Risk and Insurance Emirates Airlines - Case Study Example

RISK AND INSURANCE By Name Course Instructor Institution City/State Date Risk and Insurance – Emirates Airlines 1.0 Emirates Airlines Emirate airlines is a Dubai-based company, and one of the world’s most successful airlines. Besides that, the airline is the one of the biggest in the Middle-East and has played a crucial role in shaping the UAE into a global tourism destination. Currently, Emirates operates in over 80 countries and more than 150 destinations. In consequence, it has established Dubai as UAE’s aviation hub as well as commercial centre. The airline operates over 3,500 flights weekly across all the continents. The company was established in 1985 from a rudimentary airport having only two leased aircraft. Clearly, the airline has experienced some phenomenal growth as evidenced by its current 240-plus aircraft and the growing number of fleet, which is a combination of the most modern wide-body Boeing and Airbus aircraft and Dubai’s technologically advanced Emirates Terminal 3 that is solely utilized for the Emirates flights. In the skies, Emirates fleet is considered to be the youngest since their average operation age is 80 months and this would further reduce after it acquires more than 200 aircraft it has already ordered. Presently, Emirates is the world’s largest operator of A380 having more than 80 in operation and 55-plus yet to be delivered (Emirates Group, 2017). In addition, the airline has over 135 nationalities in its 15,000 cabin crew speaking more than 55 different languages. Consequently, this helps the airline to adequately serve its 1.6 million customers every year. Furthermore, the airline focuses also on the airfreight industry, distributing at least 6,800 tones every day. Emirates Airlines was the first airline to provide its customers mobile phone enabled facility (Emirates Group, 2017). 2.0 Finished Products In its product portfolio, the airline has diverse fleet such as the Airbuses and Boeing wide-body aircraft. Since the company has been highly competitive, it has purchased some of the biggest airplanes in the world which are yet to be delivered. The airline’s products comprises of excellent as well as consistent services which have facilitated the rapid growth of the airline’s revenues. To ensure qualitative services, the company’s approach towards its customers has remained personal and professional. Emirates Airlines according to Bhasin (2016) was the first company to supply personalized videos in all its fleet and also the first to offer in-flight private suite as well as showers. In addition, the company offers various services such as Economic class, Business class as well as First class services. The first class is considered to be more valuable since it is offered to passengers who like comfort, whereby their cozy seats may be converted into private suites, storage facility, minibar and flat beds. The business class seats include sockets for laptops, USB Ports, massage functions, winged headrest, partitions for purposes of privacy. According to Bhasin (2016), the economy class is suitable for every passenger since it has standard size seats with headrests that can be adjusted, entertainment option, as well as laptops’ power outlets. Furthermore, Emirates Airlines offer services such as healthcare benefits and better housing to all employees and staff, in so doing, making the internal customers satisfied. 3.0 Process of Work Affecting the Risk Profile The airline business specificity creates the need for embracing enterprise-wide techniques to risk management from various contextual dimensions of airline operations. The risk management approaches espoused by Emirates Airlines is based on observing the various industry laws and regulations, which are set apart by different functional silos, normally concentrating on managing a limited number of risks. Emirates Airlines’ business environment is distinctively complex. The company is currently the world’s fastest growing airline, in spite of several risks integral to the structure of the airline industry as well as the surrounding airline services’ provision. Akin to other businesses, Emirates Airlines is facing the general entrepreneurial risks, but still, the challenges the external environment particularly associated with governmental interventions, macroeconomic conditions, or industry structure, over which the company’s control is limited, are some of the airline’s relevant challenges. According to Misiura (2015, p.20) analyzing the industry structure of the airline using the Porter’s ‘five-forces’ framework offers some exciting results, indicating the enormous effect of five forces in the airline industry. In the airline industry, the supplier power is extremely high since the number of suppliers in the industry is very low; therefore, Emirates Airlines concern for quality as well as safety, and the desire for continuous technological advances’ updates increase the power of the engine and aircraft producers. Therefore, expanding the airline operations is normally limited because of infrastructural challenges of air traffic control systems and airports. Given that the air travel has turned out to be more available, the development of infrastructure has failed to stay abreast of increasing demand; therefore, services quality and