This Is a Summary on the Risk Management Case Study of Air Canada

1736 Words Aug 26th, 2011 7 Pages
REPORT ON RISK MANGEMENT OF AIR CANADA

SUBMITTED TO :
MRS.VANDANA MEHROTRA
SUBMITTED BY:
KUNAL KOTHARI
MOHITA AGARWAL
SAIMA AHMED
APURV SHARMA
NAINA SINGH
SONAKSHI RATHI

AIR CANADA- RISK MANAGEMENT
INTRODUCTION:
Colin Rovinescu, the Chief Executive Officer (CEO), for Air Canada was reviewing the Risk Management program of the company because the scheduled board meeting was approaching soon. He needed to deliver a comprehensive presentation in front of the board members.
CHALLENGES FACED BY THE AIRLINE INDUSTRY:

An Airline is a business providing a system of scheduled air transport. Also called airway. Airline industry is the business of transporting paying passengers and freight by air along regularly scheduled
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He was not much worried about the third and fourth quadrant risk. He was able to manage them. He was indeed concerned about the first quadrant risk of HIGH SEVERITY-HIGH FREQUENCY. Rovinescue believed they had no control over the changes in oil prices, stock prices, weather changes, foreign exchange and interest rates. The risk management program was based on dealing in such issues.
RISK MANAGEMENT BY AIR CANADA:

Fuel prices were the most commonly hedged expense within the airline industry. Because fuel comprised between 20 to 30 per cent of all expenses, a small change in the expected fuel rates often meant a difference between profits and losses. For example an increase in the cost of fuel of $1 collectively cost the US Airline Industry $425 million as an additional cost per year and to overcome this problem the airlines that were well-financed and had strong cash flows hedged 86% of their Jet fuel needs. Air Canada also hedged 34% of its anticipated purchases of jet fuel.
The second risk faced by Air Canada was the interest rate risk. The problem occurred because Air Canada’s interest expense was greater than its operating income and any change in the rate of interest could help the company to generate profits or increase its losses. Therefore, Air Canada’s policy was to have 60% of its long term debt on a fixed interest rate and the rest 40% on floating rate.
The third risk faced by Air Canada was the foreign

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