Applied business risk audit on British airways

Applied business risk audit on British airways

British Airways is one of the largest and most prestigious airlines in the world. Its transport services unite all the corners of the world stretching from Europe to Australia and South America. It is the largest carrier of the United Kingdom and was established in 1972 as a board governing several national carriers before later being merged to one unit by the name British Airways which was later privatized in 1987. It is the largest airline in UK and the third largest in Europe. It has a 1000 plane fleet and transports close to 100 million passengers across 450 airports spread in over 90 countries. The airline has established partnerships with USAir and Qantas of Australia to enhance its service delivery. In addition, British Airways has had his share of business ups and downs which increase risks of doing business and it is the ability to survive these challenges that determine whether the airline is reliable in terms of service as mentioned in the ‘The transformation of British Airways’ by King (1991).

Just like most other businesses, there are internal and external factors that determine the level of risk at which a company operates at. Risks such as human resource risks are internal factors that can quickly ensure that the airline is grounded or whether it is operating at a loss. In the event that the workers go on strike or have a go slow, the company may lose a lot of appeal to customers and hence lose its business values. In addition, there are other factors out of the control of the company that may seriously hurt the image or hurt its business by a great margin. These are factors such as the global financial crisis that affected most corners of the globe in 2008 as reported in the research by Air Transport research Society (2010). The political factors such as instabilities in the Middle East as well as problems such as terrorism are other factors that are integral in assessing the risk factor at the airline. Some other natural calamities such as the eruption of a volcano in Iceland and other extreme weather conditions have served to unexpectedly disrupt the operations on the air transport domestic market in Europe. The ability of the airline to adapt to the changing information technology world is another factor that needs to be assessed to ensure that the company does not operate on obsolete platform while at the same time ensuring that it remains competitive as suggested by Koijen (2014).

There are many factors which are considered in determining the risk level at which the airline operates at. These factors are both traditional (such as human resource factors) while others are artificial such as the fast changing technological events in the last twenty to thirty years. Such factors are going to be analyzed in detail in this article.

Internal risks

In analyzing the internal risks, there are two major areas which are the most important for this analysis. These are the human resource risk and information technology risk (Weybrecht 2010).

Human Resource Risk

Every company has two important reasons why its performance is greatly determined by the employees. These factors are that, the employees give a company its culture and its workforce. These two factors are very important in determining the output of the organization or business entity. In institutions where there is a culture of rebellion to authority or activism, there is a great chance that most of the time, there will be friction between the management and the workforce (Franzetti 2011). In addition, most of the policies that the company comes up with will be met with opposition regardless of whether they have a positive or a negative impact.

Human resource is one of the areas where a company may lose a lot of profits if they are dissatisfied. For example in late March, 2010, British airways workers went on strike in protest of the planned job cuts in the airline. This led to huge losses for the company in the five days which they were on strike. Demonstrating at Heathrow Airport, the company was forced to cancel airlines which would carry up to 25000 passengers a day from Europe. In those few days, the company lost up to $62 million and at the end of the year, British airways made the greatest annual loss of about 425 million being the highest the airline has made since 1987. This shows how a little turmoil with the workforce can be damaging to a prestigious institution. The greatest test for the airline is how it handles its employees in the event they are raising genuine concerns about their welfare (Cudworth & Hobden 2011).

Exploitative business strategies usually backfire when the personnel realize that their future lives are in jeopardy. In the British airways case, the fear of job cuts was responsible for the disruption in activities at the airline and therefore, jurisdiction of accounting require to be reviewed once in a while to update existing programs (Kaplanski & Levy 2013). British airways also got another huge setback when the Unite Cabin crew took an industrial action against the company that ultimately led to bitter court battles translating to losses on the company’s operations. Hess (2010) suggested that a Smart growth in business can only be achieved in building an enduring business which can be made by managing the risks preventing growth.

Information technology

In the last twenty years, computer and information technology in general have experienced an unexpected revolution resulting to interconnection which has further led the world into a commonly referred global village (Rebonato 2010). This trend has revolutionized events not only in air traffic controls but as well as ticket bookings, in addition to access of departure and arrival schedules by the airplanes a strategy proposed by Schneider (2012). Customers can access any type of information regarding British airways from its website and other information websites.

The revolution in the internet technology has also enabled the airline to interact with its customers in the social networking platforms such as Facebook and twitter. This way the company can know firsthand the services which the customers need included in the airline services. Online payment platforms such as PayPal, Visa and MasterCard have enabled the company to make and receive payments without the need to make queues at airports while booking flights as reported by Air transport research society (2010).

With the same revolutions came the risks associated with technology (Cudworth & Hobden 2011). Currently, it is easier for computer hackers to disable the British Airways website or compromise the payments platforms causing serious delays to flights or inability for customers to purchase tickets out of the problem.

