The international aviation market, in which Icelandair operates, is both highly competitive and sensitive to a multitude of macro-economic, sector-specific, financial, and enterprise-related risks that can impact the Company’s operations and its ability to achieve its strategic objectives. Many of these risks are outside the Company’s sphere of influence. Risks are continually evolving and may be deemed more or less prominent from one year to the next. Additional risks and/or uncertainties that do not currently exist, are not presently considered material, or of which the Company is unaware, may also impact operations. The Risk Management Policy and measures are therefore reviewed, and modified as needed on a regular basis, at least annually, and approved by the Board of Directors.
Financial risk is handled centrally for all companies within Icelandair Group while day-to-day operational risk is largely managed by directors and line managers at the division level. Relevant risk owners are obliged to monitor and manage risks proactively and to include relevant information in the planning, steering and control processes.
Sustainability and climate risk is an ever more prominent risk factor for airlines and one that Icelandair has put an increased focus on assessing. Climate risk includes both physical and transition risk where physical climate risk concerns the direct impacts to the company, such as potential damage to planes due to bad weather and delays in flights, and transition risk which concerns aspects such as new regulatory requirements concerning e.g. emissions reduction and requirements for new technology and supplies that can be difficult to access.
Icelandair considers the following, in order of importance, to be the principal risks that could compromise the achievement of our strategy and business objectives:
Demand for airline services is highly susceptible to general macro-economic conditions which can heavily impact supply and demand for air travel as well as jet fuel prices, interest rates and foreign exchange rates. Competition amongst airlines is high making asset and resource efficiency a vital component in being able to offer a competitive product.
Safety is at the core of all Icelandair’s operations. Safe and secure operations that meet the wants and expectations of customers, employees and partners is critical to the Company’s business.
The airline industry is subject to a myriad of rules and regulations. Airlines must constantly monitor and keep abreast of changes to the regulatory landscape in their operating jurisdictions to ensure compliance.
Climate change poses a financial, regulatory, and reputational risks for airlines. These can manifest in increased tax burden and costs associated with transitioning to low-carbon fuel, extreme weather events that can disrupt operations and damage infrastructure and increased consumer awareness of environmental impact which can result in reputational risk.
Failure or disruption to IT, financial or management systems, whether internal or external, could affect the Company’s ability to carry out its daily operations and services to its customers.
The airline and tourism industries are inherently labor-intensive industries. The Company is reliant on creating an inclusive and knowledge-driven culture to recruit and retain highly skilled employees.
Serious or repeated interruptions to services, or a perception that the Company is not conducting itself in a socially or environmentally responsible manner, can result in a decline in demand for the Company's products and services thus hurting revenue generation.
All identified risks broadly fall into one of four categories: Financial Risk, Strategic Risk, Hazard Risk and Operational Risk. The picture below demonstrates Icelandair Risk Map, and within which category identified risk topic belong, which is approached in our Risk Management Framework.
Liquidity risk
The risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or other financial assets.
Market risk
The risk that fluctuations in market prices such as that of fuel, exchange rates, interest rates and carbon emission allowances materially impact the Company’s profitability.
Counterparty risk
The risk that the other party in an investment, credit, or trading transaction does not fulfill its part of the deal and may default on contractual obligations.
Competition risk
The risk that the Company will lose customers due to competition. Also referred to as market share risk.
Legal and political risk
The risk that the Company’s business strategy, assets or operations suffer as a result of legal or political changes or instability in its main markets.
Sustainability risk
The risk that an environmental, social or governance event or condition causes an actual or a potential material negative impact on the Company’s operations, profitability or financial standing. Sustainability risk includes climate risk.
Reputational risk
The risk that the Company’s brand or standing is damaged due to failure to meet the expectations of its stakeholders.
Fraud risk
The risk of unexpected loss, be it financial, reputational, or material, due to fraudulent activity by internal or external parties.
Cyber and IT risk
The risk that the Company will have to suspend its business operations and services to its customers due to failure or disruption to critical IT or management systems.
Compliance risk
The risk that the Company's financial, organizational, or reputational standing may be damaged due to violations of laws, regulations, codes of conduct, or organizational standards of practice.
Process risk
The risk of loss in revenue as a result of ineffective and/or inefficient processes in inter alia maintenance, reliability, recruitment, key manager planning, accounting or controls.
3rd party risk
The risk that a third party will cause disruption to the Company’s operations including but not limited to vendors, partners, government agencies, tourism authorities etc.
Safety risk
The risk of potential loss of life or bodily harm, financial or reputational damage due to flight incidents, malfunctions or other accidents.
Environmental risk
The risk that can have a material environmental or environmentally-driven impact on the business associated with the current or planned use of operational assets.
Liability risk
The risk of the Company being held liable or responsible for an action or inaction, whether or not at fault, resulting in a direct or indirect financial loss.