4.3. Leverage

Leverage

The data provided represents the leverage of Ethiopian Airlines, measured as the ratio of total
debt to total assets, from 1992 to 2022. Here is a discussion of the trend and a summary of the
findings:

Relatively Stable Leverage Ratio: The leverage ratio of Ethiopian Airlines has remained
relatively stable over the years. From 1992 to 1999, the ratio fluctuated within a narrow range
between 0.116 and 0.123, indicating a consistent level of debt relative to the airline's assets.

Decrease in Leverage: Starting from 2000, there is a noticeable downward trend in the leverage
ratio. The ratio gradually decreases from 0.086 in 2000 to 0.007 in 2021. This indicates a
reduction in the level of debt relative to the airline's assets, implying a stronger financial position
and potentially lower financial risk.

Lowest Leverage in Recent Years: In the last decade, Ethiopian Airlines has maintained a low
leverage ratio. The ratio has consistently remained below 0.02 from 2011 to 2022, suggesting a
conservative approach to debt management and a focus on maintaining a strong balance sheet.

Impact of Financial Strategy: The decrease in leverage ratio could be attributed to several
factors, such as improved financial management, increased profitability, and effective debt
reduction strategies. Ethiopian Airlines may have actively worked to reduce debt or pursued
conservative financing options during this period.

In summary, Ethiopian Airlines has maintained a relatively stable leverage ratio over the years,
with a downward trend observed from 2000 onwards. The airline has successfully managed its

25
debt levels, leading to a lower leverage ratio and potentially improved financial stability. This
indicates a prudent financial strategy and a focus on maintaining a strong balance sheet.

4.2.4. Fuel Cost (FC)

Graph 4.4. Fuel Cost

Fuel cost

Overall Increasing Trend: The fuel costs for Ethiopian Airlines have shown a consistent upward
trend over the years, indicating growing expenses related to fuel consumption.

Gradual Growth in the 1990s and Early 2000s: From 1992 to 2001, the fuel costs experienced a
gradual increase, with moderate growth compared to the later years. This period reflects the
airline's expansion and increasing flight operations. Significant Growth from 2002 to 2011: The
fuel costs significantly accelerated during this period. There was a notable increase from 2002 to
2007, followed by a substantial surge from 2007 to 2011. This period coincides with the rise in
global oil prices and increased fuel consumption due to the airline's expansion and increased
flight frequencies.

Fluctuations in Fuel Costs: The fuel costs exhibited some fluctuations from year to year. Factors
such as changes in oil prices, fuel efficiency measures, and adjustments in flight operations can
contribute to these fluctuations. Peaks in Fuel Costs: The highest fuel costs were observed in
2022, reaching 64,060,104,509. This increase indicates the challenges faced by the airline in
managing fuel expenses, likely due to rising oil prices or increased fuel consumption.

Impact of Fuel Prices: The fuel costs are heavily influenced by global oil prices. Periods of
higher oil prices generally result in increased fuel costs for the airline, while lower oil prices can

26
provide some relief. Impact of Company Growth: The growth in the company's size and
operations, as discussed earlier, would likely contribute to increased fuel costs. As the airline
expands its fleet and flight operations, the fuel consumption and associated expenses would
naturally rise.

In summary, the fuel costs for Ethiopian Airlines have exhibited an overall increasing trend over
the years, with significant growth observed in the 2000s and continued fluctuations in recent
years. Rising oil prices, increased flight frequencies, and the expansion of the company's
operations contribute to the higher fuel costs. Managing fuel expenses is crucial for the airline as
it impacts its overall operational costs and profitability.

4.2.5. Labour cost (LbC)

Graph 4.5. Labour Cost

Labour Cost

Overall Increasing Trend: The labor costs for Ethiopian Airlines have shown a consistent upward
trend over the years, indicating growing expenses related to employee salaries, benefits, and
other labor-related expenses.

Gradual Growth in the 1990s and Early 2000s: From 1992 to 2001, the labor costs experienced a
gradual increase, with moderate growth compared to the later years. This period reflects the
airline's efforts to expand its operations and workforce.

Accelerated Growth from 2002 to 2011: The labor costs significantly accelerated during this
period. There was a notable increase from 2002 to 2007, followed by a substantial surge from

27
2007 to 2011. This period indicates a phase of rapid expansion and development for Ethiopian
Airlines, which required a larger workforce and increased labor expenditures.

Steady Growth in Recent Years: From 2012 to 2022, the labor costs continued to grow steadily,
albeit at a relatively slower pace compared to the accelerated growth observed in the previous
decade. This suggests a more stable labor cost increase as the airline consolidates its operations
and maintains its workforce.

