Risk Analysis for Etihad Airways - Assignment Example

Risk analysis for Etihad Airways Introduction and management structure Based in Abu Dhabi, Etihad Airways began operations in 2003 with the airline being the flag airline carrier for the UAE. The name is an Arabic word that means ‘union’ with it having destinations across the five continents making the airline to be the fourth largest in this Middle East country. The airline prides itself of a fleet of eighty-five Airbus and Boeing aircrafts with its passenger traffic in 2012 standing at over ten million passengers for that particular year. The hub for the airline is at the Abu Dhabi Airport within which the principle activity for the airline is passenger transport, but the airline also has interests in cargo transport and managing the Etihad Holiday homes. The leadership structure at Etihad consists of a board of directors chaired by Sheikh Hamed bin Zayed with his deputy being Sheikh Khaled Bin Zayed and Hogan James as its CEO. Like any other substantive business enterprise operating in a global competitive market, Etihad has had to apply risk analysis and management processes in order for the airline to remain relevant to the airline market. In essence, risk analysis refers to the business process of identifying and analyzing the potential dangers that organizations, individuals, or government groups may face because of natural causes or through human related influence. On the other hand, risk management denotes the identification, review, and prioritization of the business risk that an organization may encounter. Effective risk management requires the application of resources with the intention of controlling the impact of the predicted unfortunate events and ensuring that the enterprise realizes the opportunities in the risk presented. With this, this essay will delve into the risk analysis tools and risk management practices already adopted by Etihad Airways in ensuring that the organization stays relevant to its market. Further, the focus of the essay will also be on analyzing the airline’s investment data dating ten years back and using a preferred risk analysis tool decide on a project that be a future investment to the airline. 2. The risk management practices adopted by Etihad Airways Ideally, the airlines risk management processes led Etihad to become the winner of the risk manager award from the Asian Corporate Energy because of competing with other local airlines while ensuring that they deliver quality services. Therefore, the greatest risk that Etihad Airways has is competition from other stronger airline brands such as Emirates and Qatar airlines, which are relatively regional airlines. According to Jones of the Wall Street Journal, the airline adopted the acquisition of stakes in other airlines as a way of eliminating competition from rival airlines as this has enabled the passenger carrier to tap into wider markets hence edging out competition for themselves. According to Hogan James, the CEO of Etihad Airways the acquisition process has proved successful by giving an example of the airline’s acquisition of Virgin Australia that led to the expansion of its market to include other forty-five cities in Australia. The potential risk that this process portrays is that the airline might become in the vent that the acquired airline goes this route. According to Jones of the Wall Street Journal, Hogan is quick to dismiss this because he maintains that the airline only buys shares and does not have an interest in becoming the majority shareholder meaning that might not incur major losses when the acquired airline does not generate any income. The other risk management practice that Etihad Airways applies is the fuel hedging aspect whose main intention is to reduce fuel consumption and the ever-fluctuating fuel prices. According to the staff at Energy Risk, fuel hedging is a contract that seeks to shelter large consumers of fuel from price hikes in the future as the provider does so at a fixed cost no matter how high the prices may be in the market. Currently, the airline has twenty-six counterparts that have signed active hedges and another twenty-nine businesses in the other trading fields such as the banking industry. 3. Tools used in the analysis of risks In many trade organizations, risks and threats are inevitable but they are likely to influence the business towards vulnerability hence making it unlikely to achieve its goals. The risk identification process is the most significant aspect of an organization where the list of threats helps in evaluating the impact that these risks may have to the operations of an organization. When conducting a quantitative risk analysis for an organization, several tools and techniques can apply in order for the process to achieve its objective. They include sensitive analysis, modeling, and simulation, expected monetary value analysis, expert indulgence, cost risk analysis, and schedule risk analysis. I. Sensitive analysis In essence, this tool helps in determining the risks that are likely to have significant impact to the business . In this tool, an organization uses the mathematical model in calculating the effects of the various inputs and the outputs that they are likely to yield. A tornado diagram at this level is key because it helps in examining the effect of the ambiguity of the individual project element aligned to a particular objective. However, the ambiguous elements remain as baseline values in this process. II. The Expected monetary value analysis This technique is a statistical concept that determines the average outcome, including scenarios that most likely would not happen. The most applicable analysis here is the decision tree analysis in which the opportunities tend to add a positive attribute while the risks illustrate the negative aspects for the enterprise (Campbell and Brown 205). III. Modeling and simulation Here, the project simulates using a model that utilizes the specific details of the project and the uncertainties with their potential effect to the project’s objectives and goals. The process is usually an iterative simulation and the Monte Carlo analysis can be a better-placed example of an applicable process. IV. Cost analysis For any business to make substantive plans for the future, it is pertinent to the organization to ascertain the operational cost that the organization may incur in the process of achieving its organizational goals (Campbell and Brown 195). V. Schedule risk analysis Ideally, cost relatively equate to the input values picked randomly iteration as per the possible distributions of the intended values. These values help in determining the possible date of completion for the project and can be essential in calculating the probability of completing the task at a specific date and through cost implications. VI. Expert judgment This tool helps in pointing out possible operational costs and also positioning probable effects, estimate probabilities, interpreting data and ascertaining the weaknesses and strengths of the applied tools. Further, an expert as a tool for risk analysis helps in identifying when applying a certain tool would be more appropriate taking into account the organization’s potential and structure. 