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Risk Management by Qantas

In: Business and Management

Submitted By kylie
Words 6090
Pages 25
1.0 Introduction

Airlines industry faces substantial strategic, financial, operational and hazard risks due to the nature of the operating environment. Financial risks create uncertainties about future cash flows due to changes in economic conditions as well as changes in revenues, operating expenditure and financing costs. Firms are urged to minimise these risks to have higher predictability on future cash flows in order to meet various obligations, for instance shareholders’ required rate of return and debt repayment. This report looks into Air New Zealand in particular to study two of the risks that are significant for an airline company, namely foreign currency risk and fuel price risk. Section 2 of this report gives an overview of the relationships between the operation of Air New Zealand with both the risks. Besides, discussions and suggestions on Air New Zealand risk management approaches are presented in Section 3. Finally, a brief summary and conclusion is included in the last section. 2.0 Risks Description

2.1 Fuel Price Risk
The Nature of Fuel Price Risk

Fuel price risk is the risk of fluctuations in fuel prices which could adversely affect the financial performance of Air New Zealand as jet fuel is a critical input factor for airlines. Fuel prices are affected by the supply and demand, oil price futures and the downside or upside movement in the US dollar against NZ dollar. In particular, the increase in jet fuel prices adds a significant amount to Air New Zealand fuel cost. This is further compounded by the fuel intensive nature of long haul flying and the inability to fully increase flight ticket price. Air New Zealand exposure to changes in fuel prices will be greater when the fuel prices are on the rise compared to when fuel prices are declining due to their inability to fully pass on the increased in fuel costs to customers.…...

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