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1.        
INTRODUCTION

 

Airlines are one of the important means of transport
around the world and considered one of the quickest mode of transport in most
of the country in the world. “The accident rate for airline travel is lower
than for any other mode of transportation, and it continues to decline” (Lane,
2005). However, with incidents like September 11 attack, MH370 and MH17, it shows
that accidents do happen and cause a lot of fatalities. “Airlines choose to
avoid the financial distress by purchasing insurance against
loss-through-accident” (Lane, 2005). It is also considered one of the method to
transfer the risk so that the company will have sufficient coverage to
compensate for the loss in the unfavourable event. The objective of this paper
is to look into the risk faced by an airlines company in Malaysia, AirAsia
Berhad as to have a picture on how the company actually manage their risk. The
analysis and review of the annual report will assist in determining what are
the risk management process taken by the company and to answer the question of
how the company use insurance or aviation insurance to be specific to transfer
the risk. This paper consists of
introduction, background of AirAsia Berhad, risk faced by AirAsia Berhad,
insurance taken, issues in aviation insurance and the conclusion.

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2.        
BACKGROUND
OF AIRASIA BERHAD

 

AirAsia is a leading low-cost carrier which provides
air transportation service to 132 routes across the world (AirAsia, 2017). It
was established in 2001 with a vision to be the largest low-cost airlines in
Asia to serve the 4.4 billion people who are currently underserved with poor
connectivity and high fares (AirAsia Berhad Annual Report, 2016). Its missions
are to be the best company to work for whereby employees are treated as part of
a big family, to create a globally recognised ASEAN brand, to attain the lowest
cost so that everyone can fly with AirAsia and to maintain the highest quality
product, embracing technology to reduce cost and enhance service level (AirAsia
Berhad Annual Report, 2016). As at 31 December 2016, AirAsia has a total of 174
A320 Airbus young fleet with average age of 6.5 years. AirAsia also carried a
total of 56.6 million passengers in 2016 alone. With such volume of fleet and
passengers, it is very crucial for AirAsia to manage their risk effectively and
efficiently. As the other business, there is impossible to eliminate all the
risk faced by the company. Therefore, AirAsia have considered the strategies to
control or finance the risk so that it can be reduced to an acceptable level in
their operations.

 

 

3.        
RISK
FACED BY AIRASIA BERHAD

 

Based on AirAsia Annual Report 2016, AirAsia has
identified the significant risk faced by the company and how they mitigate
those risk. The risk is classified into six categories namely strategic risks,
operational risks, financial risks, cyber security risks, compliance risk and
safety risks.

 

4.1     
Strategic
Risks

 

The first risk identified under strategic risk is the
decline in sales which is due to the unexpected changes in demand caused by
events such as pandemics in key markets, political conflict or market
depressions that could impact our income stream significantly. The mitigation
action taken by the company is to conduct periodic market analysis and
coordinated responses to market events. AirAsia has also launched low-fare
promotions from time to time to generate sales in periods of low demand.

 

Other than that, the strategic risk identified is
related to the negative publicity which is the reputational risk that stems
from widespread social networks that have acted as platforms for airing
consumer complaints or conducting anti-sentiment campaigns. Aggressive
marketing by competitors may also contribute to negative sentiment. The
mitigation action taken is by conducting annual brand health assessments with
the results used to execute positive public relation actions including targeted
marketing campaigns.

 

4.2     
Operational
Risks

 

The first risk identified under the operational risk
is the prolonged outages of mission-critical systems required for continuity of
flight operations and revenue channels have occurred more frequently in the commercial
aviation industry over the past 12 months costing significant financial loss to
affected airlines. The mitigation action taken is by developing, implementing
and testing the systems-specific backup and failovers to reduce the impact of
prolonged systems outages. The IT Disaster Recovery Plan was also developed as
well as the complementary Group Operational Response Plan to ensure that
business continues to run in the event of a critical systems outage.

 

The next one is the risk of failure in airport
services, such as airport fuelling systems, baggage handling systems or
customs, immigration and quarantine processing that could possibly impact our
operational continuity and lead to significant delays and business disruption.
The mitigation action taken is by creating incident-specific business
continuity plans for the main hubs while partnering closely with airport
operators and authorities. AirAsia also developed and tested fuel supply
disruption business continuity plans for KLIA2 in light of several actual
incidents during the year. Further contingency plans for loss of airport bays
are also being developed and due by the end of 2017.

 

4.3     
Financial
Risks

 

The first risk identified is the increase in fuel
price above USD75 per barrel which definitely put a significant impact on
AirAsia’s profits with fuel making up one of the key cost components for
operations. The mitigation action taken is by hedging the price of nearly 75%
of AirAsia’s jet fuel until the end of 2017.

 

The second risk is the depreciation of Asian
currencies beyond expected lower limits and the unexpected massive currency
depreciation of the Malaysian Ringgit to the US Dollar which will cause a
detrimental effect on the cost of financing for AirAsia. The mitigation action
taken is by hedging approximately 59% of US Dollar loan liabilities with forward
foreign exchange contracts.

 

4.4     
Cyber
Security Risks

 

AirAsia is exposed to cyber intrusion due to our heavy
focus on online sales channels, guest feedback, help channels and other digital
solutions. The integrity of the online activities, electronic and network
systems, as well as digital storage of business and operations information
could be compromised by cyber intrusion. The mitigation action taken is by establishing
a centralised team responsible for managing and improving the cyber security.
This team regularly reviews and monitors cyber threats globally. AirAsia have
also achieved ISO/IEC 27001 Information Security Management System (“ISMS”)
certification for its control systems.

