K P M G ’s D i s c l o s u r e s H a n d b o o k : Ac c o u n t i n g a n d F i n a n c i a l Re p o r t i n g i n t h e G l o b a l A i r l i n e I n d u s t r y 4 5
KPMG comment
Sample risk disclosures
Dependence on key personnel
“Dependence on key personnel.
This risk factor is not a specific airline
The Company’s success depends to a significant extent upon the efforts and abilities
issue. The value of a capable senior
of its senior management team, including Michael O’Leary, the Chief Executive of
management team is an intangible that
Ryanair, and key financial, commercial, operating and maintenance personnel. Mr
is difficult to quantify. It is interesting to
O’Leary’s current contract may be terminated by either party upon 12 months’ notice.
note that labor cost percentages are
See “Item 6. Directors, Senior Management and Employees – Compensation of
now debt covenants for some airlines.
Directors and Senior management – Employment Agreements”. The Company’s success also depends on the ability of its executive officers and other members of senior management to operate and manage effectively both independently and as a group. Although the Company’s employment agreements with Mr. O’Leary and its other senior executives contain non-competition and non-disclosure provisions, there can be no assurance that these provisions will be enforceable in whole or in part. Competition for highly qualified personnel is intense, and the loss of any executive officer, senior manager or other key employee could have a material adverse effect upon the Company’s business, operating results and financial condition.” – Ryanair
Reliance on suppliers
“Supplier failure.
Airlines, like all businesses, are
The Group is dependent on third parties, e.g. fuel suppliers, caterers, IT, for important
dependent on their suppliers to enable
aspects of its operation. It is essential that critical supplies should be maintained; if
delivery of their own services. Failure
this were not so, operations would be disrupted and the business and results would
of suppliers can cause major disruptions
suffer.” – British Airways
and financial loss. Services interuptions at hubs
“Interruptions or disruptions in service at one of our hub airports cold have a material adverse impact on our operations.
Virtually all airlines operate from a small
We operate principally through primary hubs in Charlotte, Philadelphia and Phoenix
number of key airports or hubs through
and secondary hubs/focus cities in Pittsburgh, Las Vegas, New York, Washington, D.C.
which their flights originate. Disruptions
and Boston. A majority of our flights either originate or fly into one of these locations.
at these hubs may have a major impact
A significant interruption or disruption in service at one of our hubs could result in
on those airlines operations.
the cancellation or delay of a significant portion of our flights and, as a result, could have a severe impact on our business, operations and financial performance.” – U.S. Airways
Early retirements
“The retirement of a significant number of our pilots prior to their normal retirement age of 60 could require significant contributions to our defined
Early retirement of employees is an
benefit pension plan for pilots, significantly disrupt our operations and
increasingly common feature where
negatively impact our revenue.
airlines are in financial distress. Employees take early retirement in
Under our defined benefit pension plan for pilots (“Pilot Plan”), Delta pilots who
order to crystallise the benefits they
retire can elect to receive 50% of the present value of their accrued pension benefit
have accrued under post employment
in a lump sum in connection with their retirement and the remaining 50% of their
plans and avoid the risk of a potential
accrued pension benefit as an annuity after retirement. In recent years, our pilots
reduction in benefits in the event of the
have retired prior to their normal retirement age of 60 at greater than historical levels
airlines bankruptcy.
due to (1) a perceived risk of rising interest rates, which could reduce the amount of