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How to Create a Risk Management Plan for Your Aerospace Business

Two people in a workplace discussing aerospace risk management

The aerospace industry is a field of constant change, both in laws and regulations and in the business environment. While it brings many opportunities and benefits, it also potentially brings fundamental threats that can have severe consequences for business operations.

Managing risk for aerospace may sound like a daunting proposition, but it could save you from the negative ramifications of any system failure. A solid aerospace risk management plan would help you define your operational strategies and processes and enable you to make more informed decisions regarding new investments, relationships, and growth opportunities.

Taking risks is essential for gaining a competitive advantage over your competitors, and having a strategy will protect your accomplishments and ensure your success in the future. That is why a proactive approach to aerospace risk management is vital for any aerospace company.

What Is an Aerospace Risk Management Plan?

Risk, as everyone knows, is an inherent part of every business. It is impossible to predict what could go wrong in the future, especially when you are not the only one who has a say in it.

As your business grows, you hire more employees, get new customers, and work with many vendors and partners. Also, the economic and business environments change constantly, not to mention the political circumstances around the globe. All these factors, but also many more internal and external influences, could affect your aerospace company and the risks it faces.

Risk management is the process of identifying your potential risks, analyzing and assessing them, and then taking steps to eliminate or reduce them to a manageable level. Aerospace risk management is the industry-specific process that aims to mitigate operational, regulatory, commercial, criminal, and other risks your company may encounter.

An aerospace risk management plan represents your company’s strategy for dealing with risk. It should outline all the steps you and your team take to recognize and deal with threats. A risk management plan is all about ensuring that your business is in a good position when coping with unforeseen circumstances.

Your aerospace risk management plan is supposed to be tailored specifically for your company to address your unique risk exposure. Of course, there is no way you can predict absolutely every problem your business will encounter, but being prepared to handle similar situations increases your chances of surviving any crisis.

Make no mistake—creating an aerospace risk management plan for your company is no easy task. You must analyze every aspect of your operations, and it is a process that should be repeated regularly throughout your company’s lifecycle. It will allow you to take calculated risks that should empower your company to thrive.

Now that we know what a risk management plan represents, let’s see how to design one.

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Steps to Take to Manage Risks

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Your business needs a solid aerospace risk management plan to help you deal with your risks effectively and efficiently. For that to work, you need to plan every step separately and ensure they are clear and easy to follow. Here are the phases every good aerospace risk management plan needs to round up:

Awareness

Awareness is a step that some security experts fail to include when creating (or assisting with creating) a risk management plan. But it is a very important step as business owners, and employees need to be aware of the common risks their business environment carries in order to identify the risks relevant to their industry and particularly to their company.

Awareness usually comes with training and experience. More experienced employees, especially those working in the safety and risk management fields, should be able not only to identify the potential risks a company could face but also to recognize their early signs.

Depending on the industry you are in, you should ensure that your employees get adequate training and guidance on the particular hazards in your area of the aviation and aerospace business environment. Make sure to repeat the process whenever necessary, especially when you hire new employees.

Identify Your Risks

Once you know the potential industry risks, the next phase of creating a risk management plan for your aerospace business is to identify risks your business might face and write them down. This will help you prepare for the major problems your company can encounter, and it would be a significant step when deciding how serious a risk is and how to mitigate it.

Business risks are commonly divided into five major categories: strategic, operational, compliance, financial, and reputational risks. We will rely on a report by Ernst & Young when discussing the top risks aerospace companies face.

Strategic Risks

When you design your business strategy, you want to ensure that it is the best plan for your future success. However, as your company grows, the market and business environment change, and if you don’t adapt, your business strategies could stop producing the desired results.

If you fail to keep up with the competition and don’t reach your set goals for the fiscal year, it means that your strategies are not working anymore. Whether it’s the new players in the market, your competitors leveraging new technologies, or something entirely different—you need to embrace the difference and adjust your strategy to the new climate.

Aerospace companies usually face fierce competition in both domestic and international markets. Researching the market and adapting to new conditions would help decrease strategic risks, leading to better business decisions.

Operational Risks

Operational risks are those risks your company encounters in its everyday operations. For example, they can be related to production, the supply chain, online systems, or even your employees. If a machine breaks down, the production stops until it’s fixed. If your company suffers a cyberattack, your systems become inoperable, and you can suffer great losses until you get back online and contain the breach.

If you successfully identify and prepare your risk management strategy for combatting these problems, your response time will be much lower, and you will resume operations more quickly.