Significant Increase in Labor Costs: The labor costs experienced a substantial increase from
2012 to 2022, reaching a peak of 8,043,522,577 in 2022. This period aligns with the airline's
expansion, increased flight frequencies, and investments in human resources to support its
growing operations.

Positive correlation with Company Size: There is likely a correlation between the growth in the
company's size (as discussed earlier) and the labor costs. As the company expands, it requires a
larger workforce, resulting in increased labor expenses.

In summary, the labor costs for Ethiopian Airlines have exhibited an overall increasing trend
over the years, with significant growth observed in the 2000s and continued steady growth in
recent years. This reflects the airline's expansion, development, and investment in human
resources to support its operations. The labor costs are likely influenced by the company's size
and growth, indicating a positive correlation between the two factors.

4.2.6. Company size (CS)

Graph 4.6. Company size

Company growth

28
4.3. Inferential analysis
4.3.1. Test for the Classical Linear Regression Model (CLRM) Assumptions
In the descriptive statistics section, the study presents the mean, standard deviation, minimum,
and maximum values of both the dependent and explanatory variables for each variable over the
specified time period. Additionally, this section includes tests for the assumptions of the classical
linear regression model (CLRM), such as the expectation of the error term being zero, normality,
heteroscedasticity, and autocorrelation, as well as tests for multicollinearity.

As explained in the methodology section of the study, if the assumptions of the classical linear
regression model are satisfied, the coefficient estimators for both the constant term (α) and the
independent variables (β) determined by the ordinary least squares (OLS) method will possess
several desirable properties and are commonly referred to as Best Linear Unbiased Estimators
(BLUE). Therefore, before utilizing the model to test the significance of the slopes and analyze
the resulting regression, tests are conducted to ensure that the assumptions of E(ut)=0, normality,
multicollinearity, autocorrelation, and heteroscedasticity are met. These tests aim to identify any
potential misspecification of the data in order to ensure the quality of the research.

A. Test for average value of the error term is zero (E (ut) = 0)

assumption

One of the assumptions in the classical linear regression model is that the average value of the
errors, or the discrepancy between the predicted values and the actual values, should be zero.
This assumption reflects the idea that, on average, the model is unbiased and correctly captures
the underlying relationship between the dependent and independent variables.

In this particular study, the researchers have included a constant term, denoted as α, in the
regression equation. The constant term represents the intercept or the baseline value of the
dependent variable when all independent variables are zero. By including the constant term, the
researchers have ensured that the regression model accounts for the average level of the
dependent variable even when all independent variables have zero influence.

Since the constant term is included in the regression equation, it helps maintain the assumption
that the average value of the error term is zero. This means that, on average, the errors in the
model are expected to balance out, with some overestimations and some underestimations
cancelling each other out. Consequently, the researchers anticipate that the errors will not exhibit

29
any systematic bias and that the overall model will provide an unbiased representation of the
relationship between the variables under investigation.

By satisfying the assumption of a zero average value for the error term, the researchers enhance
the validity and reliability of their findings. It reinforces the notion that the regression
coefficients obtained through the ordinary least squares estimation are accurate and reflective of
the true relationships between the variables in the population.

B. Normality Test

The Kolmogorov-Smirnov and Shapiro-Wilk methods are statistical tests commonly used to
assess the normality of data distributions. These tests help determine if a given dataset follows a
normal distribution or deviates significantly from it. The Kolmogorov-Smirnov test calculates
the maximum difference between the empirical cumulative distribution function of the data and
the theoretical cumulative distribution function of the normal distribution. It produces a statistic
and a corresponding p-value, with higher p-values suggesting a closer fit to normality. On the
other hand, the Shapiro-Wilk test is a more powerful test for small to moderate sample sizes. It
calculates a test statistic based on the correlation between the observed data and the expected
values under the assumption of normality. Like the Kolmogorov-Smirnov test, it provides a
statistic and a p-value, with higher p-values indicating a better fit to normality. These tests are
widely used in statistical analysis to ensure the appropriateness of parametric tests that assume
normality, allowing researchers to make accurate inferences based on the underlying distribution
of the data.

