Harvard Case - Air Canada - Risk Management
"Air Canada - Risk Management" Harvard business case study is written by David Wood, Craig Dunbar. It deals with the challenges in the field of Finance. The case study is 11 page(s) long and it was first published on : Dec 14, 2010
At Fern Fort University, we recommend Air Canada implement a comprehensive risk management framework that incorporates both quantitative and qualitative risk assessment methodologies. This framework should be tailored to address the specific risks faced by the airline industry, including economic, geopolitical, operational, and environmental factors. The framework should be integrated into all levels of the organization, with clear lines of accountability and reporting mechanisms.
2. Background
Air Canada, Canada's largest airline, faced significant challenges in the early 2000s, including intense competition, rising fuel costs, and the 9/11 terrorist attacks. The case study focuses on the airline's efforts to improve its risk management practices and enhance its financial performance.
The main protagonists of the case study are:
- Robert Milton: CEO of Air Canada, who spearheaded the company's transformation and risk management initiatives.
- The Air Canada Management Team: Responsible for implementing the new risk management framework and strategies.
- Investors and Shareholders: Concerned about the airline's financial performance and seeking improved risk management practices.
3. Analysis of the Case Study
The case study highlights the importance of a comprehensive and proactive risk management approach for businesses operating in dynamic and unpredictable environments. Air Canada's challenges were exacerbated by a lack of robust risk management practices, leading to financial instability and operational inefficiencies.
Key Issues:
- Financial Risk: Air Canada faced significant financial risks, including volatile fuel prices, currency fluctuations, and economic downturns.
- Operational Risk: The airline was vulnerable to operational risks such as weather disruptions, labor strikes, and security threats.
- Strategic Risk: Competition from low-cost carriers and other airlines posed a significant strategic risk to Air Canada's market share and profitability.
Framework for Analysis:
We can apply the COSO Enterprise Risk Management (ERM) Framework to analyze Air Canada's situation. This framework emphasizes the importance of:
- Risk Governance and Culture: Establishing a strong risk management culture and clear lines of accountability.
- Risk Assessment: Identifying and analyzing potential risks, including their likelihood and impact.
- Risk Response: Developing and implementing strategies to mitigate, accept, avoid, or share risks.
- Risk Monitoring and Reporting: Continuously monitoring and evaluating the effectiveness of risk management practices and reporting to relevant stakeholders.
4. Recommendations
To address the challenges and improve its risk management practices, Air Canada should:
- Develop a Comprehensive Risk Management Framework: This framework should be aligned with the COSO ERM Framework and include a clear risk appetite statement, risk identification and assessment procedures, risk response strategies, and monitoring and reporting mechanisms.
- Implement a Risk Management System: This system should be integrated into all levels of the organization, with dedicated risk managers responsible for identifying, assessing, and managing risks within their respective areas.
- Conduct Regular Risk Assessments: Air Canada should conduct regular risk assessments to identify emerging risks and update its risk management plan accordingly.
- Develop Risk Mitigation Strategies: The airline should develop specific mitigation strategies for each identified risk, including hedging strategies for fuel price volatility, operational contingency plans for disruptions, and strategic initiatives to address competitive threats.
- Enhance Financial Planning and Forecasting: Improve financial forecasting models to better predict future cash flows, revenue, and expenses. This will allow for more accurate risk assessment and informed decision-making.
- Improve Communication and Transparency: Air Canada should enhance communication and transparency with stakeholders, including investors, employees, and the public, regarding its risk management practices and performance.
- Invest in Technology and Analytics: Leverage advanced analytics and data-driven insights to improve risk assessment, forecasting, and decision-making.
- Foster a Culture of Risk Awareness: Promote a culture of risk awareness and accountability throughout the organization, encouraging employees to identify and report potential risks.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations are aligned with Air Canada's core competencies in aviation operations and its mission to provide safe and reliable air travel.
- External Customers and Internal Clients: The recommendations aim to improve customer satisfaction and operational efficiency, benefiting both external customers and internal clients.
- Competitors: The recommendations address the competitive landscape by enhancing financial stability, operational efficiency, and strategic agility.
- Attractiveness ' Quantitative Measures: The recommendations are expected to improve Air Canada's financial performance, measured by metrics such as profitability, return on investment (ROI), and shareholder value creation.
- Assumptions: The recommendations assume that Air Canada has the necessary resources and commitment to implement the proposed changes.
6. Conclusion
By implementing a comprehensive risk management framework, Air Canada can enhance its financial performance, improve operational efficiency, and mitigate potential risks. This will enable the airline to navigate the dynamic and challenging aviation industry effectively and achieve sustainable growth.
7. Discussion
Alternatives:
- Ignoring Risk Management: This option would leave Air Canada vulnerable to unforeseen events and could lead to significant financial losses and operational disruptions.
- Reactive Risk Management: This approach would involve responding to risks only after they materialize, resulting in higher costs and potential damage to the company's reputation.
Risks and Key Assumptions:
- Implementation Challenges: Implementing a comprehensive risk management framework requires significant organizational change and commitment, which could present challenges.
- Cost of Implementation: Implementing a robust risk management system requires investment in technology, training, and personnel.
- Market Volatility: The aviation industry is subject to significant market volatility, which could impact the effectiveness of risk mitigation strategies.
8. Next Steps
- Develop a Detailed Implementation Plan: Outline specific steps, timelines, and resource allocation for implementing the recommended risk management framework.
- Establish a Risk Management Committee: Form a dedicated committee to oversee the implementation and ongoing management of the risk management framework.
- Conduct Pilot Programs: Pilot test specific risk mitigation strategies before implementing them on a wider scale.
- Monitor and Evaluate Progress: Regularly monitor and evaluate the effectiveness of the risk management framework and make adjustments as needed.
By taking these steps, Air Canada can establish a robust risk management framework that will enable it to navigate the challenges of the aviation industry and achieve its strategic goals.
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Case Description
The chief executive officer (CEO) of Air Canada was reviewing the company's risk management program with the intent to suggest changes to the policy. Risk management was a topic all corporate boards were dedicating time to since the financial collapse of 2008, and boards had come to realize that hard questions needed to be asked about the source of risk, how it was disclosed, how it was to be accounted for and how it was managed. The CEO knew that he needed to consider the impact of his view of the economy, interest rates, exchange rates and the commodity markets on how aggressive Air Canada should be with its appropriate hedges. He decided to start by identifying the most relevant sources of external risk that could materially affect Air Canada's short and long-term financial performance. He then wanted to understand how these risks were managed today and how they compared to West Jet, their main competitor. Finally, he wanted to determine what changes should be made to either eliminate the source of risk or better manage any significant risks that remained.
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