Environmental risks

Environmental factors introduce the next category where risk assessment requires to be addressed when considering the airlines and British airways operation in line with the company’s values. The world is currently trying to come to terms with the effects of global warming as well as climate change (Cudworth & Hobden 2011). With it, governments are trying to come up with regulations limiting the amount of greenhouse gases industries and airlines are emitting in their atmosphere. In Europe for example, they have set up a target of up to 2020 of emitting greenhouse emissions, as the move towards reduced pollution in the article “winning the battle for skies” (2004) asserts, where the writer articulated how airlines (British Airways being domestic) are required to reduce carbon emissions in the European airspace.

British airways being based in Heathrow, London is one of the direct targets of the policy just as any other major carrier in Europe such as Air France KLM and Lufthansa of Germany. There is also the question of the susceptibility of airlines to changing environmental and climatic conditions (Uryasev et al 2010). In air travel, every plane risks the problems associated with climatic conditions and weather is usually the first consideration for the carriers. In North America, a sweeping cold wave led many flights to be grounded or delayed due to changes in climatic conditions. Recently in New York, Hurricane Sandy wrecked havoc in Jersey and Long Island as well as the city proper leading to many airlines being grounded or being delayed. These delays usually cost customers a lot of money in terms of lost business opportunities or cancelled business transactions and therefore some may opt to use alternative means of transport such as Ships, boats or trains.

Environmental factors are also responsible for most of the major accidents in the airline industry. In fact weather conditions surpass mechanical problems as the greatest source of accidents in the industry (Eilifsen et al 2001). This means that the seriousness in which the airline needs to handle the climatic factor is very important for its survival. No airline whatsoever needs to be associated with regular accidents because customers will opt for alternative airlines. British Airways is leading from the front in tackling greenhouse emissions and is investing heavily to ensure that the European vision of slashing down greenhouse emissions is achieved both physically and financially.

The survival of airlines industry is very heavily dependent on the weather factor and the ability to prevent major accidents. This implies that some critical climatic conditions can make it impossible for British Airways to normally continue with its operations. A single accident out of negligence by the pilots or unexpected weather patterns may drive away passengers and being a competitive world, it may find itself on the receiving end and lose business in the process.

Another example is the volcanic eruption, which occurred in Iceland where it spilled much volcanic smoke in the atmosphere. This made many airlines to be cancelled and others grounded since navigation was impossible at such atmospheric conditions. This led to many customers being holed up in the airports waiting for the weather to clear some for days. It was the responsibility of the airlines (British airways included) to take care of the passengers trapped in the airports, failure to which many lost faith in the national carrier in frustration. In addition, natural factors such as Earthquakes have led to a series of events that have served to not only disrupt but to seriously harm the business of airlines (Kaplanski & Levy 2013). Earthquake in Japan led to nuclear meltdown in Fukushima, Tokyo one of the busiest cities in the world. Fears of nuclear radiation made many people to cancel their flights translating to losses at the end of the day from evaluation of the risk which could have been involved (Andriosopoulos & Nomikos 2012). Airlines were also obligated to offer support to these calamities as a show of sympathy as well as solidarity with the people of Japan.

Though environmental factors pose a serious risk to travelling in airline industry, the threat of ruining the airline to the ground is greatly reduced (Berenbak & Lanser 2002). This is because in many parts of the world, meteorology has been able to predict future weather conditions and warning airlines in time before it happens (British Airways Annual Report and Accounts, 2012). In the case of hurricanes or sweeping cold waves, meteorologists warn airlines days before it happens and with advance in technology, customers as well are aware of the4se conditions and therefore make necessary adjustments to their travel schedules.

Economic recession

In 2008, the world experienced one of the greatest economic threats to be seen in western civilization in a very long time. Industries such as finance and banking were hard hit leading to many banks closing down while others were bailed out while on the brink of collapse. British Airways was one of the airlines that were affected by the economic slowdown due to its dependence on the cross Atlantic routes together with Europe. Since Europe is not yet bout of recession, the airline has expanded towards new routes in Far East as well as new grounds such as Africa and South America. Berenbak & Lanser 2002 suggested that this structural design helps in diversifying the risk in the event some regions experience slowdown.

Economic recession can be avoided by ensuring that the airline spreads its wings across the continents just as the British Airways is doing to diversify, through review of accountancy (Department of Trade and Industry 2003) and extension of audit markets (Dias 2013). China for example was not hit by the economic slowdown like the western European countries or as the United States economic slowdown was. Therefore the airlines with operations within the region survived the economic slowdown comfortably as indicated by Wang & Yang (2013) in ‘On the risk return relationship’ article in Journal of Empirical Finance.

