The financial turndown in the year 2009-2010 brought several complications for Air Canada as well, along with many other Airlines in the world. The main problem for the airlines sector was decrease in the passenger volume and revenue and increase in the operating costs. These lead to decease in the profits for the company. The Board of Directors of the company took various financial tools into consideration to measure the problems or risks faced by the company in that tenure. But, the major problem which was identified by the case study analysis included the insufficient contribution of the Board of Air Canada in designing risk management policies in an effective manner. The Board of the company needs to develop more strategic and stringent approaches for identifying the sources of risks apart from just identifying the risks. Risk management is a very important issue for an airline company. They have to manage the risk to maintain the normal functioning of the financial operations as well as earn reasonable profits for the company. The major risks which need to be managed by the Board of the company are related to avoidance and controlled loss as these risks have high frequency and high severity. These risks are posed due to frequent changes in pension reserves, interest rates, severe weather, costs of the fuel, and foreign exchange and stock prices of the company. These can also be considered to be the operational risks of the organization. The Board of the company has been focusing on the development of policies related to risk management, but the policies are not designed in a way to bring profit for the organization and give it a competitive advantage in the business. They are acting defensive to keep the organization working. Thus, the profit of the company has been low and the management needs to resolve the issue as early as possible.
For managing the issues related to risk management, by the Board, the CEO of the company must organize regular meetings with the employees and coordinate strategic planning and risk management in a better way. The risk appetite must be clearly discussed with the stakeholders of the company. Development of an active risk appetite will also help in determining the profit objectives which the company needs to attain and hence, the profit of the company can also be increased (Envato Pty Ltd., 2015).
As mentioned above, the operational risks are faced by the company due to increasing operational expenses due to interest rates, fuel prices and foreign exchange. The management of the company can take measures like revamping the business model, introducing revenue maximizing strategy, increasing the foreign currency reserve and increasing the fuel hedge pool. These strategies will also help in resolving the issues related to the financial position of the company in the competitive market (Wyman, 2013).
This section will analyse the benefits and losses of the different solutions suggested above and facilitate the decision-making in choosing the one which will be best suited for the company.
Solution 1: Coordination of risk management and the strategic planning
As mentioned above, risk management must be given equal importance just like other strategic management aspects. Since, it was previously mentioned that the company uses the financial instruments just to manage the risks and not to generate profits using them; the Board needs to develop strategies to analyze the risks using effective financial instruments and eliminating those risks to generate the maximum profits. ERM can generate the risk profiles in order to prioritize the risks and build policies to eliminate the critical risks. The risk appetite must also be discussed with the stakeholders and, the employees must be made well aware of their roles. The risk appetite must be integrated with the growth of the company as well. The Board of the company must build the risk appetites based on the profit of the company (Shinkman, 2017).
The disadvantage of this solution can be, more dedication of the risk management team towards risk management; less focus on other issues of the company; and a change into the persisting method of risk assessment can also induce resistance of board members.
Solution 2: Revamping the business model
Advantages: It helps in identification of the gap between the current position of the company and the position it wants to achieve. It also helps in understanding the current brand equity of the company. Revamping of the business model may also help in attracting the creditors and improve the credit value of company in the market. It will help in the incorporation of the risk management principles in the business strategy in a new manner. This strategy will also incorporate measures to reduce the different types of risks, such as operational risks, credit risk, foreign currency risk, interest risks and such other others, of the company as the new business model will definitely address the issues related to management (Godfrey, 2018).
Disadvantages: Development of a new business model may have the probability of going wrong, thus, this risk must always be kept in mind. A new business model may result into dissatisfaction of the old stakeholders of the company. It will also require further challenging tasks to be completed and additional efforts to be put (The Entrepreneur, 2015).
Solution 3: Alignment of Revenue maximizing strategy with profit maximization
Advantages: The revenue maximizing strategy will aim at increasing the revenue of the company and decreasing the operational expenses so that the profit of the company can be enhanced. As mentioned in the case study, currently, the Board of the company aims at improving the revenue of the company by managing the risks rather than focusing on profit maximization. The revenue maximization will help the company in controlling the market share without focussing more on the profit margin of the company. But, if this strategy is aligned with profit maximization, it will also earn more profits for the company (Latham, 2018).
Disadvantages: the major disadvantage of this approach will be that increasing the revenue strategy comes with increasing the prices and reducing the operating expenses. The increase in prices may create a decrease in the passenger volume flying with the airlines initially, which, the company will have to back up by improving the quality of its services (Wyman, 2013).
Second solution, which aims at revamping the business model, is recommended for the company. This strategy will allow the Board of the company to design the policies and strategies which, in turn, will allow the company to reduce the risks. The business model will aim at developing the strategies which can both control the risk as well as manage the revenue and profit part. The following strategies can be adopted by the Board of the company to reduce the risks discussed above. For reducing the liquidity risk, the number of account receivables needs to be decreased. For reducing the interest risks, the interest rate agreements of the short- term maturities must be forwarded. The currency risk can be eliminated with the help of currency swamps, developing forward contracts for foreign currency and signing foreign agreements. Insurance schemes can be further modified, as these schemes allow the companies to transfer their market risks to the third parties. The operational risks need to be eliminated by organizing a good technological backup. The operational costs also need to be decreased to increase the margin of profit. All these measures can be incorporated by the Board of the Company in the business model to manage the risks in the most effective manner. The risk management was analyzed as the biggest problem for the company and it can be resolved using this approach. The business model can describe the functioning of each individual aspect of the business in an effective manner.
References
Envato Pty Ltd. (2015). Effective Risk Management Strategies. Retrieved from Business.tutsplus.com: https://business.tutsplus.com/tutorials/effective-risk-management-strategies–cms-22887
Godfrey, T. S. (2018). Revamp vs. Rebrand? 10 Considerations for Your Business Website. Retrieved from Storybistro.com: https://storybistro.com/revamp-vs-rebrand-10-considerations-website/
Latham, A. (2018). Revenue Maximization vs. Profit Maximization. Retrieved from Smallbusiness.chron.com: https://smallbusiness.chron.com/revenue-maximization-vs-profit-maximization-24969.html
Shinkman, M. (2017). How Risk Management Can Enable Growth. Retrieved from Rmmagazine.com: https://www.rmmagazine.com/2017/11/01/how-risk-management-can-enable-growth/
The Entrepreneur. (2015). 8 Reasons to Update Your Business Plan Right Now. Retrieved from Entrepreneur.com: https://www.entrepreneur.com/article/241536
Wyman, O. (2013). Revamping Business Models. Retrieved from Oliverwyman.com: https://www.oliverwyman.com/our-expertise/insights/2013/oct/revamping-business-models-.html
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