Risk Management Strategy in Low-Fare Airlines - Research Proposal Example

CHAPTER 1: INTRODUCTION
1.1 Introduction
This chapter presents the following information: a detailed background on the topic of the dissertation, the rationale behind selecting the topic of the dissertation, a brief examination of all literature indicative to the research topic, aims and objectives of the study, and finally, research methods employed in carrying out the study.

1.2 Background to the study
Risks falling under the financial category include those that are associated with liquidity, market conditions, and the credit situation of a corporation (Flouris & Yilmaz 2012, p. 166). On the other hand, non – financial or operational risks include threats that arise from factors such as fraud, political instability, threats arising from information technology infrastructure, and lastly, the dangers posed by natural perils and possible failure of the technical operations of a corporation (Damodaran 2008, p. 25).

Although this typology of risk identification and classification can be used for corporations operating across all sectors of the economy and in different geographical regions, it is important to note that its application in managing risks is not uniform in nature but rather varies depending on the type of sector involved. This variation arises from the fact that different sectors have different degrees of exposure to the risk of a particular kind (Fragniere & Sullivan 2006, p. 54). For instance, whereas corporations in the manufacturing sector place much emphasis on how to mitigate risks that threaten their operational efficiency, corporations in the financial sector put much emphasis on credit-related risks and other risks that threaten the financial performance of the corporation (Bjelicic 2007, p. 19). Apart from the universal typology of risk management presented above, another way of classifying risks entails dividing them on the basis of the source of the threats. Under this categorization, risks are caused by factors that operate from either within or outside a corporation (Muck & Rudolf 2005, p. 577). Internal risks, in general, include threats that arise from factors such as the quality of the management team of the corporation, how the working capital is managed, the level of technical equipment and labor employed by the corporation in its operations, how the technical, human and administrative efforts of the company are coordinated and finally, how new acquisitions by the company are integrated into the system can be a potential cause of risks for the company (Damodaran 2008, p. 22). On the other hand, external risks originate from the following factors: increased competition within the industry, changes in regulations and policies, fluctuations in the exchange rates, changes in the relations between the business and its investors, fluctuations in the supply structures, and finally, changes in customer behaviors and size of the market.

The phenomenon of low-cost carriers started in North America and then spread to Europe before being replicated in several regions across the world (Burton 2009, p. 22). According to Collier and Agyei (2009, p. 19), all low-cost airlines have a number of characteristics that define their model of operations. These characteristics include the use of low-cost and out-of-town airports, lack of printed tickets, seat allocations or free meals and drinks, high utilization achieved by fast turnaround times for aircraft, the practice of yield management, high-frequency flights, and point-to-point service. Further, Fort (2006, p. 18), observes that these characteristics of low-cost carriers developed as a result of the implementation of changes in the aviation industry that was aimed at reducing operational costs and providing the entire market with a standardized product at a reduced cost. This was in line with Michael Porter's theory which states that businesses can employ either of three basic strategies in achieving competitive advantage in the market; these strategies are differentiation, cost leadership, and focus (Fojt 2006, p. 19).