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Risk Management in the Airline Industry - Case Study Example

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This paper "Risk Management in the Airline Industry" discusses the financial risks involved in the operations of a proposed international airline. The report uses the findings based on an analysis of the risk management strategies employed by two major international airlines…
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Risk Management in the Airline Industry
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Download file to see previous pages With revenues in excess of ₤9 billion and a fleet of 245 aircraft as of March 2009, Heathrow-based BA’s risk management strategies provide an excellent example.
b) easyJet Plc, a Low-Cost Carrier, flying to more than 100 destinations in Europe, UK, and Northern Africa, and clocking over 50 million seats, with revenues of ₤2.4 billion in 2007-08 [2]. Covering over 380 routes with a fleet of 165 aircraft as of September 2008, Luton-based easyJet’s risk management strategies provide another excellent example with a different set of policies.

The airline industry, internationally, is characterized by its exposure to substantial operational and financial risks. Financial risks result in uncertainly in key parameters such as cash flows, revenues, shareholders’ funds and the bottom line, and these financial risks in this industry arise mainly from volatility in fuel prices and foreign currency exchange rates, besides fluctuations in interest rates and financing costs. These risks are compounded by the inherent features of the airline industry such as i) cyclical demand; ii) intense price competition in both domestic and international markets; iii) heavy capital investments; and iv) high gearing levels. Because of these features, the airlines find it difficult to reduce the impact of the financial risks by restructuring their operations internally [3].

A quick look at Annexure-1 giving the historical price movement chart of crude-oil and jet fuel gives us an idea of the level of uncertainty in the fuel price [4]. As can be seen, the per-barrel price of crude-oil had ranged between a high of US$132 and a low of US$38 between October 2007 and March 2009 - the period relevant for the Annual reports of British Airways and EasyJet that we are analyzing. This range is more than as much as 50% on either side of the mean of US$85. Further, fuel costs generally account for nearly 30% of the total operating costs of most airlines, also evidenced by the figures for BA and EasyJet as per their Annual reports. ...Download file to see next pagesRead More
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