Aviation Risks
The Economic Times defines risk as the uncertainty in future concerning the shift from expected revenue or the outcome expected by an individual or company. Further, risk denotes the uncertainty measures investors willingly take in their hope to realize profit from investment in a venture. In taking the risks, the investors hope to gain revenue and reputation as well as experience in the given field. Risk is therefore the apprehension and gain investor look to get from a venture.
Risks inherently carry uncertainty and in extreme cases can lead to loss. It is for this reason that many organizations have safety programs within which there are modalities on the management of risks. Ivensky (2016) contends that safety programs ensure there are no disagreements among members particularly in risk-averse industries such as aviation. In management of risks, such safety programs have models for the assessment and management of risk. One such model involves a process that starts by the assessment of risk level, removal of hazards, a reassessment of the risk levels, adding safety factors, reassessing the risk levels, and a final process that involves a bail out. In such as safety program the management of risk also involves grading risks at different levels, and using the levels to factor in countermeasures in the event that such risks may actually come to fruition.
The risk-averse nature of the aviation industry is perhaps a direct consequence of its highly volatile nature and especially its sensitivity to shocks in international fiscal markets. Additionally, fuel prices are a great risk given the huge role jet fuel plays in the operation costs of airline companies. Air Canada, one of the biggest airlines in the world, has an intricate risk management and assessment strategy to cushion it from the volatile industry. According to Fernando (20016), the company employs financial derivatives in the management of its exposure to jet fuel prices changes as well as those in interest rate and foreign exchange. Thus, in the management of the interest rate risk inherent in its route of operation, Air Canada enters into forward interest rate agreements. The agreements have a maturity limit of 18 month. On the other hand, in the management of foreign exchange risk volatility, the company enters foreign exchange forward contracts as well as currency swaps.
In addition to risk management, Air Canada performs risk assessment. The company’s assessment of risk follows an extrapolation of the trends in the exchange rates and jet fuel prices. After performing the assessment, the company then implements a series of strategies, including systematic fuel hedging strategy that conveniently increases its hedge position for its 24-month consumption (Fernando, 2016). Additionally the company hedges its fuel consumption in mid and long-term in crude oil. Alternative invests for the company includes financial institutions, major corporations and the government, all of which collectively reduce its exposure to substantial credit risk (Fernando, 2016).
Conclusively, the fact that jet fuel prices, exchange rates and interest rates volatility are among the major risks airlines face means that staying afloat requires a program to manage the risks—all integrated within the company’s operations. To manage the risk, the program needs integration within the general company operations by making it a part of the general operation program. For the management of exchange rate risk, entering into exchange agreements presents a viable option especially for largely frequented destinations. Further, given the importance of jet fuel, the price volatility and the risk presented by the volatility, hedging agreements present a viable option for the management of the volatile market risks. Hedging particularly presents a viable option given its potential for future gains.
References
Fernando, S. (2016). Risk Management Practices in the Airline Industry. Simon Fraser University. Retrieved from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjg7aPWtJvWAhWLaRQKHShLCekQFggsMAA&url=http%3A%2F%2Fsummit.sfu.ca%2Fsystem%2Ffiles%2Firitems1%2F3430%2Fetd2415.pdf&usg=AFQjCNH-re-_0eDVqJIhrF0Id8dcAj_qLw.
Ivensky, V. (2016). Managing risk perceptions: Safety program supports outcomes. Professional Safety, 61(8), 7-14. Retrieved from https://www.researchgate.net/publication/306106928_Managing_Risk_Perceptions_Safety_Program_Support_Outcomes.