4. Analyzing investment data for Etihad Airways and using the best tool for risk analysis to decide on possible projects for the airline in the future Since its inception, Etihad Airways has been operational for the past ten years and the organization has come in ensuring that it meets its organizational objective, which is to be the best airline in the globe. According to analysts, Etihad Airways is one of the business enterprises that have registered significant growth capacity as compared to any other commercial air transport company. According to John of the Khaleej Times, the airline flies to fifty destinations in 2007 and has experienced growth in which the airline flies to ninety-six destinations across the globe by 2013. According to Hogan, who has been at the helm of operations at the airline since 2006 the airline carrier has set the standards in which other airlines look up in order for them to be the best in the industry and in the market. In a period of ten years, the airline has established its name in the global transport industry although it started as a start-up airline with minimal brand recognition across the transport market. The inefficiencies that the airline dealt with in its ten year journey include poor network connectivity, minimal brand awareness, the lack of partners and alliances in the transportation industry that are in key in order for an airline to survive the challenging storms of operation. Many airlines have come to look up to Etihad as a commercial role model in the aviation industry as it owns eighty-six aircrafts that are inclusive of dreamliners and Airbuses. Using the cost analysis tool for risk analysis, the airline intends to increase its fleet of airlines in the future in order to meet the customer demands of flying to untapped destinations. In essence, the costs of making these purchases in the future are worth the risk because globalization aspects are forcing regions that have been locked economically to attract investments. Other than this, the airline also intends to buy stakes in airlines across other regions in order to add on its passenger and cargo destinations, which can also be a way of spreading risk losses. In essence, not many travel destinations have peak passenger travel in all seasons of the year hence influencing the airline to acquire more destinations to ensure that it is operational all through the year. Therefore, Etihad has adopted this growth model to ensure that it edges out competition from the other airlines whose area of operation is within the Middle East. The probable benefits that the airline can reap in the future include customer satisfaction and influencing the market to buy into the services of this airline more. According to Jones of the Wall Street Journal, the airline has made strategic acquisitions across the globe over the last ten years through beneficial partnerships as they have continued to add value to the operations and profit margins for the airline. Looking at the net profit data for the company in 2012, the level stood at $42 million and $4.8 billion in revenues, which was a 200% significant rise from the net profits generated in 2011 even after it became operational eight years prior to this achievement. The passenger traffic by the airline has also increased to more than twenty million with a probable increase in the future hence making it necessary for the company to look into buying more fleets in the future. Other than this, Etihad through its CEO feels that they have a role to play in enabling Abu Dhabi’s plan for the future because of their impressive contribution to this region's economy. John of the Khaleej Times intimates that Etihad contributed 10.5% of the non-oil GDP for the Abu Dhabi region, which is a $10.7 billion contribution to the GDP of the United Arab Emirates in general. The other area that presents risks in the future is that of airline security in which Etihad reported zero accidents as at 2011for employees and passengers alike, which the organization feels that it is an integral part of its operations. The airline has also committed itself to complying with the global safety standards in order for it to continue attracting more customers through the Safety Management Systems as stipulated in the UAE laws. The efforts that Etihad has applied in the past ten years enabled the airline to acquire ISO certification in 2006 for its compliance with the safety standards. In future, the airline has also pledged to adopt safety mechanism structures at whatever cost as the safety of their people they serve and work for is their priority. The cost implications of setting up to date safety mechanisms may be high but it is worth the risk because it guarantees return on investment for the airline and also customer satisfaction. The advancements in technology have also seen the demand by customers for specific services such as the internet making the airline to invest heavily on infrastructure. Meeting the demands of the customers of the airline is beneficial as this is set to make the airline to be the preferred carrier of a significant fraction of the market. This will be helpful of Etihad as it will be a step of its competition in terms of delivering customer oriented services and minimizing on the costs of operations. In essence, the fuel hedging practice that the airline adopted is likely to cushion the airline against future unstable crude and oil prices that might affect the operations of the airline. In the end, the risk analysis and management strategy that Etihad Airways has and will apply will be significant to its operations because it will raise its stakes in the air transport industry. Works cited Campbell, Harry F, and Richard P. C. Brown. Benefit-cost Analysis: Financial and Economic Appraisal Using Spreadsheets. Cambridge [u.a.: Cambridge Univ. Press, 2003. Print. Energy Risk Staff. Asia Corporate Energy Risk Manager of the Year: Etihad Airways. Financial Risk Management News and Analysis. 27 Sept. 2013. Web. 10 Dec. 2013. John, Isaac. Etihad Airways: 10 years- Right people, Right location, Right strategy. Khaleej Times. 12 Nov. 2013. Web. 10 Dec. 2013. Jones, Rory. Q & A With Etihad Airways CEO James Hogan. The Wall Street Journal. 11 Sept. 2013. Web. 10 Dec. 2013. Read More