PGP 2012-13 Course: Business Risk management Module: Financial Risks Instructor: B.B.

Chakrabarti

Case: Air Canada Risk Management (IVEY 9B10N037) 1) What were Air Canadas strategies since 2009 to improve financial performance and control of risks? 2) Discuss the sources of risk in Air Canadas business. What strategies are applied for risk mitigation? 3) Do you think that Air Canadas risk management practices are appropriate? If yes, why? If not, why?

ANALYSIS OF THE VARIOUS RISKS TAKEN CARE OF BY AIR CANADA 1.CATASTROPHIC RISK :- Despite flying be the safest form of passenger travel but still aviation insurancewas considered very important because it could generate potential losses to a very high extent evenfrom a single event .A large commercial aircraft was typically insured for $100 million-$250 million andits liability coverage ranged between $1.5 million -$2 billion. 2.OPERATIONAL RISK:-Operational risk had the potential for high frequency given the volume of passengers and flights. To manage these issues the used:-1.All airline equipment required stringent programs of preventative maintenance and safety2.The IT INFRASTRUCTURE had back-up systems and contingency plans in place. 3.HUMAN RESOURCE PLANNING ENSURES ADDITIONAL CAPACITY WAS AVAILABLE IN THE EVENTS OF ADEALY OR SICKNESSNOW ,QUADRANT WISE DESCRIPTION IN RISK MANAGEMENT OF AIR CANADA QUADRANT 1:- IN particular,the board of directors were most concerned with the risk in quadrant 1 thatwere beyond his control. AIR CANADA and the airline industry in general were vulnerable to frequentand dramatic changes in interest rate ,pension reserves,foreign exchange,severe weather,fuel costs andeven their own stock prices.So indirectly, they need to understand that they they were in a big issue asthey were being banged by a lot of problems together which they needed to avoid it but no other optionwith them . QUADRANT:-2 IN GENERAL,the board of directors were being satisfied that AIR CANADA had theinsurance required to quadrant 2 risks as the took the AVIATION INSURANCE at that particular timeQUADRANT3:-NOW in the third quadrant they started undertaking risk .they were now in a position tohedge jet fuel upto a position of 34% for 2010 and 8 % for 2011 .FUEL PRICES WERE a relativelyimportant part in consideration as even a $1 increase in the cost of fuel collectively cost an increase by$425 million in additional operating costs per year .QUADRANT 4 :- IN QUADRANT 4 ,they started using the safety measures as they were already able toreduce risk by the 3rd quadrants,so now they started preventing the reduced risks . INTEREST RATE RISK AND LIQUIDITY RISK :at fixed rate and 40 % at a floating rate .Because the interest rates on debt ws prevailing majorly onfloating

could definitely reach the situation of liquidity risk as stated above they were needed to usethe swaps and interest on cash reserves as well.

FOREIGN EXCHANGE RISK :,but a large portion of it,s expense were in U.S. DOLLARS .To help manage this exchange