First, the individual risk manager for an airline must determine the areas or activities that are a potential risk, loss or exposure to the air carrier’s liability policies. Additional to the determination of potential loss, the calculation of the total amount of the potential loss is required. This will be determined by the multiplication of the total potential loss with the percentage change an accident or loss might occur. (Wells, Clarence & Rodrigues, 2004) The definition of loss in the aviation industry is not just constraint to an economic setback for the company.
Additional to capital or physical losses caused by accidents, air carriers must consider the setback in public relations. Presently, crashes occur relatively infrequently and the public reaction of the initial shock is predicted by the airline risk management in advance. The public eventually is able to regain its faith into the airline involved in such an incident. However if the number of airline incidents rises proportionally to its increase in flights, the public eventually loses their faith into the company and as a result of that, the credibility and loss of revenue could determine the fate of an individual air carrier. (Wells et al.
, 2004) Understanding the risks that are involved by just evaluating a potential loss, it increases the importance of risk management. When establishing operational plans or procedures, the loss is able to be minimized. In risk management, four basic techniques are used to limit the amount of loss. Those techniques are elimination, reduction, transfer and retention. (Rodwell, 2003) Utilization of Risk Management Techniques Elimination The first risk management technique is elimination. An airline is able to eliminate loss potential by not engaging in risk activities. For most air carrier however, this method is out of question.
Like driving a car, airplanes have a high potential for risk and the air carrier would not be in business if it would back out of any potential risk. Yet any airline is able to limit the amount of potential risk that it is involved. For example, by replacing an older fleet of aircraft and maintaining its fleet and equipment to a high standard, the risk can be reduced to a fraction. Also due to the availability of risk bearing insurance, many insurance companies do not want to eliminate the possibility of risk but quantify the risk potential and maintain a sufficient amount of clientele.
Without risk the insurance companies would have no use of doing business. That is why the decision of avoiding risk is mainly economical. The main determinant for the term avoidance in the aviation industry is to minimize the amount of operational or revenue interruptions. (Wittmer, Bieger & Mueller, 2011) Reduction Another risk management technique is reduction and is closely related to the first technique of elimination. By using the technique in the airline industry, risk managers rather reduce the risk involved with the industry than eliminating it. Southwest Airlines has a good example of reduction.
By eliminating the risk of long flights, it created short flight plans for its commuter flight routes and its proof is its good standing in flying safely without incidents. (Wittmer et al. , 2011) Another form of reducing a loss is when the incident has already occurred. This method is also called post-loss control. By standing up and claiming responsibility, the air carrier involved is eventually regaining the trust of its customers over time. This can be done by providing family members and relatives with a rapid response and superior customer relations. (Wittmer et al. , 2011) Transfer
Transfer is another relative common type of risk management technique. Using this technique the risk of potential loss is transferred to a third party, which usually is an insurance company. The insurance carrier will more likely ensure that money will be available to coffer the costs of a potential loss. However using this method can have the possibility of moral hazards such as air carriers letting their guard down due their elimination of risk of loss and transferring it to the insurance provider. (Wittmer et al. , 2011) Retention Retention is the fourth method of the risk management techniques.
When using this technique the air carrier assumes part of the risk itself by using a deductible or self-insurance. While the deductible is a down payment towards an existing insurance coverage, the self-insurance is a premium or cash amount that is reserved in the airlines budget to cover the costs of potential losses. (Wittmer et al. , 2011) Another way to cover potential losses is to engage in complete retention. Using this method the air carrier must determine its potential losses for the year and reserve this specific amount for the only purpose of damage control.
The money set aside from previous years will increase the airlines coverage. The disadvantage is that if a loss occurs and the reserves are exhausted, the airline does not have any more savings for potential losses in the near future which eventually could result in bankruptcy in case another accident occurs. (Wittmer et al. , 2011) the accuracy of such audits, the fewer audits will be executed in that particular field location. It also improves Continental Airlines overall risk assessment and a decrease in potential loss and therefore results in a lower insurance deductible and increase in savings. (Goepfert, 2012)
Another exceptional example of good risk management is Finnair. It is the largest airline in Finland and was ranked as one of the best European airlines regarding flight safety. For Finnair, risk management is part of their overall business plan and uses a systematic form of recognizing, analyzing and managing possible risks associated with the operation. Like Continental airlines, Finnair has prepared a risk management plan, with its concern on flight operations and safety and strategic and financial risk as well. The airlines conduct regular audits that are based on European and international safety commission standards.
The management related to loss or damage is divided into flight safety and corporate security with both is run by its own department. Its safety policy is followed by all employees, contractors, vendors, and leasing partners. Finnair’s strategy is to be able to quickly correspond to any surprising event. Therefore the air carrier is able to quickly adjust capacity, air routes and cost to a rapid changing competitive and risk bearing environment. (Finnairgroup, 2011)For a company to associate publicly draws those into the potential for risk occurring. The same happens when we purchase a car insurance to protect us legally from potential risk.
Air carriers are no difference and risk management plays an even more important role. The general term for risk management is the process of identifying, evaluating, reducing, and accepting risk. Risk management also involves the conservation of assets and the minimization of losses or the detection of hazard before they occur. For enterprises in general, threats exposed due to risk are company assets, income or legal liability. While flying airplanes form one location to another is the daily business for airlines, the potential for risk is inevitable.
Especially in the aviation industry it is important to follow Federal Aviation Administration guidelines. Therefore positive risk management is an important asset to the aviation industry. If risk can be reduced or eliminated, the potential for accidents or mishaps occurring will drastically be reduced. Increasing the potential for risk will have many negative aspects. It will reduce the trust of customer or passenger, loss in revenue and potential law suit due to accidents and increased premiums or higher deductibles with the associated insurance carrier.
Positive risk management can be seen by air carriers such as Continental airlines or Finnair. Both companies use distinctive risk management techniques to avoid future confrontations and so secure their companies financially. Many air carriers feel the threat and pressure that is exposed due the high risk factor. For those not willing to comply with their companies’ policy regarding risk, they willfully endanger their surrounding environment and the life’s of innocent citizens. Therefore the job of a risk manager must be taken critical, not just in aviation but in our society as a whole.