It is not just production and cyber risks that aerospace companies face in their daily operations. They also need to manage their supply chain successfully and embrace new technologies to ensure an uninterrupted operations flow.

Having all these flows run smoothly allows companies to invest in innovation and provide their employees with opportunities to grow and thrive. When employees feel appreciated and are given the opportunity to learn and be challenged, they feel motivated to stay at the company longer and be a part of the winning team.

Compliance Risks

Ensuring that your company is compliant with the laws and regulations – local, state, or federal, means that you run a legitimate, legally-responsible business. Usually, your legal counsel (in-house or outsourced) ensures you do everything by the books when you open up shop.

So why do we mention compliance risks? Because it doesn’t mean that once you are compliant with all laws and regulations, it stays like that forever. Your legal team needs to keep up with all the regulatory changes and ensure that your company remains compliant as laws and regulations evolve and change as the business environment changes.

This is particularly true of the aerospace industry, as it is heavily regulated. If you extend or move your operations, you should be very careful with the restrictions and regulations in force at the new location.

Financial Risks

Your revenue and business expenses directly influence your company’s financial performance. While all the risks we previously mentioned also have a financial impact, these two factors are all about the financial risk.

If business was slow in the previous period and you had to get a loan to keep your operations running smoothly, any change in the interest rate could be a financial risk. If we look at 2020 and the Covid-19 pandemic, we can’t disregard its impact on commercial transport aerospace companies. That is one example of a substantial financial risk aerospace companies had to combat to survive.

Another financial risk that companies that operate internationally cannot disregard is the political insecurity around the world and its effect on local currencies and price fluctuations. It takes a lot of careful financial planning to be prepared to mitigate such risks.

Reputational Risks

Reputation still means a lot in business. Any event that could negatively influence your company’s good name could also cause a great deal of financial damage. News travels fast in today’s connected world, and a single mistake could inflict a lot of damage on a company.

For example, if word got out that your company failed to lower its carbon emissions, leading to increased pollution, your reputation would suffer. Also, if one or more of your employees file a wrongful termination, harassment, or discrimination claim and wins the case, that could flag you as a bad employer.

Providing low-level service for your customers could also harm your reputation. Even if you usually maintain a high level of service, yet a few customers have a different experience, those few can be very vocal and reach many potential customers who would then reconsider using your service.

Having a plan in place for handling reputational scares could save your business from significant losses, even ruin. Identify your potential reputational risks and ensure your HR and PR teams are ready to minimize or eradicate them.

Assess and Prioritize Risks

Suppose you have completed the identification phase of your process. It is now time to assess and prioritize the risks you identified. Some are more dangerous to your company’s prosperity and even survival, whereas others are more acceptable and more easily managed.

One way to assess your risks is to analyze them and determine their place in the risk matrix experts have designed to evaluate the risks a company could encounter. Each risk should have its place in the matrix based on the occurrence probability and severity of the damage it could inflict.

For example, if you classify a risk as minor, but the company will likely encounter it frequently, it is a mid-level priority risk that you should be prepared to handle. Your absolute top priority risks should be those that occur often and could have catastrophic consequences to your operations.

When you have prioritized your risks based on occurrence probability and severity, it’s time to work out a strategy for dealing with them. That way, you’ll be prepared to act promptly if you need to prevent a disaster from happening.

Decide How to Handle Your Risks

Once you have classified your risks, you should decide how to handle them. You’ll want to avoid facing those that pose the greatest danger to your company by taking action to eliminate them. By avoiding these risks, you are protecting your company from potentially crippling consequences.

However, the business climate changes constantly, and so does your company. As you adjust, these risks you previously wanted to avoid can become ones you are now willing to accept.

Let’s say that a couple of years ago, an expansion to overseas markets was a huge risk that your company couldn’t afford to take. Now, you are in a different place and considering taking that risk but reducing it by expanding only to a mature market such as Europe, for example. Reducing the risk is another way of handling it that could benefit your company.

If you classify a risk as minor, negligible, or improbable, then it’s a risk you can accept. Those risks cannot harm your company much, and they can even end up being favorable for your company’s growth.

There are also those risks that are inevitable but could pose a great threat to your business. You might want to get some help when handling them. If your team can’t manage these risks alone, consider hiring outside experts, such as cybersecurity specialists or other contractors. A good partner could also be an insurance carrier who will take a part of the financial risk off your plate.

When you sign a contract with your insurance carrier and pay your policy premium fees, you transfer a significant part of your risks to your insurer. Preferred insurance policies provide a financial safety net your business needs to survive lawsuits, potential cyberattacks, crimes, and other harmful events.

