Risk mitigation strategies for Easyjet

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Risk Mitigation Strategies for Easyjet

Prepared for:

Easyjet Board of Directors

6 December 2010

Executive Summary

About us

We at Risk Management Consultants Ltd have vast experience in risk mitigation. We have compiled reports for various leading organizations, specializing in the aviation industry.  

Objective

The objective of this report is to analyze the main risks affecting Easyjet and to identify as well as evaluate the various risk mitigation strategies that could be deployed by the company.

Aim

As aviation companies are exposed to large number of risks we as Risk Management Consultants Ltd aimed to identify  the risks faced by the Easyjet and provide relevant mitigation strategies when dealing with key risks.

Key risks

The following are key risks we think have the greatest influence to Easyjet's performance: fuel risk, foreign exchange risk, operational risk, safety risk. We have used COSO Enterprise Risk Management Model to evaluate each of these key risks and came up with the following risk mitigation strategies:

Contents:

Introduction

         4

Outline of risks        5

Fuel risk        6

Foreign exchange risk        8

Safety risk        10

Operational risk        11

Conclusions        12

Recommendations        12

References        13

 

Introduction

On behalf of Risk Management Consultants Ltd we have identified various risks affecting Easyjet plc. Due to the vast number of risk exposures we have acknowledged key risks that will have significant impact on key aspects of the business. The four main risks that the report will focus on are: fuel risk, foreign exchange risk, operational risk and safety risk.

By having an expertise in risk management we believe failure to manage key risks for an organisation will have a detrimental effect on the performance of the company. That is why we have chosen Enterprise Risk Management (ERM) framework which looks at methods and processes used by organisations to manage risk and seize opportunities.

The ERM framework provides a step by step method in managing risks; from identifying the risks all the way to determining an effective strategy. ERM ensures a proactive attitude to managing risks and maximizing opportunities for a firm.

So we have started risk analysis of Easyjet by categorizing all the risks their respective groupings and then further into internal and external factors (figure 1.1). It is important to establish whether the risks are such that affect all operators in the aviation market or these risks are specific to Easyjet's internal environment.

As all the risks are important in affecting business performance however this report will focus on the risks highlighted with red colour in figure 1.1 as we believe such risks have the greatest adverse affect on the business than certain other risks.

Outline of risks

Figure 1.1

Fuel risk

For an aviation company fuel costs have major financial implications on its performance, especially due to recent economic conditions. This is evident in the volatility of oil prices during August 2007 to December 2009 period. In August 2007 the price of oil was $71/barrel this had risen to $147/barrel in July 2008 and then fell to a low of $32/barrel in December 2009 (figure 1.3). It is clear that with such volatility it is difficult to hedge favourably for an airline as the price of oil is affected by various factors. One theory for the rising oil price is the excess demand from emerging economies such as India and China. In addition, disruption to oil pipelines can cause a significant rise in oil prices.

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By examining Easyjet's reports up to 2009 it is apparent that company used forward contracts as a mean of hedging against the risk of oil increasing oil prices.

Figure 1.2

As we can see from figure 1.2, the overall fuel cost for Easyjet has risen by 9.7% from 2006 to 2007 and 66.6% from 2007 to 2008. This big increase is a result of crude oil prices rocketing to $147/barrel. By studying the accounts from 2007 to 2008 Easyjet hedged 40% of the fuel at $735 per metric tonne compared to 66% being hedged at $1147 per metric tonne ...

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