speed are hindered. This places an indirect burden on the profitability of the airline and reduces its ability to meet the increasing demand for air transport services. Emirates Airlines operates in an environment that is highly competitive, wherein there are numerous indirect and direct competitors, while the difference of services between the airlines is insignificant. Furthermore, new competitors’ threat is exceedingly high and air travel’s perceived commoditization makes it challenging for the airline to switch costs for buyers. Additionally, the airline industry is highly regulated in different areas like passenger rights, airspace usage, environmental impact, and safety. Because of the existing restrictions and the ever-changing regulations, Emirates Airlines does not have commercial freedom that other businesses boast. Aside from the challenges associated with the complex as well as the flawed structure of the airline industry, Emirates is also facing risks associated with their labor, capital, and technological risks. The company’s business is typified by low-profit margins as well as high fixed costs; the operation costs associated with fuel and labor costs are exceedingly high. Furthermore, the company is vulnerable to various risks such as terrorism and cyber threats. Although advancement in technology has led to high air travel safety, the risk of an accident is integral to this type of business. The multi-dimensionality as well as severity of consequences associated with airline accidents stresses the value of safety. For Emirates Airlines, natural phenomena are considered very crucial since poor climate conditions could distort the operations plans; for instance, poor weather can lead to flight delays, cancellations, or diversions and this imply extra costs to the company. The airline is also facing ‘macro’ risks like fluctuations of exchange rates, interest rates as well as fuel prices, changing legislations, and political conflicts. In the coming years, Emirates Airlines is likely to experience various high-impact developments that would need efficient management to ensure the company is sustainable. Still, the airline would face some challenges such as threats of deregulation, market liberalization and substitute services, fossil fuels finiteness, and increasing vulnerability in the industry. Some of the risks that Emirates Airlines face can be categorized into financial, strategic, operations and compliance risks. The financial risks, especially the hedging risks could prevent the airline from operating smoothly. According to Genovese (2014), hedging decisions are crucial since it enables the airline to know which future pricing should balance the budget decisions, consequently having an effect on the projected profits.  Therefore, currency hedges and oil price hedges are some of the hedging exercises that Emirates Airlines have to monitor continuously at a high level. Fluctuations of oil price and currency have an effect on the company’s profitability.  In the modern-day airline operations, Genovese (2014) posits that the fuel accounts for 30 per cent of the total operations costs whereas currencies remain fundamental for fuel purchase (normally made in U.S. dollars) as well as collecting fares that are negotiated in different countries. In addition, risks associated with credit control are dominant since they could simply influence the company’s liquidity position. On the other hand, the operations risk are those that the company experience in its everyday activities, and normally involve processes, systems and people.  On average, such risks are managed by internal management. Some of the operations risks that Emirates Airlines face include poor financial processes resulting in ineffective control, safety, and insufficient IT backup systems resulting in data loss. On the other hand, strategic risks are related to the company’s positioning in the market. Such risks are considered very serious and are normally managed at the Board Level.  Owing to the competitive nature of the airline industry, positioning has become very important. The low cost carriers have started emerging; thus, creating high competition to large airline companies such as Emirates and consequently augmenting the strategic risks.  One of the strategic risks that Emirates face is pricing issues that could lead to business failure if not carefully managed.  Another risk is a decision to join an alliance that could influence the ability of the company to makes decisions individuals. The last group of risks is the compliance risks which is related to the company’s ability to observe the existing legislations and regulations.  