MACRO-ECONOMIC FACTORS AND PROFITABILITY OF DOMESTIC COMMERCIAL AIRLINES IN KENYA

The airline industry plays a crucial role in Kenya's economic development by facilitating trade, tourism, employment creation, and connectivity. However, domestic commercial airlines in Kenya have experienced declining profitability, with many recordings negative return on assets (ROA) over consecutive years, leading to airline closures and financial distress. Kenya Airways, the largest carrier, reported losses for ten consecutive years, with ROA ranging from -6.503 to -20.46 between 2019 and 2023. Despite the recognized importance of macroeconomic factors in influencing firm performance across various sectors, limited empirical evidence exists regarding their specific impact on Kenyan domestic airlines' profitability. This study investigated the effect of macroeconomic factors inflation rates, interest rates, and exchange rates on the profitability of domestic commercial airlines in Nairobi City County, Kenya. The study was anchored on Agency Theory, Deflation Theory, Fisher Theory, and Purchasing Power Parity Theory. A descriptive research design was adopted, utilizing a census approach covering all 13 domestic commercial airlines operating from 2019 to 2023. Secondary data was collected from financial statements and Central Bank of Kenya reports. Profitability was measured using ROA, while macroeconomic factors were operationalized through annual averages. Data analysis included descriptive statistics, diagnostic tests (multicollinearity, stationarity, normality, heteroscedasticity, and autocorrelation), correlation analysis, and panel regression analysis using SPSS. The findings revealed that inflation rate had a significant positive effect on airline profitability (β=0.336, p=0.004), exchange rate had a significant negative effect (β=-0.348, p=0.003), while interest rate showed an insignificant positive relationship (β=0.016, p=0.274). The model explained 50.6% of variance in ROA. The study concluded that macroeconomic factors significantly influence airline profitability. It therefore recommended implementation of foreign exchange hedging strategies, dynamic pricing models, and comprehensive macroeconomic risk management frameworks to enhance financial sustainability of domestic commercial airlines in Kenya.