Risk Management Strategies Which Are in Use in the Airline Industry Across the World - Research Paper Example

CHAPTER 3: RESEARCH METHODOLOGY 3.1. Introduction This chapter presents details of the research methodology employed in carrying out the study on how low-cost carriers in Saudi Arabia can successfully implement risk management strategies in their operations. This chapter offers information on the following specific sections: the design of the research, the target population, the research instruments used in the study, their validity and reliability in carrying out the study, the procedures used for data collection in the study, the techniques used for analysing the data and lastly, the ethical considerations used in carrying out the study. According to Panneerselvam (2004, p. 3), research methodology can be defined as a system of models, procedures and techniques which are used in the process of realising the aims of specific objectives in a research process. According to Crotty (2003, p. 4), the process of research methodology entails three things: one, a description of the techniques and procedures that have been used in the process of gathering and analysing the data that is relevant to the research topic; two, the strategy and design that informs the chosen methods and procedures in relation to the objectives of the research and lastly, the theoretical perspectives for the context and process of the entire research process. 3.2. Research Objectives The objectives of this research were as follows: To determine general risk management strategies which are in use in the airline industry across the world. To examine common models of risk management strategies that have been adopted by low-cost airlines across the world. To examine how low-cost airlines in Saudi Arabia can benefit from the successful risk management models in use worldwide by recommending strategies for implementation. 3.3. Research Design This study was guided by a descriptive qualitative research design that was used to compare risk management strategies in low-cost airlines across the world and identify ways in which low-cost carriers in Saudi Arabia can learn from these models in implementing a successful strategy. In research, design refers to the end result of a sequence of decisions that are made by the researcher on how the research study shall be conducted (Punch 2005, p. 201). A research design is of great importance to the entire process of research. For instance, Creswell (2003, p. 74), observes that it offers guidance on how the study shall be conducted with special attention being given to exercising maximum control over factors that may interfere with the validity of the results. This is made possible because the research design is used to guide the planning for implementation of the study with reference to the framework. Research design varies depending on how strict the researcher is in conducting the study as well as the type of structure the researcher imposes on the study (Creswell 2003, p. 77). Whereas the designs for quantitative studies are highly structured, those for qualitative studies assume a generally fluid and less structured approach in practice. In this study, primary data was collected by holding an interview with professionals in the low-cost airlines operating in Saudi Arabia. According to Marshall and Rossman (2011, p. 11), qualitative research takes a programmatic and interpretive approach that is based on the experiences of individuals. In essence, this type of research is characterised by the following values: one, dependence on multiple methods that identify and respect the humanity of the participants in the research; two, being enacted in naturalistic settings and lastly, being generally emergent, focuses on the context and is fundamentally interpretive (Patton 2002, p. 12). Generally, there are two primary methods of conducting research: the quantitative approach and the qualitative one (Creswell 2003, p. 179). A quantitative approach entails the process of asking respondents about their opinion regarding a particular subject in a highly structured way which yields facts about the enquiry. In order for the researcher to get reliable statistical results, it is important that a large sample of people is interviewed in the process (Maxwell 2005, p. 13). This allows the researcher to work with a sample that is truly representative of the target population. This research will entirely involve the use of qualitative research techniques. This type of technique is used when seeking to find out the “why” as opposed to the “how” aspects of the phenomena under investigation (Tracy 2012, p. 21). Unlike quantitative research which primarily relies on numerical data, qualitative research uses sources such as interviews, notes, emails, and open-ended survey responses to analyse unstructured information required in the research (Tracy 2012, p. 22). This technique will be used to gain insight into the general trends in the aviation industry in Saudi Arabia. When conducting a qualitative research, special emphasis is laid on the meaning, experience and understanding of a particular phenomenon (Maxwell 2005, p. 13). Because of this, such studies have a design that allows the researcher to interact with individuals whose experiences and understanding is required in the entire research process (Merriam 2009, p. 97). Since this study entailed the process of collecting primary data from industry insiders by means of interviews, a