Dealing with Risk and Uncertainty. Mathematics & Economics Essay

Dealing with Risk and Uncertainty
Name
Institutional Affiliate
Dealing with Risk and Uncertainty
Introduction
The probability of both a known and an unknown outcome to occur in a given project is a decisive factor in the success or failure of the same. Risk refers to the chances of the known or unknown results occurring in a given business activity. The mitigation of effects of the known and unknown factors characterizing the possible outcomes of business activities, projects, or transactions calls for the implementation of effective risk management strategies. Such interventional measures function to enhance the sustainability of business entities across the diverse sectors of the economy. However, the preferred risk management strategies in alleviating or mitigating the risk factors in a given project often create a gap or uncertainty towards their efficacy in achieving the desired outcome. It is therefore important for business organizations to embrace effective risk and uncertainty management strategies to enhance their sustainability in the highly competitive markets across the globe. The airline industry makes for one of the sectors of the economy with a wide range of risk factors that require effective interventional measures for the firms to remain afloat. The break out of the Coronavirus pandemic in late 2019 exposed different airlines to unprecedented risk factors and uncertainty in the highly competitive market bringing the business to a standstill. The response measures embraced by Delta Air Lines against the adverse effects of COVID-19 on the industry provide an excellent framework for the analysis and evaluation of how business organizations deal with risk and uncertainty.
Evaluation of the company’s recent actions
The containment measures for COVID-19account for a significant reduction in the demand for air travel across the world with airline companies reducing their business operations such as air travel to almost 90% with a majority of the companies. Airline companies face the risk of bankruptcy and uncertainty over the return to normalcy in business operations as a majority of the organizations are forced to shut down their daily business activities including air travel. Delta Air Line has adopted various responses and interventional measures against the risk and uncertainties posed by the novel Coronavirus. The risk management strategies embraced by the company focus on the achievement of two primary outcomes; enhancing the safety and health of both the consumers and employees and reducing the company’s operational capacity to address the declining demand CITATION Del20 \l 1033 (Delta Air Lines Inc., 2020). Among the measures taken to maintain the company’s liquidity is reducing the domestic and international operational activities by 80% and 90% respectively CITATION Del20 \l 1033 (Delta Air Lines Inc., 2020). The company also endeavors to extend the expiration of consumers’ traveling credits in bids to increase consumer’s flexibility in re-booking and planning their travel arrangements.
The outlined measures function to maintain the firm’s consumer base while also enhancing the quality consumer experience, which functions to alleviate the risk of losing consumers and curbing the uncertainty arising over the firm’s competitiveness in the market in the near future. Delta Air Line has further reduced its expenses by 50% through a wide range of activities including the consolidation of airport facilities such as the Delta Sky lounging clubs. The firm has also suspended the recruitment and hiring of employees with approximately 37,000 workers put on unpaid leave CITATION Del20 \l 1033 (Delta Air Lines Inc., 2020). The executive management is also receiving pay cuts and significant reductions in working schedules to reduce salary expenses. The financial risks and uncertainties posed by the declining demands and incurred losses through inactivity necessitated the firm’s implementation of cash preservation and liquidity enhancing interventional measures. These measures included raising its capital to over $5.4 billion, sought extensions for its payment terms with vendors and airports, and the suspension of shareholder returns CITATION Del20 \l 1033 (Delta Air Lines Inc., 2020). The company is also in the process of receiving the last installment of $5.4 billion payroll support from the federal government through the CARES Act Relief fund with an additional $4.6 billion upon the firm’s application and acceptance of the additional amount CITATION Del20 \l 1033 (Delta Air Lines Inc., 2020).
Advice for Improving Risk Management
The Coronavirus pandemic poses both risk and uncertainty shocks to companies operating in the airline industry. Prolonged parking of airplanes reduced operational capacities at both the domestic and international levels, and the running costs of maintaining the firm’s relevance in the market make for some of the certain risk variables whose expected value on the firm can be mitigated through the outlined responses CITATION Del20 \l 1033 (Delta Air Lines Inc., 2020). The company’s response towards cash preservation and enhancing liquidity function as effective risk management strategies in alleviating the expected value of the damage or losses incurred during this period of travel restrictions. However, the industry’s uncertainty shock over whether or not business activities in the airline industry will return to normalcy and the time it will take for the realization of such expectations poses a great challenge to companies within the industry. Surviving the grounding of its fleet in the unforeseen future requires Delta’s to implement the flexible risk and uncertainty management strategy CITATION Tom12 \l 1033 (Toma, 2012). The firm’s extension of consumer’s traveling credits coupled with its extending of the terms of payment to airports and other vendors makes for an integrated approach of flexible and operational hedging strategy that should be embraced by the firm to cushion it from the uncertainty shock posed by the COVID-19 pandemic.
Examine an Adverse Selection Problem
The COVID-19 pandemic is a global health problem with adverse economic effects across different sectors of the world economy. The risk and uncertainty variables posed by the pandemic are known to the companies, employees, as well as the consumers. Delta’s response to the effects of the pandemic on its business operations thrives on known facts of the disease and its impact on the daily economic activities around the world CITATION Tom12 \l 1033 (Toma, 2012). In essence, the risk and uncertainty management strategies or initiatives are taken by the company in its transactions with the consumers, lenders, and other entities such as airports that thrive on the symmetric exchange of information among the parties involved. The problem of adverse selection is thus alleviated...