ABSTRACT
This chapter introduces the concepts of risk management and their relationship with a company’s overall management strategy. It presents the identification of the main components of risk, together with appropriate risk-mitigating strategies. Fuel is the single-largest expense for most airlines, accounting for about a quarter of operating costs. In business, risk management involves the practice of uncovering potential risks associated with any project in advance, analyzing them and taking precautionary steps to mitigate them. The concept of risk often includes a situation involving ambiguity or uncertainty. Generally, fuel surcharges are subject to change without notice, and the carriers reserve the right to amend the airfare. An important factor to consider when hedging using call options is that cash needs to be spent upfront to purchase the options at the premium price. In essence, the gains or losses of all future hedging contracts need to be shown on the income statement.
