RISK MANAGEMENT IN FINNAIR
Risk management in Finnair is a Group management responsibility. Risk management measures are directed primarily at risks that threaten the fulfilment of the Group's business objectives. To exploit business opportunities Finnair is prepared to take controlled and calculated risks. In contrast, in flight safety matters Finnair takes no risks.
Finnair's risks are classified into strategic, operational, financial and accident risks. The Board of Directors and the Chief Executive Officer are responsible for the Group's risk management strategy and principles as well as for the management of risks that threaten the fulfilment of strategic objectives. The Senior Vice Presidents of business units and the Managing Directors of subsidiary companies are responsible for risk management in their areas of responsibility.
Operating environment risks
Demand for passenger and cargo traffic has been influenced most by competition in the industry as well as various unexpected events, such as terrorism, environmental accidents and epidemics. The current trend clearly indicates that competitiveness in the air transport sector depends on how flexibly the company can react and adapt to unexpected events, changes in demand and to a changing competitive environment.
A critical factor for operational flexibility is the adjustment of fixed costs to fluctuations in demand. Moreover, the company's ability to react quickly in adjusting capacity, routes and costs to correspond to changing demand as well as economic and security conditions is also an essential factor in maintaining the its profitability. During the past few years, Finnair has implemented several projects that have increased structural flexibility, and more of these are planned for the future .
Preparing for epidemics is part of Finnair's crisis management planning. Finnair actively monitors and continuously analyses the situation with regard to epidemics throughout the world. The company takes various measures to prepare itself for any worsening of the situation.
Finnair will defend its operating rights
An airline domiciled in the European Union can operate freely within the entire area of the Union. To date Finland, like other European countries, has negotiated bilateral operating agreements with countries outside the European Union.
In future, regulation at the European Union level will bring the negotiation of aviation agreements between countries inside and outside the European Union under the European Commission. Existing bilateral operating agreements will remain in force in the new situation.
As a negotiating party the Union is stronger than an individual country and thus can strengthen the position of European airlines when negotiating operating rights. In some cases this may have an adverse impact on Finnair and may weaken the company's competitive position in relation to other European airlines. Finnair for its part will endeavour to influence actively the parties who negotiate operating rights in order to safeguard its interests.
The company's operations are subject to legislative changes, to regulations and to changes in airport charges and taxes on both national and international levels. Possible changes are actively monitored by the company and an effort made to influence them via airline industry bodies, such as the International Air Transport Association (IATA) and the Association of European Airlines (AEA).
Market risk
The air transport business is sensitive to both cyclical and seasonal changes. Competition in the sector is intense and the decline in average ticket prices has been considerable due to over-capacity and the continually changing market situation. Airlines are cutting their prices in order to increase volumes, achieve sufficient cash flow and maintain market share.
A change of one percentage unit in the average price level of scheduled passenger traffic services affects the Group's operating profit by around 10 million euros. Correspondingly a change of one percentage unit in the load factor of scheduled passenger traffic services also affects the Group's operating profit by over 10 million euros.
Finnair manages the residual value risk related to aircraft ownership by leasing approximately half of the fleet under operating lease agreements of different durations. Aircraft leasing also allows for flexible capacity control in the short and long term.
Reliability of flight operations
Reliability is an essential prerequisite for operating successfully in the airline industry. The air transport business, however, is exposed to various disruptive factors such as delays, bad weather and strikes. As well as their impact on operational and service quality, air traffic delays also increase costs.
Finnair invests continually in the overall quality and punctuality of its operational activities. The Network Control Centre brings together all the critical parties for flight operations, thus enabling the most effective overall solutions to be implemented. Finnair Technical Services' reliability and diverse expertise as well as its detailed specification of technical functions ensure the reliability of flight operations.
Furthermore, in operational activities the contribution of partners and interest groups is essential. Finnair monitors the quality of external suppliers within the framework of standards specified in advance and through regulations prescribed for flight operations.