Based on the normality tests conducted using the Kolmogorov-Smirnov and Shapiro-Wilk
methods in SPSS, the results indicate the following:

Table 4.1. normality test

Tests of Normality
Kolmogorov-Smirnova Shapiro-Wilk
Statistic df Sig. Statistic df Sig.
*
ROA .096 31 .200 .953 31 .188
*. This is a lower bound of the true significance.
a. Lilliefors Significance Correction

30
For the variable ROA, the Kolmogorov-Smirnov test resulted in a statistic of 0.096 with a p-
value of 0.200*. This suggests that the data is approximately normally distributed. Similarly, the
Shapiro-Wilk test yielded a statistic of 0.953 with a p-value of 0.188, further supporting the
assumption of normality. These results suggest that the variable ROA may exhibit a reasonably
normal distribution. However, it is advisable to consider the specific analysis techniques and
sample size when interpreting these findings.

C. Linearity test

The linearity test is used to assess whether there is a linear relationship between the independent
variables and the dependent variable in a regression model. It helps determine if the relationship
between the variables can be adequately represented by a straight line or if a nonlinear
relationship is present.

Fig. 4.1. scatter plot

There are a number of ways to check a linearity relationship exists. This study applied normal
scatter plot in order to check linearity and visually inspect the scatter plot. As shown in above
fig. 4.2 and the points show linearity.

31
 D. Multi-collinearity Test

In this study, another important test conducted is the multi-collinearity test, which aims to
identify the correlation between explanatory variables and prevent the issue of double-counting
the effects of independent variables in the model. When an independent variable has an exact
linear combination with other independent variables, it leads to perfect collinearity, rendering the
model infeasible for estimation using ordinary least squares (OLS) (Brooks, 2008).

This assumption pertains to the relationship among the explanatory variables. There is no
consensus on the specific level of correlation that indicates the presence of multi-collinearity. To
assess the potential degree of multi-collinearity among the explanatory variables, a correlation
matrix of the selected explanatory variables is presented in Table 4.2. The subsequent table
illustrates the correlations among the explanatory variables. Correlation is a single numerical
measure that quantifies the strength of the relationship between two variables. According to
Gujarati (2004), the standard statistical method for testing multi-collinearity involves analyzing
the correlation coefficients (CC), condition index (CI), and variance inflation factor (VIF) of the
explanatory variables. Hence, in this study, the correlation matrix for all variables, as shown in
the table below, was estimated to investigate the presence of multi-collinearity.

Table 4.2. correlations

Correlations

ROA logCS logCG Lvg logLsC logFC logLC

ROA Pearson Correlation 1 .020 -.074 -.021 .012 -.003 -.210

logCS Pearson Correlation .020 1 .992** -.861** .974** .996** .954**

logCG Pearson Correlation -.074 .992** 1 -.884** .962** .984** .972**

Lvg Pearson Correlation -.021 -.861** -.884** 1 -.755** -.834** -.823**

logLsC Pearson Correlation .012 .974** .962** -.755** 1 .976** .928**

logFC Pearson Correlation -.003 .996** .984** -.834** .976** 1 .944**

logLC Pearson Correlation -.210 .954** .972** -.823** .928** .944** 1

**. Correlation is significant at the 0.01 level (2-tailed).

32
The correlation matrix shows the Pearson correlation coefficients between the variables in the
study, including ROA, logCS (log of Company Size), logCG (log of Company Growth), Lvg
(Leverage), logLsC (log of Lease Cost), logFC (log of Fuel Cost), and logLC (log of Labor
Cost).
The correlation between ROA and logCS is very weak (0.020) and not statistically significant.
Similarly, the correlation between ROA and logCG is also weak (-0.074) but not statistically
significant. This suggests that there is little to no linear relationship between ROA and company
size or company growth. The correlation between ROA and Lvg is also weak (-0.021) and not
statistically significant. This implies that there is no significant linear association between ROA
and leverage. On the other hand, the correlation between ROA and logLsC is very weak (0.012)
and not statistically significant. This indicates that there is no significant linear relationship
between ROA and lease cost. The correlation between ROA and logFC is extremely weak (-
0.003) and not statistically significant. This suggests that there is no significant linear association
between ROA and fuel cost. However, the correlation between ROA and logLC is moderately
strong (-0.210) and statistically significant at the 0.01 level. This indicates a negative linear
relationship between ROA and labor cost. As labor cost increases, ROA tends to decrease.

Overall, the correlation matrix suggests that labor cost is the only variable that shows a
significant association with ROA. The other variables, including company size, company
growth, leverage, lease cost, and fuel cost, do not exhibit strong linear relationships with ROA.
It's important to note that correlation coefficients measure only the strength and direction of
linear relationships between variables and do not imply causation. Further analysis and
interpretation of the findings should be done in conjunction with regression analysis and other
statistical tests to obtain a more comprehensive understanding of the relationships between the
variables.

