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Accounting Assignment Question

Write an individual research project or dissertation on an evaluation of risk management and corporate strategy in budget airlines?

Accounting Assignment Solution

1. Introduction

Risk management is an integral part of any organization. Risk management is not a profit maximization strategy but it's a loss minimization strategy. Airline businesses are prone to the vagaries of market forces which can dent the profitability of the airlines. Risk management in budget airlines is more relevant as the budget airlines operate on thin margins and even a small spike in cost can dent the profitability (Barton, Shenkir, 2001). Risk management is a part of any corporate strategy. The corporate strategy should clearly communicate and setup the risk framework for risk management. The risk framework should be robust and should be periodically updated based on the findings of the risk monitoring. Risk management in most organizations is done through use of financial instruments like derivatives (Bayazit, 2007).  Another important aspect of risk management is the enterprise risk management which lays the foundation of risk framework in enterprises.

Due to change in regulatory requirements and business environment of airlines, there is a dynamic effect on the air transportation market and there is increase in complexity of airlines. They might also face difficulties in plotting the right courses for the success in future ahead. The abilities to adapt the changes and identify the problem are the key factors for the success. Airlines are given more importance as compared to other transport in order to manage the risk and protect the reputation effectively (Bealsey, et al., 2008). Entire Risk Management provides a structure to airline management for dealing effectively with associated risk, opportunity and uncertainty by enhancing the capacity to add value. In a corporation, ERM acts as an enabler for the process of management but does not operate in isolation. Combining deregulation of air markets with other factors had led to increase the volatility of demand and growth in aviation market. More existence of competitive market had led the industry to get changed due to which airport and airlines need to become more adequate in order to exist in the market. The capacity changes rapidly due to volatility. This means that there is an average variation in traffic year to year.  If the volatility of traffic is more, there is existence of more risk. If the airport's clientele is uncertain, it might affect the revenues. Based on current discussion with airlines along with other users, the exact relation between revenues and traffic can be specified. Greater risks leads to increase the cost of capital due to interest charges are become higher (R.de Neufville and J. Barber, 2001).

Air transportation is a key asset which gives access to market and enables the financial development of regions and nations (Bruno and Clarke, 2003). The airline industry had led to adopt structural changes many years back. The airline industry is also facing many risks due to change in current climate. Airlines always operate in competitive environment. The problems faced by airlines are financial, hazard, operational and substantial strategic risks. Due to expose of risk, airlines face catastrophic loss. Airlines are monitored by following highest standards related to security and safety and also work with significant authorities for ensuring the safety of customers is paramount at every point of time. The airlines industry has always been characterised by high fixed costs and low profit margins. The business of air transport is sensitive to both seasonal as well as cyclical changes. Competition in the airline industry is intense and the ticket prices get decrease due to change in the market situation and over-capacity. In 2005, the Airline Risk Management Survey was launched with the objective of enhancing a better understanding of trends and issues within the risk management of………………………..