general descriptive qualitative design was employed for the study. According to Maxwell (2005, p. 24), description is a vital tool for qualitative research. Using a descriptive design, a study is used to gain more information about a particular phenomenon. Whereas descriptive designs examine the salient characteristics of a particular phenomenon (Morse 2004, p. 4), exploratory designs offer a detailed examination of a single process (in this case, risk management models in low cost airlines). The full nature of the issue under research, the manner in which it is manifested and how it relates to other factors is presented. In the literature review of the study, salient features of risk management in low-cost airlines in the rest of the world were examined. Since it was found that there is a similarity between the current situation facing low-cost carriers in Saudi Arabia with what the situation was like in the rest of the world for other similar carriers, this research attempted to explore, describe and recommend risk management strategies that can be effective for low-cost carriers in Saudi Arabia. 3.4. Target Population According to Holloway and Wheeler (2013, n.pag), a population is the total group of individuals who meet a particular set of criteria in a research study. There is a difference between the target population and the accessible population. Whereas the target population comprises all the cases that the researcher intends to make references to in the course of the study, the accessible population comprises all the cases which satisfy the designated criteria for the study and are completely accessible to the researcher as a pool of potential subjects for study throughout the course of the research study (Holloway & Wheeler 2013, n.pag). In this study, the target population for the interview comprised professionals who had either worked or currently are working in the aviation industry in Saudi Arabia; particularly in the low-cost airlines. The accessible population comprised of four individuals as follows: two former managers at Sama Airlines and two current managers at Nas Air. These individuals were interviewed for their knowledge, experience and understanding of risk management trends in low-cost carriers in Saudi Arabia. 3.5. Organisation of the Study This study was conducted in two broad phases. In the first phase, secondary data was primarily used. Academic publications from journals, books and other peer-reviewed materials were used to collect information on three broad subtopics: general risks encountered in the aviation industry, common models of risk management strategies that have been successfully adopted by low-cost carriers in the world and finally, general risk management trends in the aviation industry in Saudi Arabia. In the second phase, data was collected using a qualitative approach. Questions were used to interview individuals who have once worked or are currently working in low-cost airlines in Saudi Arabia. The information gathered related to issues to do with their experiences in the low-cost carriers, salient challenges that low-cost carriers are facing in Saudi Arabia as a result of the current political environment, the general history of low-cost carriers in Saudi Arabia in relation to the entire world and lastly, their understanding of possible future trends for low-cost carriers in Saudi Arabia in terms of how to effectively manage business risks. 3.6. Sample Punch (2005, p. 101), defines sampling as the process by which a small part of the entire population is selected to represent the entire population in a research study. Generally, a qualitative research requires that a small sample is chosen through a deliberate selection process in order to represent the entire population (Leininger 2004, p. 103). The criteria for selecting individuals who participate in the research are first-hand experience and understanding of the subject of the study. For this study, purposive sampling was used to select four individuals who represent the desired population (two former managers of Sama Airlines and two current managers of Nas Air). Participants in this study were selected because they have a deep understanding of the aviation industry in Saudi Arabia, having worked in low-cost airlines in Saudi Arabia (for the case of former managers of Sama Airlines) and, therefore, demonstrating a high level of experience in risk management strategies that have been employed by such airlines. 3.7. Methods of Data Collection In this study, primary data was collected by holding interviews with four individuals who have experience working in low-cost airlines in Saudi Arabia (two former managers at Sama Airlines and two current managers at Nas Air). Secondary information was obtained from relevant academic sources that are related to the objectives of the study. According to Punch (2005, p. 166), text is a valuable source of data in doing a qualitative research study. Because of this, the interviews were carried out in such a manner that the individuals selected had a chance to offer all their understanding and industry experience in responding to the questions. The interview questions allowed the respondents to make accurate and detailed responses to all the issues raised in the course of the study. The information that was received from these interviews was then analysed and used to confirm the findings from secondary sources of data. The interview covered the following questions which are relevant to the objectives of the study. 