Aerospace companies have a unique risk profile, and every company has its specific exposures. We will name some coverages aerospace companies should consider obtaining and tailoring to their particular needs.

Depending on the kind of business you run, here are some basic business insurance policies and some industry-specific ones:

  • Aviation commercial general liability: Covers the claims of third-party bodily injuries or property damage resulting from your aerospace/aviation operations. This is an occurrence policy, meaning that an incident must occur while the policy is in effect to trigger the coverage.
  • Property/physical damage coverage: Provides coverage for the physical damage to the aircraft that occurs due to an unanticipated event or continuous exposure to an outside influence. Note, however, that this policy doesn’t cover any mechanical issues.
  • Workers compensation: This policy is mandatory for any company with employees in all states but Texas. It covers medical costs and lost wages in case of a workplace injury.
  • Cyber liability insurance: Any business with an online presence should strongly consider buying a cyber liability insurance policy. If you collect confidential personal and financial client information, you are a potential target for cybercriminals. A cyber insurance policy would cover your losses stemming from a data breach or a cyberattack on your company.
  • Aerospace/aviation professional liability: Protects aerospace and aviation professionals, such as engineers, consultants, maintenance providers, safety experts, auditors, and others, from the claims of professional misconduct, including unintentional breach of professional duty, errors, and omissions.
  • Aircraft hull and liability: Protects against all physical loss or damage risks, including malicious damage, like vandalism. It also covers the legal liability related to passengers and their baggage, and you could add medical coverage for pilots, crew members, and passengers, if necessary.
  • Non-owned aircraft liability: If an injury or property damage to a third party happens when you or one of your employees handles an aircraft your company doesn’t own, this policy will kick in to cover related claims.
  • Aviation product liability: Manufacturers and distributors of aircraft components and parts should strongly consider purchasing this policy. A single malfunction or defect of their products could cause significant damage and immense legal liability.
  • Airport and ground handler insurance: Protects airport managers and ground handlers from claims arising from running an airport, heliport, or a private airstrip. Depending on your specific needs, you can design the coverage to include damage to third-party aircraft, war and terrorism liability, airport premises liability, etc.
  • UAV/UAS insurance: Unmanned aerial vehicle (UAV) or drone is a part of the unmanned aircraft system (UAS). They require coverage designed specifically for the unique risks of commercial drone operations.
  • Airline insurance: Like any other business, an airline company (cargo or passenger) needs insurance policies tailored to its specific exposures.
  • Fixed base operator (FBO) insurance: Fixed base operators provide many services that leave them exposed to legal liability. You should work closely with a broker to design your insurance policies to cover anything from airport premises liability to product, hangar keepers, flight training, and other specific risks.
  • Space and satellite insurance: This type of insurance rounds up policies needed for all the stages of a satellite project: prelaunch, launch, and in-orbit (including life insurance). It can include assembly, integration, and test risk (AIT), facility damage risk, third-party liability, and other recommended coverages.

Implement and Test Your Risk Management Plan

Two people in a workplace testing an aerospace risk management plan, man uses tablet, woman is seated at desk

One of the final stages of every risk management plan creation is the implementation and testing. Of course, the test environment will not be the same as an actual risky situation, but it should give you some clarity into what you need to change in your plan.

At this point, you should ensure that every employee is familiar with this document and that they are aware of their roles and responsibilities. Remember that creating an aerospace risk management plan for your business is never a finished process. As your business evolves, the risks you face also evolve, and you should be able to adjust to the new circumstances.

Review and Improve Your Plan

The review and improvement phase comes after the testing, whether in a controlled environment or after your company experienced a risky event. This phase is your chance to review how your risk management strategy performed during a crisis and to determine what you need to change.

No risk management plan is foolproof, and there is no guarantee that you’ll identify all the threats on the first try. That’s why this phase is vital. You not only should but must update your plan if you want to put your business in the best possible position for handling risk.

Reevaluating your risks and strategies for combating risks is crucial to improving your risk management plan. When you reach the point where you are confident that your plan is solid and only needs some minor tweaks in the future, that’s when you are ready to deal with risks face-on.

You should remember that you don’t have to embark on this quest alone and that transferring a part of the risk to an insurer takes a significant weight off your shoulders. If you’d like to learn more about the insurance policies for aerospace companies, feel free to reach out to one of our experienced brokers via Drift. If you are ready to get your coverage, you can start now by getting a quote for your aerospace business.

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