Failure to follow the recommendations set forth by the IATA Operational Safety Audit and not abiding by the international as well as national laws could result in heavy penalties and reputation damage. According to Yilmaz (2008, p.138), airline are facing risks that could influence their safety, customers, operations, security as well as corporate value. Changes in air transportation can also introduce risk into the enterprise, and such risks have created the need for airlines to implement the enterprise risk management (ERM). Akin to other successful airlines across the globe, ERM has turn out to be Emirates focus point since it enables the company to meet the hard conditions of airline market. Given that the air transportation market dynamics are changing, the complexity associated with the airline’ business environment has increased; thus, making it difficult for the companies to find the right course that would facilitate sustained success. As a result, most airlines have been compelled to effectively manage their risks and protect their reputation. At Emirates Airlines, the ERM has offered the management a framework for effectively handling the risks and uncertainties related to this type of business; thus, improving its ability generates value. Still, the air markets’ deregulation together with numerous other factors, have led to demand growth in aviation markets. Emirates Airlines is operating in an extremely competitive environment that leaves it exposed to substantial hazard, financial, strategic, and operational risks. 4.0 Risks That Emirates Airlines Must Manage According To Risk Management Tools 4.1 Cyber Threat A survey by PWC (2016) established that Cyber security has turned out to be a main risk that affects the airlines’ business. Nowadays, cyber attackers are not just skilled and persistent, but also technologically savvy. Approximately 85% of airlines’ CEOs consider cyber security as a major risk, considering the nature of passenger data and flight systems that are highly sensitive. The security procedures espoused by Emirates Airline has been somehow effective, but safe integration of technological advancements into the airline and its fleet has been challenging. Currently, the airline industry is facing some major issues associated with technological advancements which consequently bring about intricacy of safeguarding assets and data. This is attributed mainly to the installation of Wi-Fi connectivity and in-flight entertainment systems as well as tablet-based electronic flight bags (EFBs). The EFBs are predominantly utilized by many pilots, but PWC (2016) established that the majority of airlines lack a targeted plan the guarantees EFBs security. Emirates Airlines was amongst the first companies to implement Wi-Fi connectivity and in-flight entertainment systems in its fleet. Although these systems have been segregated physically from the cockpit systems, they have enormously increased the number of the involved technologies, vendors, and connections, which consequently have generated more opportunities for cyber attacks. The modernization of air traffic control, notably the Quadrant ADS-B air traffic surveillance poses a serious threat to the airline. Although this system seeks to improve fidelity, accuracy, and safety through utilization of global positioning system, the entire automation can lead to a security threat. The majority of Emirates Airlines fleet has been equipped with state-of-the-art technologies that have been networked. Therefore, the aircraft can be compromised and exploited by cyber attackers. According to Paganini (2014), security is crucial for all airlines bearing in mind that accessibility of many tools on the market makes it easy for a hacker to attack any airline. 4.2 Financial risk Just like other airlines, Emirates Airlines is vulnerable to various financial risks that could influence the realization of the companies' objectives as well as the overall financial performance. The risks include pandemics effect, fluctuations of exchange rate, strong government influence, and low entry barriers. As mentioned by Tsai (2008, p.41), handling these challenges effectively is imperative since they influence not only the airlines' operations, but also the shareholder returns. Even though numerous issues are not associated directly with financial perspectives, Tsai (2008) asserts that the value related to them could change the financial performance, like getting the permits for landing or new government regulations. Handling the company’s exposure to the main financial risks is very crucial to the function of corporate finance. As observed by Loudon (2004, p.296), besides the market variables volatility, the airlines’ operating environment is confronted by serious turbulence. For instance, terrorism attacks increases the external pressure that the airlines are facing. New Zealand and Australia airline industry, for example, experienced a major shakeout after the 9/11 attacks with the collapse of Ansett as well as the associated financial challenges that its parent company, Air New Zealand was facing. Prior to placement onto voluntary administration in 2001, Ansett was Qantas’s main competitor. However, it started experiencing some decline in demand because of the Iraq war, Bali bombings, as well as the epidemic of the SARS virus. Some of the important risks that affect Emirates Airlines are related to fuel-price, currency, and interest-rate, and they are usually hedged. A number of airlines such as Qantas are managing exposures to financial risks by means of financial instruments like interest-rate swaps as well as forward rate agreements (Loudon, 2004, p.296). These tools for risk management offer non-linear and linear payoffs; thus, enabling the management to identify crucial asymmetric as well as symmetric exposure components. 