According to statistics compiled on European network airlines, Finnair was the most punctual airline in Europe in 2005 on the basis of flight arrival punctuality.
Risk of loss or damage
Management of risks relating to loss or damage is divided into two main areas: flight safety and corporate security. Development work in these areas is coordinated by the flight safety and corporate security departments. Risk management in this area encompasses, for example, risks to flights, people, information, property and the environment as well as liability and loss-of-business risks, and insurance cover. The priority in the management of risks relating to loss or damage is on risk prevention, but the company prepares for any possible emergence of risks through effective situation-management preparedness and insurance.
Finnair actively monitors the effects of the company's operations on energy consumption, emissions and noise values. Finnair publishes annually a separate Environmental Report, which includes measures and key figures for the assessment of environmental efficiency.
Operational risk
Finnair's operations are based on a rigorous flight safety culture, which is maintained through continuous and long-term flight safety work. The company has prepared an operational safety policy, for which the company's Vice President, Flight Permits and Operating Licences is responsible for implementing. Every subcontractor working directly or indirectly with the Group's employees or flight operations must undertake to comply with the policy.
When operational decisions are made, flight safety always has the highest priority in relation to other factors that influence decision-making. Flight safety is an integral mechanism of all activities as well as a required way of operating not only for the company's own personnel, but also for subcontractors.
The main principle of flight safety work is non-punitive reporting in the way intended by the Aviation Act and the company's guidelines. The purpose of reporting is to find reasons, not to assign blame. The company, however, does not tolerate wilful acts contrary to guidelines, methods or prescribed working practices. Decision-making not directly related to operations must also support the company's objective of achieving and maintaining a high level of flight safety.
Accident risk
The management of occupational health and safety is diverse and challenging, because the Finnair Group operations are spread across many fields of business. Occupational safety risks are known to be high in precisely those areas - services, food industry, heavy aircraft maintenance, warehousing and transport - of which Finnair's operations principally consist.
The frequency of work-related accidents resulting in at least 4 days' incapacity was in Finnair Group around 30 accidents per million working hours. During 2005 one work-related accident resulted in a fatality; a Finnair Technical Services' aircraft mechanic died during a technical check of an aircraft cargo hold.
The vision of occupational safety activity is zero accidents, towards which the company is progressing with unit-level intermediate targets. Means of improving occupational safety include identifying and evaluating safety hazards in the workplace and preventing accidents and hazardous situations. Emphasis is also placed on the investigation of hazardous situations and accidents.
Information technology risk
The diverse use of information technology in support of operations is increasing. Systems vulnerability and the development of new global threats represent a risk factor in a networked operating environment.<0} Finnair is continually developing its situation-management preparedness for serious disruptions to information systems and communications. Such preparations have a direct impact on information technology and data security costs.
Developing information system solutions and the IT environment requires continuous investment. Careful selection of external partners in IT solutions also reduces the technology risk. The Group has gained access to technological expertise through the cooperation of Finnair and IBM.
The coordination of the Group's information system architecture as well as its IT purchases and strategies has been centralised in the Group's information management department. This brings synergy benefits and improves cost-efficiency through economies of scale.
Principles of financial risk management
The nature of the Finnair Group's business operations exposes the company to foreign exchange, interest rate, credit and liquidity, and fuel price risks. The Group's policy is to limit the uncertainty caused by such risks on cash flow, financial performance and equity.
Financial risk management is based on the risk management policy approved by the Board of Directors in November 2004, which defines acceptable minimum and maximum levels for each type of risk. Financial risk management is directed and supervised by the Financial Risk Steering Group. Practical implementation of financial policy and risk management have been centralised in the parent company's finance department.
In its management of foreign exchange, interest rate and jet fuel positions the company uses a wide range of hedging instruments and methods, such as forward contracts, swaps and options.
Financial risks have been described in more detail in note 28 of the Notes to the financial statements. | 