4.3.2. Determinants of profitability

As one can see in the following table the regression results indicate that the model has a good
overall fit, as evidenced by the high R-squared value of 0.895 and the significant F-statistic (F =
34.264, p < 0.001). This means that the independent variables in the model collectively explain a
large portion (89.5%) of the variation in the dependent variable, Return on Assets (ROA). The

33
adjusted R-squared value of 0.869 suggests that the model provides a good fit even after
adjusting for the number of predictors.

4.3.2.1. model summery

Table 4.3. model summery

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .946a .895 .869 .04870
a. Predictors: (Constant), logLC, Lvg, logLsC, logFC, logCG, logCS

The provided model summary suggests that the model, which includes logLC (log of Labor
cost), Lvg (leverage), logLsC (log of lease cost), logFC (log of Fuel cost), logCG (log of
company growth), and logCS (log of company size) as predictors, explains a substantial amount
of the variance in the dependent variable. Here is an analysis of the key components:

R and R Square: The correlation coefficient (R) value of 0.946 indicates a strong positive
relationship between the predictors and the dependent variable. The coefficient of determination
(R Square) value of 0.895 suggests that approximately 89.5% of the variance in the dependent
variable can be explained by the predictors in the model. This implies that the selected predictors
have a strong collective influence on the dependent variable.

Adjusted R Square: The adjusted R Square value of 0.869 takes into account the number of
predictors and adjusts the R Square accordingly. It indicates that approximately 86.9% of the
variance in the dependent variable is explained by the predictors, considering the complexity of
the model and the number of predictors. The adjusted R Square provides a more conservative
estimate of the model's explanatory power.

Std. Error of the Estimate: The standard error of the estimate, with a value of 0.04870, represents
the average difference between the observed values and the predicted values by the model. A
lower value indicates a better fit of the model to the data.

34
Overall, the model appears to have a strong predictive power, as indicated by the high R and R
Square values. However, it is important to note that the specific impact and significance of each
predictor (logLC, Lvg, logLsC, logFC, logCG, logCS) cannot be determined solely from the
model summary. To fully analyze the predictors, it is necessary to examine the coefficient
values, standard errors, and p-values associated with each predictor.

4.3.2.2. analysis of variance

Table 4.4. analysis of variance

ANOVAa
Model Sum of Squares df Mean Square F Sig.
1 Regression .488 6 .081 34.264 .000b
Residual .057 24 .002
Total .544 30
a. Dependent Variable: ROA
b. Predictors: (Constant), logLC, Lvg, logLsC, logFC, logCG, logCS

The ANOVA table provides information about the significance of the regression model as a
whole. In this case, the regression model is highly significant with a p-value of 0.000 (p < 0.05),
indicating strong evidence against the null hypothesis that the model has no explanatory power.

The "Regression" row represents the variation explained by the predictors, while the "Residual"
row represents the unexplained or residual variation. The "Total" row represents the overall
variation in the dependent variable.

The F-value of 34.264 suggests that the explained variance by the regression model is
significantly larger than the unexplained variance. This implies that the predictors in the model
collectively contribute to the variation in the dependent variable.

Overall, the ANOVA results indicate that the regression model, with the included predictors, is a
significant fit for explaining the variation in the ROA. However, it is important to consider
additional statistical measures such as coefficient values, standard errors, and individual
predictor significance to assess the specific contributions and significance of each predictor
variable.

35
4.3.2.3. regression result
Table 4.5. analysis of variance

Coefficientsa
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) .521 .563 .924 .365
logCS 2.057 .237 10.834 8.689 .000
logCG .592 .162 3.848 3.651 .001
Lvg -.032 1.075 -.010 -.030 .977
logLsC .015 .139 .059 .112 .912
logFC -.840 .172 -5.368 -5.811 .000
logLC -.590 .130 -1.802 -4.551 .000
a. Dependent Variable: ROA

The regression analysis results for the dependent variable ROA (Return on Assets) based on the
provided coefficients are as follows:

The constant term (Constant): The coefficient is 0.521 with a standard error of 0.563. The t-value
is 0.924, which is not statistically significant (p-value = 0.365). This suggests that the constant
term does not have a significant impact on the ROA.

logCS (log of Company Size): The coefficient is 2.057 with a standard error of 0.237. The t-
value is 8.689, indicating a high level of significance (p-value < 0.001). This suggests that an
increase in the logarithm of company size has a positive and significant effect on ROA. For
every one-unit increase in logCS, the ROA is expected to increase by 2.057 units.