4.3 Terrorism Risks Following the 9/11 attacks, it became evident that the need for protecting airport terminals, the aircraft, and other facilities like car parks from terrorism was imperative. Baggage and passengers have become the main sources of threats to airlines. The threats are also sourced from scores of processes supporting the airport as well as the aircraft and passengers it serves: ticketing, maintenance, catering, cleaning, air traffic control, baggage handling, and many others. The general public is allowed to access most of the areas of the airport without restriction. Emirates airline security depend mostly on risk and cost reduction data that was gathered in 2004 by RAND, which highlighted that the shooting attacks or bombings had reduced in nearly all airports, especially in the terminal buildings where the passengers are screened (Baker, 2015). Although airline security procedures have been in the UAE and other countries following the 9/11 attacks, Baker (2015) posits that terrorists have been carrying out surveillance missions on various airlines. The objective of the surveillance was to determine the flaws in the current security procedures with the objective of desensitizing the security personnel. Clearly, protecting airlines from terrorism creates a need for high vigilance level since one lapse in the security procedure could lead to deaths of many people, destruction of equipment, and the confidence of the public in air travel could be reduced. In the 9/11 attacks, the terrorists capitalized on the U.S. aviation security weaknesses and the results were certainly catastrophic. 4.4 Safety Risks Basically, safety level could be identified by how it looks in the flights’ system, with regard to managing risks associated with dangerous activities. As mentioned by Oster et al. (2013), the safety of commercial airlines have improved to a larger extent since the rates of fatal accident have reduced tremendously; thus, making the airline industry the safest means of transportation. Still, airline should move from incident, reactive-based approach towards a system, more proactive, predictive-based approach. Safety risks at Emirates airline are attributed to equipment failure, such as failure of landing gear, tires, instruments, engines, electrical systems, or the control surfaces. Besides that, when seatbelt fails to fasten it could result in the death of passenger, especially when the airplane encounters turbulence and the flight crew have already offered adequate warning. Essentially, accidents attributed to aircraft damages due to turbulence pose serious threats to the safety of the passengers. Accidents could also be caused by poor climatic conditions leading to slippery runway, wind shear, and emergency landings. Human error also poses serious threat to the safety of the passengers; for instance, the pilot error can lead to accident and death of many passengers. 5.0 Suitable Insurance Policies Some of suitable insurance policies for Emirates Airline includes: aircraft hull insurance policy that protects the airline from unintentional destruction or damage of the aircraft as well as all the attached equipment. Another suitable policy is the Public Liability insurance that covers third part’s property losses, injury, or death caused by the airline’s aircraft or objects/people falling from the aircraft. The passenger legal liability is insurance is another suitable policy for the airline since covers the death or injury of all the passengers while in plane or loss of their luggage. The hull insurance policy covers the aircraft itself, and can be grouped into In Flight and Ground Risk. The In Flight insurance policy protects the airline’s plane extensively in all phases of flight, stationary, taxiing or on the ground, and in the air. This insurance cover is more expensive. On the other hand, the ground risk insurance policy protects and covers the airline’s plane only when on ground. This type of policy can be grouped into Not in Motion and Taxing. The second insurance policy is liability, which offers protection for all the liabilities that the face while doing business or flying. Liability insurance can be divided into Passenger Liability and Public Liability. The former covers all claims attributed to a passenger’s death or injury caused during a plane crash while the latter covers all the damages caused to a third party by the Airline (Emge, 2015). 6.0 Suitable Insurer The most suitable insurer for Emirates Airlines is the Emirates Insurance Company (EIC) since it offers all the types of insurance policies that have been discussed above: Hull and liability insurance policies. The EIC will cover Emirates Airlines from aviation liabilities associated with third parties, damage or loss to the aircraft’s hull, hull war risk, liability of airport operators and owners, and accidents cover. With the view to hull insurance policy, EIC would pay Emirates for damage or loss to any of its aircraft as indicated under the policy for the insured risks (normally ground, taxiing and flight risks). The EIC offers a different premium rate for flight risks and the premium for the ground risks is somehow reduced. Therefore, it is imperative for to understand such differentials considering that it has a fleet of business jets, which could be grounded for long because of economic downturn or commercial reasons. Besides that, Emirates Airline should ensure that a 'lay-up' clause is included in the insurance policy in order to ensure premium returns for any of the