Since the risks mentioned above are all critical to the company’s financial survival, the respective risk strategies suggested should be followed to avoid the risk occurrence as suggested by Mainelli (2013) who indicated companies should observe mitigation from insurance. From observing the two business risk models, ‘Value at risk’ and ‘Damage from natural disaster’, several suggestions were made by both Kaplanski and Levy (2013) and also Schneider (2012). They define ‘value at risk’ concept from finance, where the Value at risk is measured from a portfolio conditional. Therefore, the return below the 5th percentile of all returns is the ‘value at risk’ (Wang & Yang, 2013).   On the other hand, ‘Damage from natural disaster’ is the other model illustrated by property damages and human costs from potential natural disasters (Weybrecht, (2010).  Uryasev et al (2010) suggested that insurance company validation is made over a 5-year period that might be assessed. This model assumes that assumes that a disaster may or not occur within a specific period of the year, and therefore when damages occur, ‘the total damage or cost is composed of the random number of people affected and the damage or cost per person affected’ (Kaplanski & Levy 2013, 28).

In efforts to validate risk models, the Risk Map method is used which creates a clear display of the risk assessment by ‘jointly accounting for the number and the magnitude of extreme losses and graphically summarizes all information about the performance of a risk model’ as suggested by Franzetti (2011). More so, the Risk Map can be used to validate market, credit, operational or systemic risk estimates (Dias, 2013) since the Risk mapping leads to illustrating of the risk associated with an organization, project other system.

Since risk mapping is qualitative, it helps improve models from increasing understanding of the risk profile and its discussion in an organization (Rebonato 2010). From the risk mapping, risk register can be easily linked to the models of risk management for improvement through transparency.

Conclusion

In all industrial and business operations, risks are always involved and it requires continuous caution from the organizations’ management. The management must analyze the different risks involved whether internal or external to enable smooth business operations. Since internal risks involve the human resource risk and information technology risk, the proper precautions will determine the overall performance considering that some risks cannot be avoided. For example, Human risks cannot be avoided since human actions are involved in the day to day interaction. Technology risks also cannot be avoided since daily operations like in the British Airways must involve machine and computerized systems. Generally, risks in business cannot be completely avoided but the people working on the environment should work consciously in efforts to prevent their occurrence. Environmental risks which are natural should be cautioned in industries like the British airways, which has an emergency team as well as professionals who can predict the risk occurrence and therefore propose the right ways and precautions to avoid them.

Risk ranking matrix

Frequent Occasional Seldom unlikely
Major Economic recession Environmental risks
Serious Human resource
Minor Information technology
Unlikely

References

2010 ATRS World Conference, 2010, Air Transport Research Society, Vancouver, BC, Canada

Andriosopoulos, K, & Nomikos, N 2012, Risk management in the energy markets and Value-at-Risk modelling: a hybrid approach, The European Journal of Finance, 1-27

Berenbak, J, & Lanser, A 2002, The structural design of the “British Airways London Eye” (Zum Tragwerksentwurf des “British Airways London Eye”), Stahlbau, 71(4): 285-288.

Cudworth, E, & Hobden, S 2011, Beyond environmental security: complex systems, multiple inequalities and environmental risks, Environmental Politics, 20(1): 42-59.

Dias, A 2013, Market capitalization and Value-at-Risk, Journal of Banking & Finance, 37(12), 5248-5260.

Eilifsen, A, Knechel, RW, & Wallage, P 2001, Application of the Business Risk Audit Model: A Field Study, Accounting Horizons, 15 193-207.

Franzetti, C 2011, Operational risk modeling and management, Boca Raton: CRC Press.

Hess, ED 2010, Smart growth: building an enduring business by managing the risks of growth, New York: Columbia Business School Publishing.

Kaplanski, G, & Levy, H 2013, Value-at-risk capital requirement regulation, risk taking and asset allocation: a mean–variance analysis, The European Journal of Finance, (1) 27-32

King, L 1991, The transformation of British Airways, Engineering Management Journal, 1(1): 5.

Koijen, R S 2014, The Cross-Section of Managerial Ability, Incentives, and Risk Preferences, The Journal of Finance, 110(3), 503-519

Mainelli, M 2013, Learn from insurance: cyber bore, The Journal of Risk Finance, 14(1), 100-102.

Rebonato, R 2010, Coherent stress testing. A Bayesian approach to the analysis of financial stress, Hoboken, NJ: Wiley

Schneider, PJ 2012, Risk Evaluation and Mitigation Strategies, The Journal for Nurse Practitioners, 8(9), 747-748.

Uryasev, S, Theiler, U. A, & Serraino, G 2010, Risk-return optimization with different risk-aggregation strategies, The Journal of Risk Finance, 11(2), 129-146.

Wang, J, & Yang, M 2013, On the risk return relationship, Journal of Empirical Finance, 21, 132-141.

Weybrecht, G 2010, The sustainable MBA: the manager’s guide to green business, Chichester, England: Wiley.

31st December, 2012. British Airways Plc Annual Report and Accounts

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