Assessment of Risk Environment in Heathrow Airport: Analytical Essay

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Heathrow airport has a long-term goal of making Heathrow into “Heathrow 2.0 in which their vision is to make it have a sustainable growth. In this vison, they have highlighted that they want to improve life for their colleagues, communities, contribute to thriving economy and also tackle global issues such as climate change” (Heathrow).

Risk environment

Corporate failure is guaranteed if the management team are not aware of the threats and opportunities that exist both within the entity and outside it. To analyse the risk environment of the company, I have used a key – SWOT analysis. This tool helps us to balance the business’s internal strengths and weaknesses with those possible opportunities and threats that the organization will face.

Strengths

Strong brand reputation as they are regarded as one of the best airports in the country
Leading market position
Record number of passengers in 2019
Large asset base

Weaknesses

Weak finances – debt is rising
Old terminals need refurbishing – could be costly
Expensive to maintain standards (health and safety) and remain a market leader
Frequent changes in management

Opportunities

Economic growth – exploring new destinations/ routes
Weak competitors
Change in political and economic environment
Market growth

Threats

Economic downturn – Brexit
Rising fuel prices
Increased competition from other airports in the country
Global warming/ weather
Rising risk of drones

Risks they face

Risk 1 – increased debt and liabilities

“At 30 September 2019, Heathrow SP’s nominal net debt was £12,844 million (31 December 2018: £12,407 million)” (Heathrow, 2019). Compared t0 2018, the debt in 2019 has increased. Total liabilities as at 30th September 2019 (£19,835m) compared to 31st December 2019 (£17,402m). As you can see the, liabilities have increased even though the figure of (£19,835m) is not the year end figure. So, you can expect the year end figure to be even higher.

This is a weakness for Heathrow Airport. If the ratios are increasing – more debt in relation to equity, then the company is being financed by creditors/debt rather than by internal positive cash flow which may be a dangerous trend.

The liabilities compared to previous year have also increased meaning potential obligations of the business have also increased. Therefore, the company can face solvency and liquidity issues if their current assets aren’t higher than their current liabilities.

Risk 2- Brexit

This is very large issue and risk for all the businesses in the UK because of uncertainty regarding if UK leaves the European Union with a deal or no deal. This is a political issue and the only thing businesses can do is prepare for the months or year after Brexit and plan for the worst. UK’s economy has declined which has led to pound falling compared to other currency’s due to uncertainty. People are reluctant to book holidays therefore leading to less revenue for airports and airlines. Airports have also been asked by airlines for renegotiations of terms due to Brexit.

Risk 3 – Security

There is always a risk of security at the airports. In the past, there have been many incidents in the past like- smuggling, terrorism, proper checks. The responsibility falls on the airport to make sure the security is top class. For example- airport need to make sure their security officers are trained properly so they know what procedures to follow in case of an incident. Airports need to make sure their security cameras all working and cover all areas.

Risk 4/ Opportunity – Expansion

Heathrow airport have been in the process of expanding by building a 3rd runaway and also a 6th terminal. However, there have faced challenges form of local communities, environmental groups because of increased level of noise pollution as well as adding to the UK’s carbon emissions from the increased number of flights. However, the expansion plan has highlighted a new low-emission zone for the airport, meaning additional charges for those who drive a more polluting vehicle to the airport.

In recent years, the board of directors at Heathrow have been working to bolster the effectiveness of their organisation’s governance model. Boards appear to have strengthen their governance frameworks and policies as well as established board- level risk committees. They also have cleared the responsibilities of the other board committees and appointed chief risk officers.

In my opinion, Heathrow have a good governance structure as they have a clear line of sight into the management’s decision making and risk management process. For example- the board have established those line of sights by stating the types and amount of investments and transactions and the risk exposure at should come its attention. Their governance structure for Heathrow also specifies the information that the board and its committee require, from whom and how often. This assists the board in executing governance more effectively.

Heathrow proud themselves of having a great place to work at as they provide environment where colleagues feel safe, motivated and enjoy what they do. Heathrow continue to provide career opportunities along with best training. For example, in 2018 there were 472 colleagues that were promoted. Heathrow has seen a positive shift in their culture and behaviours which is very important for achieving great results.

The Board of directors determines-

the long-term strategy
group is acting ethically
has necessary resources to meet its objectives
to monitor performance

Executive Committee determines-

developing, reviewing medium and long-term Group business strategies,
policies and development plans for Board approval
reviewing the principal risks and the risk management framework

Audit Committee determines-

considering the appointment of the external auditor
discussing with the external auditor the nature and the scope of the audit
reviewing Internal Audit reports to the Audit Committee

Nomination Committee determines-

recommending new appointments of independent N-ED
ensuring a rigorous procedure is followed for the appointment of new independent N-ED

Remuneration Committee determines-

the remuneration policy, compensation packages, contractual terms of the members
the design and terms of long-term incentive plans

Finance Committee determines-

the borrowing of any money
the refinancing of any existing indebtedness
the making of any repayments of principal

Executive Risk Committee determines-

responsible for reviewing the effectiveness of the risk management strategy and framework and for reviewing the principal risks

Sustainability and Operational Risk Committee determines-

reviewing Heathrow’s policies, and risk management approach
reviewing and challenging the performance
monitoring and challenging management over the effectiveness

Risk management is a key element of the Heathrow’s corporate operations and risks are managed by a fully dedicated senior team. Enterprise risk management function sets out the strategy for risk management to provide necessary framework. This ensures that they gain an understanding of the main risks that organisation faces at all levels of the business. The management attention is focused towards the mitigation of these risks and emerging risks are reviewed which may impact the business and strategy.

Heathrow have a proactive approach when it comes to its risk management. The directors are responsible for internal controls to mitigate the risks. Circumstances which pose short term risks to normal operations at the airport like- weather conditions, natural disasters, terrorism etc. can have significant impact to operating at full capacity. The business tries to anticipate the effects of these events and have contingency plans to minimise disruption. For example- the business seeks to have a flexible, competent workforce that can respond to the ever-changing environment. The plans and strategies on how to deal with these risks are implemented throughout the organisation.

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