FINANCIAL RISK MANAGEMENT PRACTICES: THE CASE OF ETHIOPIAN AIRLINES

Abstract

The Aviation Industry is one of the industries that is capital intensive and circled around multifaceted financial and other enterprise risks. The major financial exposures of airlines are fuel price risk, foreign exchange risk, and interest rate risk. The objective of this paper is to analyze the financial risk management practices in the case of Ethiopian Airlines. The study employed descriptive research design using primary and secondary data. The data for this study was obtained through semi-structured interview for the primary data and annual reports, financial statements, due diligence reports, and company policies for the secondary data. Interviews were conducted with three managers to triangulate and supplement the data obtained from the secondary data. The result reveal that the Airline uses various risk management tools in respect of foreign currency risk (such as natural hedging, currency pooling, dollar indexed bonds purchase, treasury bill purchases, forward contracts, currency swap, and property purchase) and interest rate risk (through making a mix of fixed and floating interest rate based on the market trend); but the Airline does not have any risk management tool with regard to fuel price costs. The Airline follows a wait-and-see approach for fuel price risks and it missed the possibility of hedging fuel prices especially for the current fiscal year where fuel price is escalating at an alarming rate. Based on such finding, the conclusion drawn is that the non-use or limited use, or non-availability of, financial derivatives as a major tool for financial risk management is an indication that the Airline is vulnerable to any fuel cost, interest rate, and currency volatility. The study recommends that the Airline should work more towards devising ways of increasing the expertise of its concerned staff and management by offering formal trainings and availing various systems of forecasting the hedging market. This will help the Airline to try hedging exercises (including in cases of fuel price hedging) in an informed manner.