7

Entity-Level Risks

The aviation industry is a tough one – as US billionaire Carl Icahn would agree. He took exposure to the US Aviation Industry in 1985 through the purchase of Trans World Airlines (TWA) and became its chairman; however he left the company in 1993 as TWA collapsed and became bankrupt.

What are the challenges of the aviation industry? It is cyclical and has relatively high operating leverage (e.g. high depreciation) and capital intensity, given the heavy investment in costly aircraft. Moreover fuel costs, which are at the mercy of volatile oil prices, account for a significant portion of its running expenses. To remain adequately hedged against the volatility of fuel prices is in itself an immense challenge for airlines.

Whilst several global and regional airlines continue to suffer from losses, a few airlines such as UAE's Emirates Airlines and US based South West Airlines are relatively consistent in their performance and profitability.

Haven't you noticed this pattern in other industries as well? While some companies perform satisfactorily, earning reasonable profits, there are others which struggle to exist and incur losses.

Here lies the explanation as to why firms within the same industry facing exactly the same external environment perform differently. Decision-making skills, policies and competencies define certain crucial risks that can make or unmake a business enterprise. The strategies, methods, technologies, the motivation level, etc. are a few factors ...

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