Southwest Airlines: Risk And Uncertainty (Research Paper Sample)
Assignment: Dealing with Risk, Asymmetric Information, and Incentives
Due Week 9 and worth 310 points
Earlier in the quarter we discussed Southwest Airlines’ use of game theory to create new strategy. Continue to research Southwest Airlines or a company of your choice and write a six to eight (6-8) page paper in which you:
Evaluate a company’s recent (with in the last year) actions dealing with risk and uncertainty.
Offer advice for improving risk management.
Examine an adverse selection problem your company is facing and recommend how it should minimize its negative impact on transactions.
Determine the ways your company is dealing with the moral hazard problem and suggest best practices used in the industry to deal with it.
Identify a principal-agent problem in your company and evaluate the tools it uses to align incentives and improve profitability.
Examine the organizational structure of your company and suggests ways it can be changed to improve the overall profitability.
Use at least five (5) quality academic resources in this assignment. Note: One of your references regarding your should have been published within the last 6 months. Note: Wikipedia does not qualify as an academic resource.
1 Actions dealing with risk and uncertainty.
Following a catastrophic accident In April 2018, one of Southwest’s plane bound for Texas from New York suffered an engine blow out that led to the death of one passenger. It was forced to land in Philadelphia, and after assessment of the engine, it was concluded that it was caused by engine fatigue. The Southwest management ordered an inspection to all its fleet and audits of each aircraft’s safety. In a statement issued by the CEO, Gary Kelly, he said ‘it would conduct accelerated ultrasonic inspections of the fan blades on CFM56 engines within the next 30 days. Additionally, the FAA said it would finalize the inspection in two weeks. The airline sought to work with the engine manufacturers for the check despite a long-standing issue on their proposed maintenance contract agreements with the airline. Southwest suffered a similar accident in 2016 though it did not result in death and barely two years later another accident which could point to an underlying problem with the airline's inspection, maintenance, and repair operations. However, following the recent accident in which a business lady was killed, the airline ordered an inspection into its fleet to ensure it prevents another possible accident stemming from issues related to maintenance and inspection. The afore-described actions were justified to ensure the company reassured the public of the safety of their planes to avoid losing its market share which is largely domestic.
2 Offer advice for improving risk management.
Risk management is dependent on early diagnosis and effective communication systems for the airline. In the modern times, corporates have embraced technology, and most airlines including Southwest have been very slow to adopt this technology. Some of its operations are based on 3.1 windows operating system, and their employees still use faxes to send and receive information. These are old and largely unreliable forms of communication and platforms to support the operations of the airline. There is need to adopt new forms of communications and do away with the traditional forms which can be easily manipulated and ground the airline. New technology such as cloud computing, artificial intelligence, mobile computing, data analytics, etc. also comes with advanced tools to help protect the system and ensure reliability to the employees, management, and consumers compared to old systems. Additionally, an effective communication system based on the modern technology can help track and fix potential problems before they even occur. Ancient tools like logbooks, radio, pneumatic tubes, and whiteboards are potentially ineffective in helping the employees address problems in time or even channel the information to actuators in time.
Additionally, the company has to invest in inspections and repair procedures. It has to contract a new firm to be auditing the inspection procedures and repairs. Having two engines blow out in less than 24 months could be a pointer to laxity by the crew who do such procedures. The airline has to invest in ensuring the quality of these checks and ensure there is no room for error because such catastrophic accidents could be prevented by more vigilance during the check. Alternatively, the airline has to retire older fleet in favor of new fleets to ensure it minimizes repairs cost and improve their safety levels. Phasing out older fleet is an underway program, and it should be routinely carried out to ensure it only has new aircraft which are less likely to suffer from fatigue.
3 Examine an adverse selection problem your company is facing and recommend how it should minimize its negative impact on transactions.
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