Aviation Risks may be categorised in four categories; operations, strategic, compliance and financial.
Mario Genovese
Operations risks comprise of risks incurred by the organisation’s day to day activities, and as such they involve people, systems and processes. Normally, like in other industries, these risks are mitigated by internal senior and middle management. Amongst the most typical operations risks within the airline industry we find hazardous activities affecting safety, inadequate financial processes leading to inefficient control and inadequate IT back up systems leading to loss of information.
Strategic risks, on the other hand, are risks having to do with the positioning of the company within its environment. These have high stakes and are often dealt with at Board Level. With today’s environment in the airline industry, positioning is of utmost importance. The emergence of low cost carrier companies competing with the traditional legacy airline companies have added importance to these risks. The most common risks comprise of pricing issues which may easily throw a company out of business if not mitigated carefully. Other airline strategic risks include alliance decisions which may effect the company’s ability to decide for itself and positioning decisions which will affect future operations decisions.
Compliance risks regard the adherence with external regulations and legislations. Not following IOSA (IATA Operational Safety Audit) recommendations and not adhering to national and international laws may lead to heavy penalties and above all loss of reputation.
The main financial risks that may hamper an airline carrier to operate smoothly are the hedging risks. Hedging decisions are the pivot on which future pricing will have to balance budget decisions, subsequently affecting forecasted profits. There are two very important hedging exercises which have to be continuously monitored at high level; oil price hedges and currency hedges. Both currency fluctuations and oil price fluctuations may on their own tip the scale to a profitable situation or one of a loss. In today’s airline operations, fuel makes up for 30% of the total costs while currencies are instrumental for the purchasing of fuel (usually done in USD) and for collection of fares which are negotiated in various countries. Credit control risks are also paramount in that they may easily affect the liquidity position of the company.
Like in any other industry, the risk exposure quantifies the amount of loss that might occur from any particular activity. This is normally measured in terms of likelihood and impact. Examples of risk exposure are:
- People Risks:
o Burn out of Management Team due to overload
o Demotivation due to lack of Senior Management interest
- Fuel Price Risks:
o Sudden significant fluctuations not covered in yields
- Event Risks:
o Ash Cloud event preventing company achieving its sales goals
- Safety Risks:
o Hazards that may lead to serious accidents
- Industrial Risks:
o Prolonged Union Negotiations may constrain proper strategic planning
- Competition Risks:
o Increased competition leading to reduced sales and lower fares
The level of risk that the company is willing to take (the risk appetite) is also important in the Risk Management function of airline companies. Typical examples are:
- Financial:
o Types of accepted hedging instruments
o Tolerable % changes of market price against budget
- Fuel Quality Risks:
o Quality parameters set in order to be safe and economical.
- Event Risks:
o Level of Insurance coverage
o Minimum compliance levels accepted
- Safety Risks:
o Normally Zero Tolerance
- Industrial Risks:
o How much the company is prepared to give away to strike an agreement
- Incident Risks:
o The lowest levels of error acceptable that will not lead to safety issues
To conclude, I am listing hereunder the most common risks which feature on the risk registers of all the airline companies.
- Fuel Availability/fuel cost hedging
- Adequate Liquidity
- Availability of Credit
- Currency Fluctuations
- Low Cost Competition / Price discounting
- Government Intervention
- Supply Chain Risks
- Employee/Labour relations/ Retention of key employees
- Global Economic Uncertainty
- Terrorism / Military Escalation
- IT failures, technology and e-commerce
- Fixed Obligations/ debt and other financial commitments
- Volatile or Seasonal Demand / Tourism
By Mario Genovese
- Vice Chairman of International Air Transport Association (IATA) Risk & Insurance Management Working Group (RIM)
- Risk Manager at Air Malta p.l.c.
- Board Member of the Malta Association of Risk Management (MARM)