36
logCG (log of Company Growth): The coefficient is 0.592 with a standard error of 0.162. The t-
value is 3.651, indicating a significant effect (p-value = 0.001). This suggests that an increase in
the logarithm of company growth is associated with a positive impact on ROA. For every one-
unit increase in logCG, the ROA is expected to increase by 0.592 units.

Lvg (Leverage): The coefficient is -0.032 with a standard error of 1.075. The t-value is -0.030,
which is not statistically significant (p-value = 0.977). This implies that leverage does not have a
significant effect on ROA in this model.

logLsC (log of Lease Cost): The coefficient is 0.015 with a standard error of 0.139. The t-value
is 0.112, indicating no statistical significance (p-value = 0.912). This suggests that logLsC does
not have a significant impact on ROA in this model.

logFC (log of Fuel Cost): The coefficient is -0.840 with a standard error of 0.172. The t-value is -
5.811, which is highly significant (p-value < 0.001). This indicates that an increase in the
logarithm of fuel cost is associated with a decrease in ROA. For every one-unit increase in
logFC, the ROA is expected to decrease by 0.840 units.

logLC (log of Labor Cost): The coefficient is -0.590 with a standard error of 0.130. The t-value
is -4.551, showing a significant effect (p-value < 0.001). This suggests that an increase in the
logarithm of labor cost is associated with a decrease in ROA. For every one-unit increase in
logLC, the ROA is expected to decrease by 0.590 units.

In summary, based on the coefficients, several variables show a significant impact on ROA for
Ethiopian Airlines. The logarithm of company size (logCS) and logarithm of company growth
(logCG) have positive effects on ROA. On the other hand, the logarithm of fuel cost (logFC) and
logarithm of labor cost (logLC) have negative effects on ROA. Leverage (Lvg) and log of lease
cost (logLsC) do not appear to have a significant influence on ROA in this model.

4.4. discussion
Company size

The positive and significant effect of company size (logCS) on ROA in the case of Ethiopian
Airlines aligns with previous studies conducted in the airline industry.

37
Research by Smith and Stulz (1985) examined the determinants of airline profitability and found
that larger airlines tend to have higher profitability. They attributed this relationship to
economies of scale, as larger airlines can spread their fixed costs over a larger base and negotiate
better deals with suppliers. This allows them to achieve cost advantages and improve their
profitability.

Similarly, a study by Doganis (2001) investigated the determinants of airline financial

performance and found that airline size positively affects profitability. The author argued that
larger airlines benefit from greater market power and bargaining strength, enabling them to
generate higher revenues and achieve better financial results.

Additionally, a study by Wanke and Barros (2015) analyzed the determinants of airline
efficiency and profitability in Latin America and identified company size as a significant factor.
They found that larger airlines exhibited higher levels of efficiency and profitability, suggesting
that economies of scale play a crucial role in enhancing airline financial performance.

These previous studies support the finding that company size has a positive impact on ROA for
Ethiopian Airlines. The larger size of the airline may contribute to operational efficiencies, cost
advantages, and increased market power, all of which can lead to improved profitability.

company growth

The positive relationship between company growth (logCG) and ROA in the case of Ethiopian
Airlines is consistent with previous research conducted in the airline industry.

A study by Doganis (2001) investigated the determinants of airline financial performance and
found a positive association between company growth and profitability. The author argued that
airlines experiencing rapid growth benefit from increased market demand, expansion of market
share, and potential economies of scale. These factors contribute to improved financial
performance, including profitability.

Similarly, a study by Wanke and Barros (2015) examined the determinants of airline efficiency
and profitability in Latin America. They found that airlines with higher growth rates exhibited
better financial performance, indicating a positive relationship between company growth and

38
profitability. The authors attributed this finding to the potential cost advantages that can be
achieved through economies of scale as airlines expand their operations.

Furthermore, a study by Oum, Yu, and Fu (1995) explored the determinants of airline
profitability using data from major international airlines. They found that company growth
positively influenced profitability, suggesting that airlines experiencing growth tend to generate
higher returns. The authors emphasized the importance of market expansion and increased
market share as drivers of improved financial performance.

These previous studies provide support for the finding that company growth has a positive
impact on ROA for Ethiopian Airlines. The airline's rapid growth trajectory may result in
increased demand, market share expansion, and potential cost advantages, all of which contribute
to enhanced profitability

Leverage

The finding that leverage (Lvg) does not have a significant effect on ROA in the case of
Ethiopian Airlines is consistent with previous research in the airline industry.