1. Please describe the position of your company in the Saudi Arabian market. Did the company attempt to attain a leadership position in the market? If so, what strategies did it employ in its attempt? 2. How would you describe the typical class of customers for your company? 3. How would you describe the aviation industry in Saudi Arabia currently? 4. What impact do the current political changes in the region have on the general risk management strategy of your company? 5. In what ways would the entry of foreign low-cost airlines into the local market threaten your market position and how would you respond to the situation? Also, participants in the interview were required to provide information about the airline they worked for, its size in terms of the number of customers served in a year and the risk management strategies employed. The entire interview guide is shown in the Appendix. 3.8. Data Analysis According to Merriam (2009, p. 66), data analysis is a process in which themes and hypotheses are identified and constructed as suggested by the data that has been collected in the study. The data that has been collected is simplified, transformed and verified to confirm the hypotheses that have been suggested. In this study, the qualitative data from interviews with industry insiders was analysed in three broad steps. First, the themes inherent from the results of the interviews are identified. Second, the identified themes are subjected to a verification process by comparison with parallel data. Lastly, the themes are categorised and any support information recorded. 3.9. Ethical Considerations When conducting a qualitative research, a number of ethical principles have to be taken into consideration. These include the principle of autonomy, self-determination and disclosure (King & Horrocks 2010, p. 106). When conducting this study, these principles were taken into consideration in accordance with the demands of a qualitative study. The individuals who were interviewed were informed about the nature of the study and what their responses would be used for. 3.10. Conclusion This chapter has presented in detail information on the research design that was used in the study, the target population, methods of collecting data and data analysis procedures. The findings from these processes shall be presented in the next chapter. CHAPTER 4: RESULTS AND ANALYSIS 4.1. Introduction This chapter comprises the analysis, presentation, interpretation and discussion of primary research data set in the context of the literature review for the study of how low-cost carriers in Saudi Arabia can successfully implement risk management strategies in their operations. It presents an analysis of the data that was gathered using the tools described in chapter three of this research study. The first part presents information on the responses in the interviews with experts in low-cost airlines in Saudi Arabia. The second section presents information on general risk management strategies in the aviation industry, general strategies employed by low-cost carriers across the world, the general trend of low-cost carriers in Saudi Arabia and lastly, ways in which low-cost carriers in Saudi Arabia can successfully implement risk management strategies in their operations basing on the practices of similar airlines across the world. In essence, this section summarises the findings of this study. 4.2. The Interview Results The study used interviews with experts in the Saudi Arabian aviation industry as a means of gaining information about their understanding, experiences and expectations on risk management strategies. This method of collecting primary data was used to complement the secondary data upon which the study heavily relied, in particular when exploring general risks that are common in the aviation industry and risk management models in low-cost airlines across the world. Four individuals were selected for the interview (two former managers at Sama Airlines and two current managers at Nas Air). Each of the individuals was interviewed separately and their responses to the guiding questions of the interview recorded. Whereas the interview with the current managers at Nas Air yielded comprehensive responses to questions about the current status of the industry and possible future responses by the low-cost carriers, the interview with the former managers of Sama Airlines did not yield this information since the company is no longer in operation, having gone bankrupt back in 2010. 4.3. Risk Management Strategies in Low-Cost Airlines across the World The first objective of this study was to determine the general risk management strategies that are commonly employed in the aviation industry across the world. This was established through examination of secondary information on the subject. From the literature review, it can be seen that the airline industry is characterised by a number of common risks which can be categorised basing on whether they are of financial, operational or safety concerns to the company (Damodaran 2008, p. 26). Further, risks in the aviation industry can either be external (being caused by factors that operate outside the company) or internal (being caused by internal factors). The second objective of this study was to examine the models of managing risks that are employed by low-cost carriers across the world. In collecting primary data through the interviews, this objective was established through the