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Financial Management of Risk

Risk Management in an Organization

INTRODUCTION

Risks are inherently associated with business activities but in the case of aviation industry, they can be disastrous for not only the organization but for public as well. There has been seen increasing numbers of accidents and incidents in civil aviation section which has crossed the total number of cases to 50 accidents with an average victim rate of 13000 people. In this context, it is evident that such incidents occur because business enterprises within this sector often fail to reveal the existence of safety risks (Ritchie, 2004). Therefore, risk assessment and risk management have become important tools for defining acceptable levels of risks in order to reduce the same. In the present research report, researcher is focusing on evaluating the risks that can threaten the achievement of company’s goals. Accordingly risk map has been presented to address the need of research project. Along with this, different tools have been utilized to measure the potential risk exposures. In addition to it, different stakeholders has been evaluated and the affects that they can have through these risks. Thereafter, investigator focuses on Enterprise wise risk management framework to minimize the affect of risks and uncertainties on the business functioning. In order to enhance the level of study, Brussels Airline has been chosen.

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In the present study, Brussels Airline, a company based in Belgium in aviation sector has been chosen for which risk assessment procedure has been investigated. Risk management can be defined as a process which is based on systematic application of management and engineering principles for optimizing various aspects of safety within the organization (Ashley-Smith, 2013).Risk is the probability of loss from exposure of hazards therefore; causes for hazards have been evaluated belonging to aircraft for addressing risk assessment effectiveness of aforesaid company (Backett, 2011).

Alternative risk management strategies

As the number of accidents within the airline industry have been constant within airline sector therefore, it becomes essential to make mandatory provision of risk management by the companies falling within this sector. Thus, Brussels Airline is also required to manage business risk for achieving organizational excellence (Sadgrove, 2005). As it is the largest flag carrier of Belgium therefore, it is significant for the company to identify potential hazards/perils which can cause risks. To this point of view, it will be appropriate to state that risk management is essential approach that company should adopt. In this regard, hazard identification is the first and foremost step of risk management. It can be described as any real or potential condition that can cause mission degradation, injury or death to personnel or damage of property or other equipment. Hence, hazard identification can be considered as the foundation of risk management process for this airline company. The ways through which real or potential hazards to Brussels Airline can be identified are described under the following heads:

Experience: Engineers or industry experts can identify or assess hazards for Brussels Airline based on their technical knowledge and experience in the industry.

Common sense: Even if a person or stakeholder does not have experience in this field but employees and concerned authorities can use common sense to recognize obvious hazards.

Specific risk management tools: There are various risk management tools available such as tools for scenario analysis, risk metrics and Fishbone analysis which can be used to identify risks associated in operational activities of Brussels Airline (Preston and et.al., 2011).

In order to identify the hazards to this business, three step process of hazard identification is followed which is presented in a diagrammatic manner.

Action-1: Mission/task evaluation

In this step, Brussels Airline can examine 5-M’s comprising Man, Machine, Management, Mission and Media. Here, interaction of 5-M’s to produce successful mission is studied in which the extent of interaction between the individual component of each system can be reviewed. Thus, this step of hazard identification is accomplished by reviewing current operations of the airline.

Action-2: Hazard assessment

Once the mission is analyzed, need arises for identifying real or potential hazards to the company which can be based on the deficiency to be corrected. Thus, this investigation results in the list of inherent risks to the business of Brussels Airlines or it can also be the identification of adverse conditions which could result in harm to specific stakeholders of the aviation company (Lerbinger, 2012). For Brussels Airline, various hazards have been identified and listed below by adopting systematic approach.

  • Take off
  • Overrun of the aircraft
  • Veer-off
  • Collision with any obstacle including other aircrafts
  • Landing
  • Overrun of the aircraft
  • Veer-off
  • Collision with any obstacle including other aircrafts  (Srinivasan, 2009).

Action-3: Identification of cause

In order to identify the cause, company needs to make a list which may be associated with a particular peril. In addition to this, real and potential risks to Brussels Airline can be related to various causes corresponding to each 5-M’s for each and every case. Therefore, company needs to identify the principal cause of damage of property or individual in order to control the risk in an effectual manner. In order to identify root causes to above identified hazards related to take-off and landing for Brussels Airline, Fishbone Analysis tool has been selected which is applied for the same purpose (Barnett, 2005).