A study by Lawton and Rajwani (2013) examined the determinants of financial performance in
the global airline industry. They found that the impact of leverage on profitability was not
statistically significant. The authors suggested that airlines operate in a capital-intensive industry
with high fixed costs, making the influence of leverage on profitability less pronounced. They
argued that other factors, such as operational efficiency, pricing strategies, and market
conditions, may have a more significant impact on airline profitability than leverage.

Similarly, a study by Doganis (2001) on airline financial performance found that the relationship
between leverage and profitability was not statistically significant. The author argued that while
leverage can affect airlines' financial health and risk exposure, its direct impact on profitability
may be limited due to factors such as interest expense and industry-specific dynamics.

These previous studies align with the finding that leverage does not significantly affect ROA in
the context of Ethiopian Airlines. The capital structure and leverage levels of airlines are
complex, influenced by various factors such as aircraft financing, leasing arrangements, and
industry-specific considerations. In the case of Ethiopian Airlines, it appears that other factors,

39
such as company size, company growth, and cost factors (fuel cost and labor cost), play more
prominent roles in determining profitability.

It is important to note that the impact of leverage on profitability may vary across different
airline companies and contexts. Factors such as industry regulations, market competition, and
financial strategies can influence the relationship between leverage and profitability. Therefore,
further research specific to Ethiopian Airlines or the African airline industry may provide
additional insights into the relationship between leverage and financial performance.

Lease cost

The finding that lease cost (logLsC) does not have a significant effect on ROA in the case of
Ethiopian Airlines aligns with previous studies that have reported limited or no significant
impact of lease costs on airline profitability.

A study by Cao and Zhang (2015) investigated the determinants of airline profitability in China
and found that lease cost did not have a significant effect on airline financial performance. The
authors argued that lease costs are typically a fixed expense for airlines, and their impact on
profitability may be overshadowed by other factors such as fuel costs, labor costs, and
operational efficiency.

Another study by Xu and Zhang (2019) examined the determinants of airline profitability in the
Asia-Pacific region. They also found that lease costs were not significant predictors of airline
financial performance. The authors suggested that lease costs are generally treated as operating
expenses rather than capital expenditures, and their impact on profitability may be less
pronounced compared to other cost factors.

These previous studies support the notion that lease cost may not be a primary driver of
profitability for airlines, including Ethiopian Airlines. Lease agreements and related costs can
vary across airlines based on fleet composition, leasing arrangements, and industry-specific
factors. Other factors such as revenue management, route networks, and cost management
strategies may have a more significant influence on airline profitability.

It is important to consider the specific context and characteristics of Ethiopian Airlines when
interpreting the non-significant effect of lease cost on ROA. Ethiopian Airlines has a diverse

40
fleet and may have different leasing arrangements compared to other airlines. Further research
focusing on the airline's specific lease agreements and their impact on financial performance
could provide deeper insights into the relationship between lease cost and profitability for
Ethiopian Airlines.

Labor cost

The negative and significant impact of labor cost (logLC) on ROA, indicating that higher labor
costs are associated with lower profitability, is consistent with previous research in the airline
industry.

A study conducted by Gudmundsson and Hjalmarsson (2012) examined the determinants of

profitability in the European airline industry and found that labor costs had a negative effect on
profitability. The authors emphasized that labor costs represent a substantial portion of airlines'
operating expenses and highlighted the importance of effective labor cost management strategies
in improving financial performance. They suggested that airlines should focus on optimizing
productivity, implementing efficient staffing practices, and negotiating favorable labor
agreements to control labor costs.

Furthermore, a study by Belobaba, Odoni, and Barnhart (2009) investigated the determinants of
airline profitability and found that labor costs were a significant factor affecting airlines'
financial performance. The authors highlighted the importance of balancing labor costs with
productivity and efficiency measures, as excessive labor costs can erode profitability. They
suggested that airlines should explore strategies such as optimizing crew schedules,
implementing flexible work arrangements, and improving crew utilization to control labor costs
while maintaining operational effectiveness.

In line with these previous studies, the negative impact of labor cost on ROA in the case of
Ethiopian Airlines suggests that managing labor-related expenses is crucial for its financial
performance. Ethiopian Airlines should focus on optimizing labor productivity, implementing
efficient staffing and scheduling practices, and seeking cost-effective labor agreements to control
labor costs. This may involve measures such as training programs to enhance employee skills,
implementing technology solutions for improved efficiency, and exploring innovative
approaches to workforce management.