question on how low-cost airlines in Saudi Arabia have benefited from risk management models employed by other low-cost carriers in the world. From the results, it can be seen that the low-cost model has been successfully implemented by other carriers in the world. Hence, the low-cost carriers in Saudi Arabia have been influenced by this model in their early years of operation as shown by the two airlines whose insiders were interviewed. Both Sama Airlines and Nas Air modelled their risk management strategies around minimising operational costs, offering a standard, low-priced product to the market, efficient utilisation of technical resources and adopting fleets that can be easily used in any air routes in the event of changes. These findings correlate with the initial low-cost model that was successfully used by low-cost carriers during the onset of the industry first in the United States, before proceeding to European countries and the rest of the world (Doganis 2006, p. 191; Flenskov 2005, p. 102; Grob & Schroeder 2007, p. 43). Although the original low-cost model has been successful in its implementation in a number of low-cost carriers across the world, its implementation in the Saudi Arabian market is often confronted with obstacles. This is because of a number of factors that make the local market different from the rest of the global market. Results from the interview indicate that certain strategies from the low-cost model cannot be implemented by Nas Air. This is because of the fact that conditions in the local market are not commensurate with the situation in the market where the models have been implemented. This is exhibited in the low-cost strategy that requires efficient use of the fleet in passenger allocation. Since Saudi Arabia experiences high temperatures, the performance of airplanes is reduced hence forcing the airlines to reduce the number of passengers in each airplane. This goes against the need to ensure maximum and efficient utilisation of resources as developed in the traditional low-cost carrier model. 4.4. Low-Cost Airlines in Saudi Arabia In general, studies have indicated that the aviation industry in Saudi Arabia suffers from a number of regulatory obstacles that make it difficult for a successful development of the low-cost market segment of the industry. These findings were corroborated by the results of the interview which indicated a number of similar results. First, whereas Sama Airlines modelled its business strategy on serving the needs of passengers during religious seasons (ideally the Hajj and Umrah) as well as on Arab and foreign labour travellers during summer seasons, Nas Air has developed a strategy by which it does not rely on a specific type of customers. The company (Nas Air) depends much on providing low-cost services to passengers who have failed to get early reservations in different stations. This strategy, which is similar to the traditional low-cost carrier model of offering a standard product to the mass market, forms the major source of revenue for the company. Also, with the opening up of international flights, low-cost carriers in Saudi Arabia have benefited a lot from international flights, which are more profitable than the domestic ones. Results indicate that both low-cost carriers in Saudi Arabia benefited from international flights as opposed to the domestic ones. Sama Airlines quickly expanded to international flights within year of its inception back in 2007. The company dominated the economical aviation market because it lacked a direct competitor in the sector. Nas Air, which began its operations much later, picked up growth by offering international flights to its clients. Results indicate that the growth of the company in terms of the number of customers served per year is dependent on its success in international flights. This finding is correlated by review of literature which revealed that the apparent growth in the Saudi Arabian aviation sector in terms of the number of passengers is a function of increases in international flights by the low-cost carriers in the market (Minkova 2011, p. 15; Flouris & Yilmaz 2012, p. 173; Taneja 2003, p. 56). According to the results of the interview, the number of passengers served by Nas Air has been increasing steadily from the original figure of about 50,000 passengers that were served back in the year 2007 to the current number of over 3,000,000 passengers that were served in the year 2012. By the year 2010, Sama Airlines was serving 1.5 million passengers per annum; many of them falling in any of the following four categories: business passengers, tourist passengers, visiting friends passengers and passengers on religious pilgrimage. From the results of the interview, growth of the aviation sector in Saudi Arabia is limited by regulatory frameworks that make the business environment hostile for airlines operating under the low-cost carrier model. These issues were cited by both managers of Nas Air. Also, all the interviewees agreed that failure of the government to provide incentives and the right business environment for start-up low-cost carriers has been the main reason for the poor performance of the industry in comparison with the situation in other countries. Failure of the General Authority for Civil Aviation to ensure that there is no discrimination in access to ground services and other support services between low-cost carriers and the Saudi Arabian Airlines has been a major disincentive to investment in the sector. This was pointed out by both managers who are currently working at Nas Air. Further, results from the interview indicate that the move by the aviation authority to limit the prices of flights for economy class has made it difficult for low-cost carriers to successfully implement their strategies to minimise the costs of operation and maximise on revenue. This situation has resulted also from the existing discrimination in terms of fuel prices between low-cost carriers and the national carrier. Since Nas Air is forced to pay thrice as much as what the national carrier pays for fuel, its high operational costs and decreased revenue levels limit its growth as a company and that of the sector, by extension. 