The airline industry faces many risks and with such a volatile industry it is very important for airlines to identify these risks and what the negative consequences any unexplained events would have upon the business. British Airways lists on their website from the principal risks and uncertainties that their company faces (British Airways, 2010), the full list includes;
Brand Reputation
Competition
Consolidation/deregulation
Debt funding
Economic Conditions
Employee relations
Event causing long-term network disruption
Failure of critical IT system
Fuel price and currency fluctuation
Fuel supply
Government Intervention
Heathrow operational constraints
Key supplier risk
Pandemic
Pensions
Safety/security incident
For the propose of this paper we will concentrate on three main risk;
Competition
Event causing long-term network disruption
Fuel Price Fluctuations
Competition
The airline industry is extremely competitive and this leads to low profitability. Warren Buffet reflecting on investing in US Airways be is quoted as saying “Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results” and went even further saying “It's been a death trap for investors” (Reed, 2013). With such intense competition and the product (for the most part) being homogeneous, price competition is where airlines compete with each other.
Tony Tyler, CEO and director general of the International Air Transport Association expressed his fears in June 2013 saying that “profitability is balancing on a knife-edge” (Topman, 2013). The global profit forecast for 2012 was “£3bn... yielding a net profit margin of just 0.5 per cent” (New Statesman, 2012).
With profits reducing companies will see a negative effect on cash flow. Without reducing the price and competing the result is less passenger traffic for the airline.
Event Causing Long Term Network Disruption
There are many events that can cause long term network disruption. Terrorists attacks on 11th September 2001 grounded over 5000 planes in just under 135 minutes according too Ben Sliney, US Federal Aviation Administration's National Operation Manager in an interview for the BBC (BBC, 2011). Subsequently planes were grounded for up too three days after the attack.
In 2010 much larger disruptions occurred, so large that it was entered into the Guiness book of World Records, “The biggest climatic disruption to air travel resulted in the cancellation of 100,000 flights and was caused by the erupting Eyjafjallajokull volcano, in Iceland, from 14 - 21 April 2010.” (Guiness Book of Records, 2010). Costing the industry an estimated $2.2bn, the image below shows the areas affected by the ash cloud with countries in red having closed and orange partly closed airspace.
If planes are unable to fly any disruption can cause significant lose of revenues to airlines. Contingency plans can include insurance policy for lose of earnings, emergency reserves and contractual clauses to reduce costs should long term disruption occur.
Fuel Price Fluctuations
In a paper by Portland and Oklahoma State Universities it was found that in the U.S. Airline Industry fuel costs accounted for between 8.5% and 18.8% of total costs with the average of 13.75% (Carter, 2006). Looking closer at British Airways in 2012 their fuel bill rose “20.4% in 2012” (Thomas, C). In their Annual Report 2012 the figure stated for 'Fuel, oil and emission costs' was £3712 million (IAG, 2012). Total expenditure on operations was £10553 million excluding fuel it totalled £6841 million meaning for a major airline such as BA, 35% of operational costs are paying for fuel.
Fuel prices have been steadily increasing between 2002 and 2012. With the exception of a massive drop in price between mid 2008 and early 2009.
Comparing the cost of aviation fuel with the cost of crude oil over the same period so startling similarities.