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Although, aviation sector is technology oriented industry but role of human factors is significant for it. Thus, causes related to human factors can also be hazardous for this enterprise. From fishbone analysis, it was found that the root cause of short landing may be ineffectiveness to have appropriate information by concerned parties.

Surface conditions: Along with above described causes, surface conditions can also create adverse situations for Brussels Airline. Here, main causes identified are loss of runway lights, failure of Aviation Landmark and less competency of crew members at surface (Morgan and et.al., 2002).

Aircraft performance: Aircraft performance is another category under which relevant causes to hazards have been identified. The diagram demonstrates the causes under this category which include failure of visual guide, failure of navigation and lower speed of aircraft.

Thus, the above described causes can be hazardous to Brussels Airline which can affect various departments in the company. Nonetheless, it is also important to assess severity of this identified cause to assess the impact on various departments. In the alternative of fishbone analysis, other methods/tools can also be used which are described under the following heads:

Situation analysis: In addition to the above explained model, situation analysis can also be used by Brussels Airline to investigate cause of risk. Business of any organization disregarding of its industry affects and get affected by its internal and external environment. Internal business environment of this aviation company can be investigated by analyzed internal processes and policies in the engineering of aircrafts (Chong, 2013). In addition to this, external environment of the entity can be analyzed by available tools like PESTLE analysis.

Hazard and operation studies (HAZOP): HAZOP is renowned analysis tool for documented study which is used as a part of quantitative risk assessment method. Therefore, this can also be used by the management of Brussels Airline which provides full review of for identifying operational and safety techniques to the company. For any organization, in the risk assessment process, highlights of HAZOP can include systematic examination, human errors, recorded results, safety and other operational evaluation (Culp, 2002).

Thus, Brussels Airline can use any of the method for outlining real and potential risks in its operational process. Various hazards identified may have severe impact of different departments and stakeholders for which necessary responses can be given by them.

RISK IDENTIFICATION

Risk management is an essential aspect and it is important for Brussels Airline to carry out its business activities after making risk assessment and potential measures for it. In the above study, researcher has focused on presenting different tools and techniques by the means of which of risk and uncertainties can be minimized. Operating in airline industry there are certain risks that has to be taken care of if company wants to sustain itself for long term periods. These are as follows:

Terrorist: Nowadays, government is putting lot efforts in order to maintain the overall functioning of aviation industry after the attack of 9/11. It is one of the most common threats that an airline company like Brussels Airline has to face despite of several provisions and legislations made upon it. However, there are numerous Islamist extremist and radicalized individual that maintain a high level of interest in attracting airline sector.

Information Technology: E-Commerce present one of the biggest or gigantic investments in IT that companies has to make in terms of sustaining for long term. However, these investments are subsequently risky in nature because of their acceptance in the society. Nowadays, with high income companies like Brussels Airline are ready to invest high but can face its adverse implications which might be more risky and can imbalance whole financial position of business enterprise.

Fuel prices: Fuel prices are the major expenses that Brussels Airline has to bear while operating in aviation industry. At times fuel prices fluctuates which is directly dependent upon the international market conditions, geographical and environmental events. However, this can be a potential risk that might affect the entire course of functioning of Brussels Airline.

Changes in business environment

Once the hazards are identified, the businesses are required to assess the potential risks so that they can be controlled. Risk assessment is the process which associates hazards with risks to the business. Further, the assessment process involves qualitative and quantitative methods for determining severity of risk. Thus, this procedure defines the probability of a mis-happening which could result upon the exposure of personnel or asset to the risk in aviation sector (Kemshall and et.al., 2007). It is important to note here that exposure to above identified hazards involve both financial and human resource aspects as aircraft business is a capital intensive industry. Change in the business environment of Brussels Airline can be evaluated by following well defined actions which are described below:

Step-1: Hazard exposure assessment

In this step, various methods can be used for ascertaining the level of exposure of hazard in order to record the same. Survey, observation, inspection are few methods which can be used by management or concerned authorities of Brussels Airline to determine the severity of exposure. In recent semester, the company has witnessed strong competition which has increased severity of risks for the company. Furthermore, rising fuel prices is another change which boosts its exposure to hazards (Wu and Olson, 2009). Virgin Airlines, British Midland, Lufthansa, Emirates and Jet Airways are some of the major competitors of Brussels Airline across the world. It is important to note here that the severity of exposure of hazards can be expressed in terms of volume, time or repetition.

