Dealing with Risk and Uncertainty
Introduction
Companies and firms are often subject to changes and shocks in the system. Some of these shocks are either experienced from the macro or the microenvironment. This is to mean that shocks that often are calculated and identified as risks and uncertainties will either be caused by the internal structures and decisions or external threats and unforeseen circumstances. The COVID-19 pandemic has caused a lot of shock throughout the system. Many industries and market segments have been hit incredibly hard. Many news reports indicate many companies are already declaring bankruptcy as the disruption by the pandemic continues. These stark eventualities were experienced when the world came to a standstill on account of the virus. One of the most effective measures in dealing with the pandemic was to limit movement and introduce lockdowns. Indeed, many countries introduced national lockdowns that shut everything down. As a result, many companies are struggling, and many others are estimated to shut down permanently as the global crisis continues.
For this study, a company shall be chosen. Its risk and uncertainty assessments and strategies shall be evaluated to understand how the firm can brace for the present and prepare for the future. The company that is the focus of this research shall be Delta Airlines. The company is established in the United States, and it represents what has been seen throughout the airline industry. As the pandemic hit, many airlines across the world were left counting losses each day. The airline industry was one of the most affected as almost all countries shut down their national borders, including the airspace. The research will focus on the risk and uncertainties faced by Delta Airlines and how these risks can be minimized to ensure business continuity.
Risk assessment and management have often been guided by the principle that there is a likelihood of calculating risk. According to Frank Knight (1921), the risk is different from uncertainty. Risk was defined as randomness measured by a probability distribution, while uncertainty was defined as randomness that cannot be measured or calculated. Therefore, this means that the company must first identify what risk is and what amounts to uncertainty.
The company is cash-strapped as most airlines around the world are. This has been compounded by investment decisions undertaken by Delta over the last few years. These investments have become unsustainable. Delta has been seeking a restructuring or additional time to allow Gol, Brazil’s national carrier pay of a debt that Delta had guaranteed in the previous six months. Gol has been unable to pay the loan that was reaching maturity date on September 1st, which puts Delta in an even more precarious position. Additionally, the company said in one of its reports that it has been losing $ 27 million every day due to the pandemic.
It is not always possible to caution firms and companies against all the risks. It is even more challenging to plan for uncertainties. However, managing risks and uncertainties is often one of the most successful ways of reducing losses. The COVID-19 pandemic represents uncertainty since this is a form of randomness that could not have been anticipated or planned. One way to mitigate exponential losses is by using available financial instruments in hedging against a particular risk (Kaplan, 2016: 12). This ensures that these same instruments can earn the company money, which can then be used to caution the firm against devastating losses.
Additionally, risks have come in the form of volatile jet fuel prices. Delta airlines can leverage its investment i9n the fuel industry, which has also been badly hit in turning a profit on these instruments. Finally, as a golden rule, the equity should be preferred more than debt capital injections. This is because servicing debts during a downturn may prove fatal, as it has happened for many firms.
Adverse Selection Risks and Uncertainties
Many companies often undertake a risk assessment for all their subsidiaries, if any, and their different products and segmented markets. This is also true for airlines as they fall under the category of high risk and high uncertainties due to their vulnerabilities to global shocks. The study shall undertake an examination of adverse selection problems that may present risks and uncertainties to the firm. These include a description of what amounts to adverse selection risk and how Delta Airlines can take countermeasures to ensure business continuity.