Lufthansa

Lufthansa

Introduction:

Lufthansa was launched through the buying of 737 jets from Boeing. They were the first one’s to do so and because of this they are now the leading airline out of Germany (Wikipedia, 1). “Lufthansa operates more than 300 aircraft and employs nearly 100,000 people world-wide. In 2005, 51.3 million passengers flew with Lufthansa (Wikipedia, 1).”

When the jets were bought in 1985 for $500,000,000 it was considered a huge mistake. Since Lufthansa was just breaking into the business buying the planes from the U.S when the exchange rate was at its highest DM3.2/$ it was considered poor judgment. The man responsible for this decision Herr Heinz Ruhnau cost his company millions of dollars because of several poor decisions.

Reasons for Fired:

Herr Heinz Ruhnau had good intentions in his attempt to buy the Boeing aircraft but he overlooked several key factors. As a chairman for Lufthansa he should have thoroughly considered all factors involved with purchasing a plane.

1.) Herr Heinz Ruhnau had such a strong gut feeling, but it was based on no hard evidence, that the U.S exchange rate was going to drop that he should have postponed buying the planes until after the rate had actually dropped in order to save the company from losing money based on speculation.

2.) By not considering the financial risk he was putting the company in by purchasing a plane from their biggest competitor he potentially cut into the company’s profits.

3.) Since he did purchase the planes, regardless of any feelings he had about dropping exchange rates, it was only speculation so he should have put options on the money in order to save the company from higher losses.

Alternative Outcomes:

There were five possible Hedging Alternatives, including the Partial Forward cover option that Ruhnau chose.

1.) First is to remain uncovered which the riskiest option is allowing the company to de open to the gain or lose of money depending on the volatile U.S exchange rate. In the end it would have left Lufthansa paying 1,150,000,000, while the lowest amount still to risky of a decision.

2.) Second would be to apply full forward cover that would allow the company to buy forward contracts for the entire amount and therefore eliminate all risk. This option would have caused to pay 1,600,000,000 dollars because they had locked in the current exchange rate and would not reap the benefits of the lowered rate.

3.) The next alternative would be Foreign Currency Options this would have caused them to buy put options and let them expire then purchasing the dollars for a lesser amount in the spot market. This option would have cost them 1,246,000,000. Although it had some level of risk is the most probable option