VIRGIN Mishal Kamal 43478662 Essay

Submitted By mishal249
Words: 1758
Pages: 8

According to ASA 315 paragraph 4(b),it states that business risk results from events and actions that could affect an entity’s ability adversely to achieve its objectives and strategies or from the setting of them(Leung, Coram, & Cooper, 2015, p. 366). The top four business risks associated with the case of Virgin Atlantic are:
1) Fuel price fluctuations: Fuels prices are one of the most volatile and fluctuating commodities a business can never put a lid on and is the major cost for the airline without which it can never operate, no matter what the price companies have to comply. Fuel can represent in between 15% and 25% of total operating cost with costs varying between airlines of stage length and costs of transporting fuel(Hanlon, 2007, p. 42).Due to its unpredictability it poses the highest risk. Due to industry being homogeneous we can focus on hedging the volatile input and is positively related to airline firm value(D. A. Carter, Rogers, & Simkins, 2006, p. 53).Airline investment opportunities correlate positively with jet fuel costs.(D. Carter, Rogers, & Simkins, 2004, pp. 1-2).

2) Liquidity risk: These risks come in many forms such as interest on borrowing, contract and credit terms due to their borrowing and since it is a capital intensive business it needs a lot of investment. With that much money in play, investments pay off or put off a company when not pulled off. Because of its high level of fixed cost there is always a risk of liquidity shortage. According to the VAH annual report 2014, finance costs for Virgin Australia rose from $70.7 million to $ 119.7 million in the year ended June 2014. This increase could indicate that some of the borrowings are accruing interests due to non-payment and could be looked into for further investigation towards liquidity risks. Virgin’s capital structure, which has bigger proportion in debt compare to their equity, has increased the company's liquidity risk

3) Competitive market: The Australian market is evidence of effectiveness of actual competition rather than the ineffectiveness of potential competition.(Forsyth, 2003, p. 282). With many carriers coming into the market, companies need to keep on investing to upgrade, set proper pricing policies to break even and with that achieve economies of scale to survive. The airline industry is subject to economic regulation by ACCC of the Trade Practices Act 1974 as claimed it did not protect small businesses being predatory priced by the big firms in the industry (Kain & Webb, 2003, p. 24). This fierce competition led to very low profit margin and along with other facts like weak economic condition as a result in loss in 2014 financial year. Virgin has expanded their services into international market in the last few years, especially South East Asia. They have not able to achieve their forecast yet as shown by the idle asset capacity which impact to the impairment loss in the current year.

4) Safety risk: With global economic crisis, political issues and terrorism on the horizon can adversely affect currency exchange rates and the demand for travel. We have seen last year there have been many tragedies involving Malaysian Airline flights affecting the aviation industry as a whole and damaging consumer confidence. It is shown by a negative impact on other airlines in Australia such as Qantas. Virgin has established a Safety and Operational Risk Review Committee to oversight safety, health and security risks as a single aircraft loss just not only results in a loss of asset, comes with it fall in the brand name and negative word of mouth as consumers delete the thought of ever travelling on that specific carrier which takes companies years to earn back.

Laws and regulations applicable for VAH are:
1) FAIR WORKS ACT 2009: Act about workplace relations and employment conditions also dealing with workplace safety, minimum wage rate and discrimination ("Fairwork Ombudsman," 2009).
2) AIRSPACE ACT 2007:…