Icelandair Group’s Risk Management governance framework is designed to manage the Group’s risk-taking in the context of its business strategy, and considering its risk-bearing capacity, risk appetite, and minimum capital and liquidity requirements. The overall purpose of the framework is to improve operational stability.
The Board of Directors is responsible for determining the Company’s risk appetite and defining policy measures to reduce exposure to financial and operational risk to corresponding levels. These policy measures outline the parameters and framework that need to be considered when identifying and mitigating risk. The Audit Committee, on behalf of the Board, is accountable for reviewing and assessing the risk management and internal control processes.
The Company in principle follows a three-lines-of-defense model
| 3rd line: |
| Internal control and external auditors provide monitoring, oversight and audit activities reporting independently to the Audit Committee and/or Board of Directors. |
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.
Financial risk is handled centrally for all companies within Icelandair 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.
Risks are continually evolving and may be deemed more or less prominent from one year to the next. The disruption caused by the Covid-19 pandemic is a recent example of a risk that most would have deemed obscure or nascent in the big scheme of things. Likewise, 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.
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 more environmentally friendly aircraft.
Icelandair considers the following to be the principal risks that could compromise the achievement of our strategy and business objectives:
| Macro-economic and competition risk |
| Demand for airlines 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 and security risk |
| Safety is at the core of all Icelandair operations. Safe and secure operations that meet the wants and expectations of customers, employees and partners is critical to the Company’s business. |
| Regulatory risk |
| 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. |
| Sustainability and climate risk |
| 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. |
| Technical 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. |
| Labor market risk |
| 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. |
| Reputational risk |
| 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 can broadly be categorized into four groups
| Financial risk | Strategic risk | |||||||
| Liquidity risk | Competition 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 | The risk that the Company will lose customers due to competition. Also referred to as market share risk | |||||||
| Market risk | Legal and political 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 | 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 | |||||||
| Counterparty risk | Sustainability 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. | 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 | ||||||||
| Hazard risk | Operational Risk | |||||||
| Safety risk | Fraud risk | |||||||
| The risk of potential loss of life or bodily harm, financial or reputational damage due to flight incidents, malfunctions or other accidents | The risk of unexpected loss, be it financial, reputational, or material, due to fraudulent activity by internal or external parties | |||||||
| Environmental risk | Cyber and IT 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 | 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 | |||||||
| Liability risk | Compliance 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 | 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. |