plan that has been 'laid up' for a specific duration, as a result, making sure that the insurance costs is low. Such policy could be underwritten as 'insured value' basis; even though at inception the aircraft has value, its depreciated value during a loss could be utilized for claim settlement in case of a total loss. Still, this could be revised to 'agreed value' basis; therefore, the settlement amount in case of total loss is agreed upon in the inception under the aircraft schedule. EIC is a suitable insurer since they are flexible in offering structures of alternative premium in order to contain different deductible options. Despite the latest design improvements on turbojet aircraft, they are still vulnerable to foreign object damage. Emirates Airline should understand that the coverage of foreign object damage is only possible if it is caused by a single recorded incident. With regard to legal liability to third parties, EIC will cover Emirates Airlines for everything that the latter is legally liable to compensate as damages with respect to unintentional property damage or bodily injury caused by the aircraft, falling object, or person. This policy does not cover injury caused to the employees, operational crew, and property belonging to the insured. Still, the insured (Emirates Airlines)must take into account the indemnity limit they are purchasing and make sure they get proper advice from the insurance broker in order to ensure that the limit offers sufficient protection considering that they have a large fleet size and operation area. Regarding the passengers’ legal liability, EIC would indemnify Emirates Airline for the total amount the latter would be required to pay as damages because of the passengers’ injury or death that happens while on board, alighting, or entering the aircraft as well as the damage to or loss of personal effects and luggage attributed to an accident. In this policy, operational crew and employees are not covered. Emirates Airline would benefit if EIC does not impose 'passenger caps' on particular operation areas with the objective of limiting the liability on the ‘per passenger' basis. Therefore, this should be negotiated with regards to lease/finance agreements between the insurer and the insured to make sure there are no shortfalls in the insurance coverage. Aside from the ‘hull and liability’ insurance policies, Emirates Airline should find ways of protecting its fleet from perils such as war and nuclear risks as well as hijacking. In respect of both liability and hull coverage exclusions, Emirates Airline should 'buy-back' most of the exclusions. For instance, Emirates Airlines could buy a liability 'writeback' that covers liability for the most of the excluded perils. Besides that, the airline company can independently buy the hull war to cover the hull coverage exclusions such as nuclear detonation and hijacking. 6.1 Channels for Purchasing Policies Emirates Airlines can purchase the above mentioned insurance policies using various channels such as agents and brokers. Agents can be divided into independent agents and captive agents. The independent agents function similarly to the insurance brokers since they represent numerous insurance carriers. On the other hand, the captive agents represent only one insurance carrier. According to Thomas (2015), captive agents are the carrier’s employees. One of the benefits associated with the captive agents is that their product knowledge is exceptionally thorough. However, they cannot offer access to pricing or products from other carriers. Therefore, the insured must tolerate the specific terms of the carrier, because all carriers together with their in-house agents could utilize tough language while comparing numerous companies that the insured could come across. The online insurance websites are surging and providing insured with an alternative option to utilize while selecting the suitable insurer and insurance policy. It has become much easier to get an online insurance agent, especially from the national level. Brokers are the most suitable channel for purchasing policies since they solely focus on the client’s unique needs. The broker would help Emirates Airlines with comparison-shopping, finding the best coverage prices for the policies. More importantly, the broker would advice the airline on how they can effectively customize and bundle their policies in a manner that agents cannot do. More importantly, the brokers work with different insurance companies, and they are inclined to broadly understand the offerings of the insurance companies as well as the associated benefits. Given that they are commission-based, they would get the best deal possible for the airline in order to be contracted by the company every year. A broker would ensure that the best deal is nailed down through coverage re-shopping as well as annual review. Emirates Airlines is facing a possible increase in the insurance premiums following the industry’s most recent disaster, the disappearance of Malaysia Airlines. Still, a number of insurance brokers and analysts as cited by Gray (2014) are expecting the fallout to be handled effectively. Although the premium levels, especially the liability policy could increase because of another incident in eastern Ukraine whereby the Malaysia Airlines was shot down, the insurance