Step-2: Hazard severity assessment

The next action in risk assessment procedure is to determine the severity of the hazards in terms of their potential impact/consequences on the people, mission and equipments. In order to assess severity of the same, hazard exposure assessment serves as a guide for the company (Hadjimichael, 2009).

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Risk management framework

From the above evaluation of risk assessment, it can be stated that there are certain server consequences of the risk to airline businesses from which various stakeholders are significantly affected. The people/stakeholders who have significantly impact if such risks occur within the company. People who are most likely to be affected due to occurrence of hazards are outlined here under:

Customers: If any mis-happening related to aircraft operation occurs, and then the people who suffer the most are customers of the company because they might have serious physical injury or they can even die. Therefore, unacceptable and high risks should be controlled on an urgent basis so that interest of stakeholders can be protected (Finkel, 2011).

Government: Government is also affected by the risks because airline businesses involve heavy investment and therefore, inability of company to manage funds can lead to failure of its business. The economy and government will have to impart funds to support business because Brussels Airline is operating in an industry which is directly linked to basic infrastructure facilities i.e. transportation.

Suppliers: The international suppliers of aircraft including Bombardier and Airbus are most likely to be affected because these two are major suppliers of these parts across the world. Thus, risks exposed by Brussels Airline will also affect its suppliers. However, they can be benefited if risk occurs are demand for new aircraft may arise if there is problem in the parts of existing ones.

Crew members: Employees are most likely to be affected if a company witnesses bad time due to inability to control potential risk exposures (Ritchie, 2004). Crew members and other staff members would also be affected if Brussels Airline is exposed to risk.

For the above discussed impact of business risk to stakeholders, organizations may respond in different manner. Various possible responses have been described in context to Brussels Airline.

  • Responses
  • Description
  • Avoidance

Brussels Airline can adopt this alternative if the risk matrix shows that particular hazard involves moderate or less risk because if it done for the case of high risk it will produce losses and destruction of business. In order to reduce risk manager can use hedging process. By the means of this top level management of Brussels Airline would mitigate financial risk.

Acceptance: In this case, company may chose to accept the risk generated due to changing business environment which may not be controlled. Thus, it turns to be a positive response of the company when exposed to a particular peril. By undertaking focus group method senior managers of cited firm can mitigate risk in best possible manner. However, in this senior managers of business analyze and evaluate situation and accordingly makes decision regarding future functioning.

Prevention or control: This is the common response which contemporary organizations select to give response for risk. Using this approach, Brussels Airline can make provisions in advance to eliminate risks in its business process. For this, contingency plan can be indulged. However, it is the responsibility of senior managers of Brussels Airline has to make plan B (contingent plan) in order to face the risk of failure of major plan.

Diversification: According to this approach, risk can be diversified by business which is generally done by organizations to avoid financial risks using portfolio management or derivative tools (Pearson and Clair, 2008). For this, vertical and horizontal diversification strategy can be used by the management.

Transfer to someone else: The best example of this risk management is United Breweries group in which risk exposed by Kingfisher Airlines were transferred to different businesses of United Breweries Ltd. For this, mergers would be best possible as incorporating with large airline firm will help company in enhancing its market share as well as generate higher revenues.

In order to give appropriate response, Enterprise Wide Risk Management (ERM) framework can be used by the company which is a robust framework to deal with business risk. It is done by the organizations by strengthening the management of financial and non financial risk. On the basis of this framework, various recommendations to Brussels Airline have been provided:

Management of the company should assess the risk which is associated with different aspects of the business.

Brussels Airline is required to assess the likelihood of industrial competition, employee turnover, and financial crisis at workplace which is common threat in this industry.
Government is recommended to assist airline companies to develop appropriate ERM plan for the growth of infrastructure services in the country (Stulz, 2006).

CONCLUSION

Present research seeks to investigate the risk management and assessment approaches adopted by selected company i.e. Brussels Airline. The research reveals that it has certain server risks associated with its operational business due to complexity of the industry therefore; the company is required to manage the risk according to risk matrix developed.  The research reveals that there are different responses which can be given by the airline. Furthermore, various recommendations are given to the company for making its business sustainable.

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REFERENCES

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