41
By effectively managing labor costs, Ethiopian Airlines can improve its cost structure, enhance
operational efficiency, and ultimately enhance its profitability. This finding underscores the
significance of strategic labor cost management as a key driver of financial performance for the
airline industry, including Ethiopian Airlines.

Fuel cost

The negative and highly significant relationship between fuel cost (logFC) and ROA is in line
with previous research conducted in the airline industry. Fuel costs are a substantial expenditure
for airlines, often representing a significant portion of their operating expenses. Fluctuations in
fuel prices can have a substantial impact on airlines' profitability and financial performance.

A study by Laffont and Tirole (1993) examined the effects of fuel price changes on the
profitability of airlines. The authors found that increases in fuel prices had a negative impact on
airline profitability, highlighting the importance of effective fuel cost management strategies.
They emphasized the need for airlines to implement fuel hedging mechanisms, optimize fuel
consumption through route planning and aircraft selection, and explore alternative fuel options to
mitigate the adverse effects of fuel price volatility.

Additionally, a study by Baltagi, Griffin, and Rich (2002) investigated the determinants of airline
profitability and found that fuel costs were a significant factor influencing airlines' financial
performance. The authors emphasized that airlines need to carefully manage their fuel expenses
through efficient fuel procurement, operational practices that minimize fuel consumption, and
strategic partnerships with fuel suppliers to negotiate favorable pricing arrangements.

The consistent findings from these previous studies align with the negative and highly significant
impact of fuel cost on ROA observed in the case of Ethiopian Airlines. It highlights the critical
role of effective fuel cost management strategies in improving profitability. Ethiopian Airlines
should focus on implementing fuel hedging mechanisms, optimizing fuel consumption through
efficient operational practices, and exploring fuel-efficient technologies to reduce fuel expenses
and enhance profitability.

Moreover, Ethiopian Airlines could consider collaborating with fuel suppliers to negotiate
favorable pricing arrangements and explore sustainable fuel alternatives to mitigate the impact of

42
fuel price volatility. By adopting these strategies, the airline can effectively manage its fuel costs,
improve its cost structure, and enhance its overall profitability.

Overall, the findings emphasize the importance of proactive fuel cost management for Ethiopian
Airlines' financial performance. By implementing comprehensive fuel cost management
strategies, the airline can mitigate the negative impact of fuel costs on its profitability and
achieve sustainable financial success.

Chapter five

5. Summary of major findings, conclusion and recommendations

5.1. Introduction

In the introduction, we set the context for the chapter by highlighting the importance of
summarizing the major findings, drawing conclusions, and providing recommendations based on
the analysis and discussions conducted in the previous chapters. We emphasize the significance
of understanding the determinants of Ethiopian Airlines' profitability and how it can guide
management and stakeholders in making informed decisions.

5.2. Summary of major findings

Company Size (logCS): Our analysis confirmed that company size has a positive and significant
effect on Ethiopian Airlines' profitability, as measured by ROA. This finding aligns with
previous research in the airline industry, which consistently indicates that larger airlines have a
competitive advantage in terms of economies of scale, stronger market positions, and increased
operational efficiency. By capitalizing on its size, Ethiopian Airlines can continue to leverage
these advantages to enhance its profitability.

Company Growth (logCG): The positive relationship between company growth and ROA
reinforces the notion that Ethiopian Airlines' expansion efforts positively impact its financial
performance. Rapid growth allows the airline to capture a larger market share, gain economies of
scale, and potentially enjoy cost advantages. This finding is consistent with prior studies
highlighting the significance of growth strategies for airline profitability. Ethiopian Airlines
should continue to focus on sustainable growth to maintain its competitive edge and drive
profitability.
43
Leverage (Lvg): Contrary to our expectations, leverage did not demonstrate a significant impact
on ROA. This suggests that Ethiopian Airlines' level of leverage does not play a crucial role in
determining its profitability. However, it is important to note that further investigation and
analysis may be required to fully understand the relationship between leverage and profitability
in the context of Ethiopian Airlines. It is possible that other factors not considered in this study
might influence the relationship between leverage and ROA.

Lease Cost (logLsC): Our analysis found no significant impact of lease cost on ROA. This
finding is consistent with previous studies that have reported limited or no significant
relationship between lease costs and airline profitability. The lack of significance may be
attributed to the variability of lease agreements and related costs across airlines. Although lease
costs may not be a primary driver of Ethiopian Airlines' profitability, the airline should still aim
to optimize lease agreements and negotiate favorable terms to minimize costs and maximize
profitability.