4.5. Suggestions for Risk Management Strategies for Low-Cost Carriers in Saudi Arabia The last objective of this study was to highlight ways in which low-cost carriers in Saudi Arabia can learn from other successful low-cost carriers in the world in order to successfully implement risk management strategies in their operations. This objective was attained by the interview questions that sought the response of the interviewees on the current challenges in the industry, its future trends, the way to respond to the current political challenges and finally, how the entry of other players is likely to affect their operations. The success of low-cost airlines depends on a readily expanding market on one hand and a sound regulatory framework that encourages the growth of low-cost carriers, on the other. These two factors are central to the performance of low-cost carriers already in operation as well as affect the ease of entry and chances of survival of new players into the market. The responses to the current obstacles that are affecting low-cost carriers in Saudi Arabia are indicative of areas that new players in the industry need to take into account when developing their risk management strategies. From the findings of the interviews, it can be seen that the entry of foreign players into the local market will present a number of challenges to the local players. These will include the following: a possible decline in prices resulting into decreased profitability for local low-cost carriers, opening up flights to far-reaching destinations which the current local players do not have the capacity to sustain, and generally increased competition in the market. To address these challenges, low-cost carriers in Saudi Arabia need to take into account strategies that will ensure they are fully insulated against the risks that result from the entry of foreign low-cost carriers into the Saudi Arabian market. In order to implement successful risk management strategies, low-cost carriers will have to acquire new planes that are suitable for long distance flights, open new destinations and study the needs of the market in order to keep up with any changes in the needs of the clients. Also, results indicate that low-cost carriers will have to factor in the effect of recent political events in the Gulf region. Since political upheavals have led to increases in operational costs as well as reductions in revenue for local players, there is need for low-cost carriers to develop strategies that reduce their level of exposure to such risks. These include purchasing new aircraft that can travel over long distances, opening up new destinations and focusing on local flights. Such strategies are aimed at reducing the costs of operations that have resulted from recent political events in the Middle East. CHAPTER 5: CONCLUSION 5.1. Introduction This chapter gives a summary of the findings of the research, the results that have been attained and inferences reached at in the course of the research. Its main aim is to summarise the study, the conclusions, recommendations and suggestions for further research. 5.2. Summary of the Findings This study had three primary objectives: one, to determine general risk management strategies which are in use in the airline industry across the world; two, to examine common models of risk management strategies that have been adopted by low-cost airlines across the world and finally, to examine how low-cost airlines in Saudi Arabia can benefit from successful risk management models in use worldwide by recommending strategies for implementation. The study was set to establish ways in which low-cost carriers in Saudi Arabia could benefit from risk management strategies employed by similar airlines across the world in implementing their own strategies in the local market. It was found that although low-cost carriers in Saudi Arabia adopted basic risk management strategies similar to the traditional low-cost model employed across the world, the local situation in Saudi Arabia is characterised by a number of factors which make it important for local players to adopt their own strategies basing on similar worldwide models but taking into account the needs of the local market. The study findings revealed that airlines seek to minimise the risks that threaten their financial position, operational efficiency and safety records. It is also seen that many airlines seek to insulate themselves against fluctuations in the prices of fuel, changes in the rates of exchange and security threats resulting from political upheavals. Many airlines respond to market and environmental risks basing on the possible consequences the risks would cause to the airline in the event of their occurrence. Many airlines categorise risks as being