 

There is also an increasing number of cyber fraud from
phishing, or fraudulent emails, by automated ticket touts manipulating AirAsia’s
booking engine. The mitigation action taken is by implementing specialised
tools to mitigate the risk of automated ticket touts as well as awareness campaigns
on e-mail phishing prevention.

 

4.5     
Compliance
Risk

 

AirAsia must meet regulatory requirements of local
aviation and consumer authorities in multiple jurisdictions. Unexpected or
sudden changes in these requirements may risk non-compliance of local rules and
regulations. The mitigation action taken is by maintaining a high level of
engagement with local regulators and authorities to ensure any new regulatory
requirement is understood and swiftly adhered to. In addition, AirAsia also constantly
monitor the local regulatory landscape for new or amended regulations that it
is required to comply with.

 

4.6     
Safety
Risks

 

The exposure to operational safety hazards and risks
increases as AirAsia grow its routes, flights and passenger volume. Managing
latent threats to the business is especially important as these may be
amplified through the growth. The mitigation action taken is by implementing a
Safety Management System as imposed by the regulation, which AirAsia already have
in place. However, it goes beyond this by adopting industry best practice. In 2016,
AirAsia began preparations for eventually submitting to the IATA Operational
Safety Audit. Group Safety oversees efforts by AirAsia to adopt the highest standards
in identifying, managing and communicating with each other on safety risks
across the Group. It is also responsible for promoting a strong safety culture
at all levels of the organisation. The safety policy is to ensure that all
employees of AirAsia are aware of their responsibilities and contribution
towards safety.

 

4.        
INSURANCE
TAKEN BY AIRASIA BERHAD

 

Other than those mitigation action taken by the
company, AirAsia also undertakes adequate insurance and maintains physical precautions
on assets to ensure these are sufficiently covered against any accident that
will result in material loss. According to the AirAsia Berhad Annual Report
2016, AirAsia Aviation Insurance provides coverage for the aviation hull and
spares all risks and liability, aviation hull and spares due to war and allied
perils (primary and excess) and aircraft hull and spares deductible due to
aviation war, hijacking and other perils excess liability.

 

Aviation hull and spares all risks and liability will protect
the aircraft against loss, damage or liability arise due to an accident. It
will pay, replace or repair the damage of aircraft and the compensation for the
bodily injury caused by an accident (AIG Malaysia Insurance Berhad, 2017). Besides,
it also covers the indemnify against the compensatory damages to third party
caused by an accident and the accidental damage to property as a result of
falling object, person or the aircraft. In addition, the coverage also includes
the indemnify against the compensatory damages in respect of bodily injury to
passengers of the aircraft and loss of or damage to baggage and personal
articles of the passenger of the aircraft due to the accident.  

 

The other two
insurances are the aviation hull and spares due to war and allied perils
(primary and excess) and aircraft hull and spares deductible due to aviation
war, hijacking and other perils excess liability are mainly the insurance coverage
for the loss and damage of the aircraft due to war, strikes, riot, hijacking and
other perils associated with that.  According
to Osprey Insurance Brokers, aircraft war, hi-jacking, and other perils excess liability
(AVN52E) is the insurance taken to mitigate the risks associated with war and
allied perils, which are generally excluded under Aircraft Third Party,
Passenger, Baggage, Cargo, and Mail Legal Liability policies. It aims to extend
cover endorsement known in the aviation market as AVN52E (Osprey Insurance Brokers,
2016).

 

The uniqueness of the
aviation insurance is the coverage is limited to an occurrence basis and based on
the amount determined upon subscription of those insurance. The coverage of the
hull is placed on an agreed value basis (Arthur J. Gallagher & Co., 2014)

 

5.        
TERRORIST
ATTACK ISSUES IN AVIATION INSURANCE

 

Aviation insurance is also one of
the insurance that gives the coverage of terrorist attack such as September 11
attack (Anderson, 2002). The article further explained that this insurance
usually covered the both a first-party and liability component. The third-party
liability coverage generally encompasses bodily injury to third persons and
damage to property caused by the aircraft or by a person or an object falling
from the aircraft. Those coverage are similar to those offered by AIG Insurance
Berhad. However, in the circumstances of terrorist attack, September 11 for
example, aviation insurance may cover losses arising out of loss of the planes,
the death of passengers and crew, and claims by others allegedly arising out of
airport security insufficiencies. The loss suffered might involve a huge amount
of money and there are possibilities that the coverage from the insurance might
not be sufficient in compensating all the damages. On 22 September 2001, US
Government has passed an act to lessen the losses suffered by both the insurance
and aviation industry. According to the act, the liability of American Airlines
and United Airlines for losses resulting from the September 11 attacks will not
be permitted to exceed their commercial aviation liability insurance limits.
The losses that exceed to that amount will be borne by the government in the
event of terrorist attack. It shows that the terrorist attack is under the
responsibilities of the government to be dealt with. In the case of AirAsia
Berhad, the company did not include the terrorist attack as one of the
insurance taken by the company. It may be due to the huge premium to be paid in
order to be covered under that insurance. The issue of government responsibilities
towards the terrorist attack might require further discussion on how to deal
with loss resulted from the terrorist attack that use the airlines as a medium.

 

6.        
CONCLUSION

 

As the conclusion, there are several methods in
managing risk for an airlines company. 

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