HERIOT-WATT UNIVERSITY

STRATEGIC RISK MANAGEMENT – DECEMBER 2018

Case Study

Note: In developing your answers you can make any assumptions you wish provided these are reasonable,
do not contradict the content of the case study and are clearly written down.

Note: Company and individual names are shown in italics.

Will they take off?

Assume you are a Senior Risk Analyst, specialising in assessing risk profiles and
recommending alternative strategic policies to organisations. You are also a team member
of a special ‘task force’ for an airline company, analysing the following case.

AsiaWays Airlines (AWA) is a medium-sized airline. The airline has its hub at the main
airport (45 miles from the capital city). As a member of Oneglobe alliance, it operates 29
domestic and 70 international routes throughout Asia and the Pacific region. It has also
signed codeshare agreements with six major airlines in Europe and Africa. AWA does
not fly to North America. The company employs 7,500 people and its fleet numbers a
total of 63 passenger aircraft, with an average age of 16 years.

For the past five years, the company’s in-flight service has been ranked as one of the
‘Top 10’ in Asia, and its frequent flyer programme is very attractive, offering points and
upgrades based on the accrual of ‘on-board mileage’ when flying with AWA or one of its
Oneglobe partners.

AWA’s safety rating is relatively high (5.5/7). The company had two minor incidents and
two accidents during the past 10 years. The most famous is the crash of the AW882 flight
in 2009, as a result of extreme weather conditions only two miles short of the runway.

Since 2015, a decline in passenger numbers and revenues has been blamed on the
slowdown in the Asian economies (mainly China). However, an increase in domestic
demand in some of Asia’s most populous countries, such as Indonesia and India, was
also visible. Some economic analysts claim that it looks likely that the improving US
economy, which is the biggest trading partner for most of Asia, could be the key to
recovery. If US consumer demand recovers, so might Asian travel. Meanwhile, AWA
enjoys the global trend of a decrease in jet fuel prices since 2014 that keeps the
company’s operating income stable.

AWA’s largest competitor is Asiasky, which like AWA covers all major regional
destinations, but which has recently launched its new flight service to North America,
with the new long-range Boeing 787 Dreamliner aircraft. Customers do appreciate such
comfort and it seems the route is enjoying high demand and profitability. During 2016, a
new player entered the Asian market, offering long-haul flights to Europe. Balticwings is
aggressively making every effort to exploit and take advantage of the local Asian carriers’
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problems, with its relatively new fleet and extensive network of hubs in Eastern Europe,
connecting to the rest of Europe and the USA. There are rumours in the industry that, in
addition, Balticwings plans to offer a low-cost service to Europe in two years’ time.

The government had recently informed AWA’s management that it is reconsidering its
‘open skies’ policy. This means that new and liberalised regulation will minimise
government intervention in the aviation market (in the form of abolishing aviation-
related tax barriers) and will enhance a free-market environment. This will affect all
commercial airline companies operating in the country, including AWA, which is very
dominant in the domestic market. Both the workers’ committee chairman and the cabin
staff representative have expressed their concerns at this move, as this may affect the
crews’ working conditions.

As a result of this changing reality, AWA’s new CEO has set up a task force to assess the
next growth engines for AWA, and particularly to check the feasibility of launching a
low-cost service, or flying to North America. The aim of the team is to consider the
market in low-cost flights, as short-haul customers are increasingly looking for cheap
services that do not include the price of expensive meals and hold luggage. The team will
also consider operational costs savings related to reservations, assuming that there will be
a shift to an online system only. It is hoped that a low-cost service will allow the company
to expand its customer base and better withstand the growing competition, while
avoiding any staff reductions.

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Question 1

(a) In the context of the case study, differentiate between strategic risk, operational
risk, change risk and unforeseen risk, giving likely examples from the point of
view of AWA.
(40 marks)

(b) Discuss the concept of risk response in a generic risk management system. Suggest
and demonstrate appropriate response types that could be used in the case study.

(60 marks)

(Total 100 marks)

Question 2

(a) Identify six major residual risks and discuss possible response options.
(40 marks)

(b) Discuss the contribution of a risk interdependency field (RIF) when used in a risk
management system. Give examples of likely RIF risk nodes based on the case
study.
(60 marks)

(Total 100 marks)

Question 3

(a) Differentiate between decision making under conditions of certainty, risk and
uncertainty, and explain how AWA could use scenario planning as a tool for
decision making under conditions of uncertainty.
(40 marks)

(b) Carry out a scenario planning exercise for the case study from the point of view of
AWA.
(60 marks)

(Total 100 marks)

END OF PAPER