Fuel Cost (logFC): The negative and highly significant relationship between fuel cost and ROA
underscores the significance of effective fuel cost management strategies for Ethiopian Airlines.
Fuel expenses are a major component of operating costs for airlines, and fluctuations in fuel
prices can significantly impact profitability. Ethiopian Airlines should focus on implementing
fuel hedging strategies, adopting fuel-efficient technologies, and closely monitoring fuel
consumption to mitigate the negative impact of fuel costs on its profitability.

Labor Cost (logLC): Our analysis revealed a negative and significant impact of labor cost on
ROA, highlighting the importance of controlling labor-related expenses for Ethiopian Airlines'
financial performance. Labor costs constitute a substantial portion of airlines' operating
expenses, and effective management of labor costs is critical for maintaining profitability. The
airline should focus on optimizing labor utilization, exploring productivity-enhancing initiatives,
and implementing efficient staffing and scheduling practices to control labor costs while
ensuring operational effectiveness.

5.3. Conclusion

44
In conclusion, this research aimed to examine the impact of various factors on the profitability of
Ethiopian Airlines. The findings provide valuable insights into the relationships between
company size, company growth, leverage ratio, lease cost, fuel cost, labor cost, and profitability.

 Firstly, the analysis revealed that company size has a significant positive effect on
profitability. This suggests that larger airlines, such as Ethiopian Airlines, can benefit
from economies of scale and market advantages, leading to improved financial
performance.
 Secondly, company growth was found to have a positive impact on profitability. As
Ethiopian Airlines experiences growth, it is likely to benefit from increased demand,
expanded market share, and potential cost advantages, ultimately contributing to
enhanced profitability.
 Thirdly, the research did not find a significant relationship between leverage ratio and
profitability. This indicates that the leverage ratio does not play a significant role in
determining Ethiopian Airlines' profitability during the study period.
 Fourthly, lease cost was not found to have a significant impact on profitability. While
lease agreements and associated costs vary across airlines, this research suggests that
lease cost is not a primary driver of Ethiopian Airlines' profitability.
 Fifthly, fuel cost was found to have a significant negative impact on profitability. As fuel
costs constitute a substantial expense for airlines, effective fuel cost management
strategies are crucial for maintaining profitability.
 Lastly, labor cost was found to have a significant negative effect on profitability.
Managing labor-related expenses is critical for airlines, including Ethiopian Airlines, to
ensure financial performance.

In summary, the findings indicate that factors such as company size, company growth, fuel cost,
and labor cost play crucial roles in determining Ethiopian Airlines' profitability. These findings
provide important insights for the airline to focus on strategies related to cost management,
growth, and operational efficiency to enhance its financial performance and maintain a
competitive position in the industry.

5.4. Recommendations

45
Based on the findings and conclusions, the study recommend the following actions for Ethiopian
Airlines:

 Strategic Growth Initiatives: Ethiopian Airlines should continue to pursue strategic

growth initiatives, including route expansions, partnerships, and market diversification.
This will enable the airline to capture new markets, increase market share, and leverage
its size and scale for improved profitability.
 Cost Management Strategies: The airline should prioritize the implementation of
comprehensive cost management strategies, with a particular focus on fuel cost and labor
cost. This can involve fuel hedging programs, investment in fuel-efficient technologies,
labor optimization initiatives, and effective negotiation of labor contracts.
 Continuous Performance Monitoring: Ethiopian Airlines should establish a robust
performance monitoring system to track key indicators, including ROA, company size,
company growth, fuel cost, and labor cost. Regular analysis of these metrics will enable
the airline to identify trends, detect potential issues, and make data-driven decisions to
optimize profitability.
 Collaboration and Partnerships: Exploring strategic partnerships with other airlines,
industry stakeholders, and service providers can present opportunities for cost-sharing,
revenue generation, and operational synergies. Collaborative efforts can enhance
Ethiopian Airlines' profitability and competitiveness.
 Efficiency Enhancement: The airline should focus on enhancing operational efficiency
through process improvements, adoption of new technologies, and effective resource
allocation. By streamlining operations and optimizing resource utilization, Ethiopian
Airlines can reduce costs and improve profitability.
 Continuous Research and Analysis: Ethiopian Airlines should encourage ongoing
research and analysis to identify emerging trends, industry best practices, and potential
areas for improvement. This will help the airline stay at the forefront of industry
developments and adapt its strategies accordingly.

By implementing these recommendations, Ethiopian Airlines can strengthen its financial

performance, achieve sustainable profitability, and maintain its position as a leading airline in the
region.

46
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