British Airways is the largest airline in United Kingdom dealing with both international destinations and flights. It is the second largest airline behind easyjet measured by passengers carried. It was founded in 1972 and privatized in 1987. The company has been involved in various alliances with companies like Oneworld Airline, American Airlines Qantas and Canadian Airlines. In 2011 it merged with Iberia creating International Airlines Group (IAG) and listing it on the stock exchange. Since then it has purchased British Midland International (BMI). The company has maintained a stream of subsidiaries in various countries including BA CityFlyer, OpenSkies and hence developed its fleet size to 262 with 169 destinations excluding code-shares and subsidiaries. Its hubs are in London Heathrow Airport and Gatwick Airport. The company has also maintained several codeshare agreements and partnership with other companies like WestJet, Loganair, Finnair and several others. The company has employees represented by a number of trade unions with each employee segment having a different trade union representing it. The company as per 2011 fiscal year indicated an increasing revenue registering 10.827 billion pounds).
Exposure of foreign exchange is that sensitivity regarding a real value of domestic currency of the assets, operating incomes and liabilities to changes unanticipated that may occur in rates of exchange. The risk of foreign exchange can be determined by of value of variance of domestic currency of all liabilities, assets and operating income which is attributed rates of exchange that are unanticipated.
Table of Contents
1. Company Overview
2. Exposure
3. Translation exposure
4. Economic exposure
5. Managing exposures
6. Enterprise Wide Risk Management Policy
7. BA treasury structure
Objectives and Topics
The primary objective of this work is to analyze the foreign exchange exposure faced by British Airways and to evaluate the risk management strategies implemented by the company to mitigate these financial risks. The paper explores the sensitivity of the firm's value and cash flows to unexpected fluctuations in exchange rates.
- Identification and categorization of foreign exchange risks (transaction, translation, and economic exposure).
- Evaluation of hedging techniques including forward contracts, future contracts, and money market hedges.
- Analysis of Enterprise Wide Risk Management (ERM) policies within a multinational corporation.
- Assessment of treasury structures (centralized vs. decentralized) and their impact on effective risk management.
Excerpt from the Book
Economic exposure
Economic exposure deals with strategic evaluation of the foreign transactions and relations and they are the effects of any variations in future cash flow arising on specific transactions of BA due to the fluctuations in rate of exchanges or its position of operation within the market. This are related to structure of the market and competition levels and how capital, labor, and materials is obtained (Baker & Powell, 2009). It is rooted in the BA’s competitiveness, commitment, and viability in the participation in domestic and foreign markets. The market value in this case is affected or influenced by the unexpected fluctuations in rate of exchanges. The market share or position of the BA is hence affected by this exposure in comparison to its competitors, firms’ value and the future cash flows. This kind of risk for BA has been largely affecting the present value of future cash flows. Economic exposure may also be as a result of other business investments and activities which BA is involved in apart from just international transactions. This includes future cash flows from fixed assets. When the demand of goods and services from the company is influenced also by changes in rate of exchanges then it falls within the economic exposures affecting the company. It is vital that the effect of various cash flows of the firm be netted over product lines and markets to be able to account for diversification effects where even losses and gains can be cancelled out either in part or whole. Economic exposure does not affect BA Company alone but also its customers due to the increased trade this is because it can impact the price paid for all foreign goods.
Summary of Chapters
Company Overview: Provides a brief history and operational status of British Airways, highlighting its growth through mergers and international alliances.
Exposure: Defines foreign exchange exposure and its various forms, such as transactional, economic, and translational risks that impact the company's financial performance.
Translation exposure: Discusses the challenges of reporting consolidated financial statements when operating across multiple countries with different currencies.
Economic exposure: Examines how exchange rate fluctuations affect the strategic market position, future cash flows, and overall competitiveness of the firm.
Managing exposures: Details the various hedging strategies and financial instruments available to protect the firm against exchange rate volatility.
Enterprise Wide Risk Management Policy: Outlines the necessity of a structured risk management policy to identify, assess, and control risks at all organizational levels.
BA treasury structure: Analyzes how centralized or decentralized treasury systems influence the firm's ability to respond to foreign exchange challenges.
Keywords
British Airways, Foreign Exchange Exposure, Risk Management, Hedging, Transaction Exposure, Translation Exposure, Economic Exposure, Forward Contracts, Future Contracts, Money Market Hedge, Enterprise Wide Risk Management, Treasury Structure, Cash Flow, Financial Performance, Currency Volatility.
Frequently Asked Questions
What is the core focus of this study?
The study focuses on the foreign exchange exposure faced by British Airways and examines how the company manages these financial risks to protect its market value and operational efficiency.
What are the primary risk fields addressed?
The primary risk fields identified include transactional exposure, translational exposure, and economic exposure, all of which stem from fluctuating exchange rates.
What is the main research goal?
The goal is to determine how British Airways identifies, measures, and mitigates foreign exchange risks to maintain a competitive advantage in the global airline industry.
Which scientific methods are analyzed?
The work analyzes various financial hedging techniques, including the use of forward contracts, future contracts, and money market hedges, as well as organizational risk management frameworks.
What topics are covered in the main section?
The main sections cover the definition and impact of different exposure types, strategic hedging tools, the implementation of Enterprise Wide Risk Management, and the effectiveness of different treasury structures.
Which keywords characterize this research?
Key terms include British Airways, Foreign Exchange Exposure, Hedging, Financial Risk Management, and Enterprise Wide Risk Management.
Why is transaction exposure prioritized?
Transaction exposure is prioritized because it directly involves cash flows, which are critical for the immediate financial health and liquidity of the company.
How does the treasury structure impact risk management?
The treasury structure—whether centralized or decentralized—affects how quickly and efficiently a company can respond to currency fluctuations and manage its global cash positions.
- Quote paper
- kents Ashely (Author), 2012, British Airways: Foreign Exchange Exposure, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/270807