brokers and analysts believe that the insurance costs will less likely to strongly rebound. Currently, EIC and other insurance companies in UAE can face to forms of payouts in case the insured aircraft crash: d aircraft’s physical damage and relatives looking for compensation. As stipulated by multinational agreements governing the payments of compensation to victims of air disaster, the airline’s liability bill limited by lack of negligence should be at least £100,000 per passenger (Gray, 2014). Losses attributed to physical damage are approximately $100 million, but the insurance companies would have to determine the cause of the disaster before paying out the claims. In case Emirates Airline is shot down whether intentionally or unintentionally, the aviation “war” policy would place Emirates Insurance Company on the hook. Even if the airline was not shot down, Emirates Insurance Company would still be liable because of the passenger liability policy. As mentioned by Gazzar (2014), the high insurance premium rates in UAE are attributed to a series of disastrous events. For instance, disappearance as well as the downing of Malaysia Airlines planes, the crash of Air Algerie and TransAsia Airways, and airports attacks in Libya and Pakistan has resulted in major annual losses for many insurance companies. Furthermore, the growing insurance geo-political tensions some of Emirates Airlines’ destinations such as Africa, Ukraine and Middle East could lead to high premiums charges. Such issues have compelled a number of airlines to pass all the increasing costs to the passengers. Following the downing of flight MH17 in Ukraine, the risks associated with flying over war-tone areas have led to the increase in premium charges. The aviation war insurance policy is estimated to cost at least $60 per year. A number of underwriters, according to Gazzar (2014) have been asking for three-time increases on premiums paid for war policies. The escalating violence in many countries across the globe such as Syria, Iraq, and Libya make it unsafe for Emirates Airline to fly overhead. Stopping to fly over these countries can result in the decline of revenues or may even lead to losses. The aircraft designs’ complexity has increased; thus, having an effect on the costs. Damage of ground equipment, new materials, and the risk related to grounding are some of the factors that increase risk exposure. Given that Emirates Airlines passengers and fleet values have increased, the likelihood of risk exposure value increasing in the near future is high. According to Allianz (2014), cyber attacks are considered as serious risks because most airlines depend on interconnected systems. In 2014, despite the improved safety record, many people lost their lives because of major disasters in the airline industry. Although the total hull losses and fatalities are low than before, new types of losses as well as risks, like risk of grounding, ground equipment damage or composite repairs has led to the increase in premiums charged for hull policy. Although Europe and North America are safe destinations for Emirates Airline, Africa poses serious safety issues. For instance, 45 per cent of global aviation fatalities in 2012 happened in Africa (Allianz, 2014). Furthermore, the new generation aircraft are exceedingly vulnerable to cyber crime because of high utilization of navigation systems, onboard computer systems as well as data networks. Cyber attacks and data breaches will in the future become a major risk for Emirates Airlines and other players in the industry. Conclusion In conclusion, this paper has demonstrated that while Emirates Airlines continue to grow in both complexity and size, insurance to various risks has become more and more important. The airline industry is evolving with the objective of meet the high demands of air transportation. As a result, the need for regularly examining the airline’s risk profiles has increased. Following the 9/11 attacks, it became more imperative to manage terrorism-related risks. Clearly, the risks in the airline industry have become costly and complex; therefore, a number of insurers have decided to share the risks since paying out the claims have become more expensive. For Emirates Airlines, hull and liability insurance policies are the perfect tools for managing various types of risks. From a financial viewpoint, managing all types of risks guarantees the airline’s financial solvency at a reduced cost. Although technology advancement offers machines that are extremely capable, accidents in the airline industry are still happening. Therefore, insurance is an important tool for transferring risks. Having a risk management plan enables Emirates Airline to prepare for the unforeseen, reducing extra costs associated with risks prior to their occurrence. By taking the potential events or risks into account prior to their happening and implementing a risk management plan in place can protect an airline’s future. The risk management plan saves Emirates Airlines valuable resources such as property, assets, time, income, and people. More importantly, it creates a secure and safe environment for the passengers, crew members, and employees. Taking insurance cover increases the airline’s operations stability and reduces legal liability. 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