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Risk Assessment and its Mitigation in Aviation Industry

Research Assignment Presented to Mr. Sankarshan Sarkar, Faculty, Management of Risk NIIT University, Neemrana Ra asthan, India

Master of Business Administration (Finance and Banking)

Pre!ared "y# Aman chandan $a%i% &han M' (urga Prasad Nayanchand Rao Nitu Roy

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The !ur!ose of this re!ort is to identify, categori=e, measure risks associated >ith the Airline Industry' Furthermore, the re!ort also e<!lores suita%le risk management and mitigation techni?ues for the same' The o!erational com!le<ity inherent in this %usiness, together >ith the highly regulated and commercially com!etitive environment of the airline industry, leaves any !artici!ant e<!osed to a various of risks' Many of these risks 8 for e<am!le changes in governmental regulation, acts of terrorism, !andemics and the availa%ility of funding from the financial markets 8 can %e mitigated to a certain degree %ut remain largely under the clout of e<ternal factors'

The civil aviation sector in India had %een gro>ing at a dramatic rate@ ho>ever the glo%al economic recession in )AA: negatively affected this gro>th' (uring fiscal year )AABCAD, total !assenger traffic gre> )D') !ercent, >hile cargo traffic gre> 11') !ercent' Thus, risks management and mitigation associated >ith the %usiness needs to kee! !ace >ith this gro>th' The free market dynamics of the domestic airline industry are driving %usiness model changes at an un!recedented !ace' The introduction of ne> security !rovisions, com%ined >ith escalating fuel costs and consumer uncertainty are forcing radical ad ustments in the airline industry' As a result many airlines have sought the !rotection of "ankru!tcy to identify and remediate %usiness risks in their organi=ations@ this has forced some airlines to e<!lore %usiness restructuring and mergers as an alternative' This %usiness climate re?uires the consideration of ho> to %alance risks and re>ard, >hile integrating ne> !rocess and o!erations'

"IT#RAT!R# R#$I#%
Ta%le 1'1 8 (etails of revie> &ear Conducted '( etai)s of studies

Identification, assessment and classification of risks in aviation industry and e<!loring risk management E mitigation techni?ues for the same'

M#T+O O"O,&
The follo>ing methodology is ado!ted to achieve afore said o% ective'

1' Identification and assessment of all !ossi%le Risks in Airline industry )' *ategorical classification of the identified risks ,' Measurement of these risks 5' /<!loring various risk management and mitigation techni?ues for dealing >ith these risks

T&-# OF ST! &

This re!ort utili=es ?ualitative measures to achieve its o% ectives and aims to a!!ly statistical a!!roach as and >hen called for'

ANA"&SIS (.ua)itati/e and .uantitati/e 0 urga1 Na(an)

IMP-RTAN*/ -F RI+& MANA3/M/NT Mismanaging risk can !rove to %e very costly and it is im!ossi%le to avoid all risks' The only solution therefore is effective risk management' The essence of risk management lies in ma<imi=ing the areas >here >e have some control over the outcome >hile minimi=ing the areas >here >e have a%solutely no control over the outcome and the linkage %et>een effect and cause is hidden from us' The under!inning of an effective risk management !rogram is a thorough understanding of the risks, or the uncertainties, that a %usiness faces and >here and ho> they arise are noted %elo>' +ources of uncertainty# 1' /nvironmental Risk# Includes /conomy Risks and Industry risks )' Process Risk# Includes com!any s!ecific risks ,' Information for (ecision making risks


The overall risks associated >ith the Airline industry is as identified in ta%le 1'1' The most %asic tool is the risk matri< sho>n in figure 1')' It assesses t>o items# the likelihood of an event occurring and the conse?uence of that event'

A sam!le risk assessment matri< can %e used to differentiate a high risk and lo> risk event' Further, the mitigation is !lanned as !er the !ro%a%ility of occurrence of an event leading to such risk and the severity of the conse?uence of risk' The follo>ing guidelines have %een used for making assessments of likelihood of an event that leads to risk' Pro%a%le 8 an event that occurs several times -ccasional C an event that !ro%a%ly occur some time Remote 8 an event is unlikely to occur, %ut is !ossi%le Im!ro%a%le 8 even is highly likely to occur Furthermore, guidelines that have %een used for making assessments of severity of risk is as follo>s' *atastro!hic 8 resulting in fatalities and total loss *ritical C that causes severe damage Marginal 8 that results minor loss Negligi%le 8 that results in negligi%le loss 2the fo))o3ing diagram is 4ust for reference for us to 3rite more on the risks5

The most %asic tool is the risk matri<' FFigure 5C1G It assesses t>o items# the likelihood of an event occurring and the conse?uence of that event' CLASSIFICATION OF RISKS The overall risks associated >ith the Airline industry is categorically classified in ta%le 1')' Matri< Risk !riority matri< is as sho>n in figure 1',' MEASURMENT OF RISKS 0aria%les identified to measure these risks ?uantitatively are as noted %elo>'

S ). No . 1 ) , 5 ; B D H : 1A 11 1)

$ a r ia ' )e s Firm +i=e .i?uidity Profita%ility -!erating .everage Financial .everage -!erating /fficiency 3ro> th 3lo%al +u%!rime crisis "usiness *yclicality Airline +afety 6Accidents9 ATF *ost Profita%ility

Me asure m e n t - aram e te r Total Assets *urret Ratio PAT, R-*/ Assett Turn over Ratio (e%t Ratio Asset turn over ratio *hange in /"IT +ense< .oad Factor No' of Accidents re!orted *urrecy Fluctuation 6U+( 0s' INR9 ATF /<!ense as a I of Total /<!ense

/JP.-RIN3 T/*$NI7U/+ F-R MANA3/M/NT AN( MITI3ATI-N -F RI+&+ /<!loring avenues to manage, mitigate and hedge risks is summari=ed in figure 1',' Risk management focuses on managing uncertainties around !hysical and financial assets' $o>ever, this re!ort is not ust focusing on risk management %ut also on mitigation and hedging techni?ues >hich not only !rotect, %ut also create enter!rise value %y lo>ering the effects of risk'

Case Stud(6 0 Indi/idua) Cases (+a'i') Case Stud(7 0 Indi/idua) Cases (Na(an) Case Stud(8 0 Indi/idua) Cases (Nitu) Case Stud(9 0 Indi/idua) Cases ( urga) Case Stud(: 0 Indi/idua) Cases (Aman)

CONC"!SION (Aman and +a'i') R#F#R#NC#S


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