either internal (caused by factors operating within the airline) or external (caused by factors that are beyond the control of the airline). Also, literature reveals that there are many strategies which have been developed that airlines can use to manage operational risks. Many of these studies assume a typical framework for operational risk management that identifies risk management strategies as an integral part of safety management systems which airlines are required to implement in their operations. Such an approach ensures that airlines are covered against common firm-specific and industry-specific risks. The findings of the study established that low-cost airlines across the world have succeeded as a result of adopting a risk management strategy that not only minimises their initial costs of operations but also maximises their revenue and utilisation of resources. Such a strategy is based on Michael Porter’s theory of how firms can achieve competitive advantage in an industry. According to this theory, firms can gain competitive advantage by adopting any of the three basic competitive strategies. A firm (in this case an airline) may seek to achieve cost leadership in the industry through focusing on producing mass standard products at low costs; or it may seek to achieve differentiation for its products and services by focusing on its unique selling proposition. Lastly, a firm can gain a competitive advantage in the market by a process of market segmentation and targeting. All these strategies are embodied in the low-cost carrier model and are employed by all low-cost carriers across the world. This is necessary because of the fact that during the early periods of operation, low-cost carriers do not have control over their revenue expectations; the only viable strategy of ensuring their survival is minimising their operational costs, upon which they have direct control. Many low-cost airlines across the world seek to select a fleet that suits their operational needs, design their turnaround times to minimise operational costs and employ other cost cutting measures like doing away with free on board catering facilities. The study revealed that the aviation industry in Saudi Arabia, apart from being nascent, has a number of regulatory obstacles that make it difficult for low-cost carriers to succeed. Obstacles range from discrimination in terms of fuel prices between the national carrier and low-cost airlines, regulatory policies that fix the maximum price that can be charged by airlines for a specific flight, absence of sufficient ground services for low-cost carriers and the recent policy recommendation that is aimed at opening up the local market to foreign competitors. The existence of these conditions increases the costs of operations for low-cost carriers, resulting in low profitability. Despite the rise in the number of passengers accessing low-cost carriers in Saudi Arabia, a hostile local market has made it difficult for local players to operate successfully. 5.3. Conclusions This study, after examining risk management strategies in low-cost airlines across the world and the local situation in Saudi Arabia, concluded that low-cost airlines in Saudi Arabia should focus their risk management strategies on addressing a number of important factors. The first one is the need to address increased competition resulting from the entry of foreign low-cost carriers. Local airlines need to respond to the needs of the market, develop new destinations and focus on the local market as well. The second factor is the need to take into account the effect of political upheavals in the region. Since this factor leads to increased costs of operations as well as safety concerns, it is important that low-cost airlines seek to develop strategies that will ensure their survival in the market. The third factor is the need to maintain low operational costs in an environment that is hostile to low-cost airlines. Local players need to device strategies that will reduce the impact of regulatory frameworks that have been developed by the local aviation authority. References Creswell, J, W 2003, Research design: Qualitative, quantitative and mixed methods approaches, Sage Publications, California. 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Appendix Guide for the Interview Risk Management in Low Cost Airlines in Saudi Arabia: How Local Airlines can learn from other Successful Worldwide Models 1. What is the name of your company? 2. What is the size of the airline? 3. Please describe your position in the Saudi Arabian market? Do you try to attain a leadership position in the market? If so, how do you do it? 4. How many customers does this airline serve per year? And does the number grow? 5. How would you describe your typical customer group? 6. How would you describe the current aviation industry in Saudi Arabia? 7. How do environmental changes affect the company’s risk management model? 8. What is your risk management strategy? 9. How similar is it with the strategies employed by other low cost airlines across the world? 10. What impact do the current environmental changes in the region have on your airline? Does it force the airline to adopt new strategies as a safety measure against business risks? Are there changes in profitability? 11. Who are your direct competitors? 12. In what ways would the entry of foreign low cost airlines into the local market threaten your market position? How would you respond to the situation? Read More