...Jan. 19, 2011 Lufthansa Case Analysis Lufthansa’s chairman, Herr Heinz Ruhnau, purchased twenty 737 jets from Boeing (U.S.) in January 1985. The agreed price of the jets was $500,000,000 payable in one year. The U.S. dollars has been rising steadily and rapidly since 1980, and was about DM3.2/$ in January 1985 (Chart 1). Chart 1- DM/$ Exchange Rate 1980-1985 Herr Ruhnau believed U.S. dollar will depreciate very soon based on its appreciation in last 5 years. That is, exchange rate between DM and USD will favor Lufthansa when the company pays $500,000,000 to Boeing. However, it would be too risky to leave the whole amount uncovered. In order to hedge some risk, Herr Ruhnau used forward contract to cover 50% of the payment, and left the other 50% uncovered. There are five alternative hedging ways to choose: 1. Remain uncovered It is the maximum risk approach. If e= DM2.2/$ by January 1986, payment to Boeing would be DM= 2.2 * 500 million= DM 1.1 billion If e= DM 4/$ by January 1986, payment to Boeing would be DM= 4* 500 million= DM 2 billion 2. Full forward cover This approach would lock in an exchange rate of DM 3.2/$. Payment to Boeing would be DM= 3.2 * 500 million= DM 1.6 billion 3. Partial coverage Cover part of the payment with forward contract. Like Herr Ruhnau did, 50% covered by forward contract, DM= 3.2 * 250 million= 0.8 billion. If e= DM 2.2/$ in January 1986, total cost would be 0.8 billion + 2.2 * 250 million= DM 1.35 billion 4. Foreign...
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...the composition of firms. The weight of the analysis will be on the main phases of economic integration, meaning the way the European air transport market has developed and what effects and consequences followed by this. The second part of the paper will address the how the current and long-term EU socio‐economic trends as well as the regulatory regime will affect the industry and the case-in-point will be the German company, Lufthansa. Lufthansa is reviewed as a case study of a major international player integrating into an ever-changing air transport market facing fierce competition. When performing the analysis, the analytical framework presented in the Sanchez and Heene textbook will be utilized and applied. More specifically, the paper will aim to clarify how Lufthansa has responded to the European integration. Finally, we will discuss and give recommendations as to how Lufthansa should adapt 1) The business concept, 2) the organization concept. These two concepts are closely interlinked and the therefore the logical process will be to adapt the business concept to the new market situation following the regulatory trends and successively adapt the organization concept in order to achieve the business concept...
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...Lufthansa Case Study 1. Should the Board of Lufthansa retain Heinz Ruhnau as chairman? Should Ruhnau justify his actions? No, The Chairman of Lufthansa, Heinz Ruhnau, was criticized for his handling of the company’s exposure. The Minister of Transportation in Germany (who had ultimate authority over the airline), criticized Ruhnau for hedging 50% of the exposure which resulted in 187,500,000 marks more than if the company had not covered. As a result, Ruhnau was only offered a short term renewal contract as Chairman by the Minister of Transportation. 2. Do you think Heinz Ruhnau's hedging strategy made sense? In order to evaluate the hedging strategy, show the results for all the hedging alternatives – uncovered, full forward cover, partial forward cover, currency option, and money market hedge. Show calculations in the appendix Hedging Alternatives 1. Remain uncovered 2. Full forward cover 3. Option hedging 4. Money market hedge 5. Some combination of the above alternatives Remain Uncovered Cost: High unless the dollar depreciates Risk: Extremely high Full forward cover Cost: Only an opportunity cost if the US Dollar depreciates Risk: low Foreign currency options A put option on the DM at DM 3.2/$, could locked in DM 1.6 billion plus the cost of the option premium (DM 96 million). The total cost of the purchase in the event the put was exercised would be DM 1.696 billion. Money Market Hedge Obtain the $500 million now and hold those funds in an interest-bearing...
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...fLufthansa Case Study Herr Heinz Ruhnau decision to buy 20 airplanes from Boeing in 1985 for $500.000.000 was a mistake, so the Board of Lufthansa should fire him due to poor judgement. His strong feeling that the US exchange rate was going to drop, it wasn’t based on any evidence, so he should have postponed buying the planes until after the rate had actually dropped, in order to save company money. Regardless of the speculations that he had about the exchange rate, he should have put options on the money to save the company from higher losses if he’s intuition was not correct. There were 5 possible hedging alternatives. First was to remain uncovered, the riskiest option, which it depends on how the exchange rate will change in the coming year. In this case it would the the most profitable, but still a big risk to make such a decision. The second one was to apply a full forward cover which allows the company to buy forward contracts for the entire amount and eliminate the risk. In this case, Lufthansa pays $1.600.000.000 due to the current spot exchange rate and it doesn’t depend on how the rate would change. The third alternative was to buy Foreign Currency Options, this means to buy put options and let the expire, then purchase dollars for a lesser amount. This would have cost the company $1.246.000.000 and it would be the most profitable decision. The last alternative was to Buy Dollars Now which required the company to have all the money and hold them until the...
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...Airline Lufthansa Companies Strategic Change and Strategic Challenge for Lufthansa Introduction The biggest airline in Germany- Lufthansa is one of the leading airline companies in the world, but it suffered from the danger of bankruptcy in 1991. However, the flexible strategic change programs made it survive. Thus, the implementation and effects of those programs are obviously attractive and deserve further study. Moreover, current business environment is full of opportunities and challenges, which poses Lufthansa to identify relative challenges and adopt some reaction to respond. Therefore, this report will discuss two parts: one is strategic change programs and the other is current strategic challenges for Lufthansa. In the first part, it will evaluate the strategic change programs which Lufthansa applied and also cover the effects of leadership and politics. The second part of this report will analyse the strategic challenges for Lufthansa based on current and future business environment. I. Strategic changes for Lufthansa Strategy is argued to be a useful tool for an organization to achieve its target in the long term, and its contribution to development of the organization is evident. However, it is impossible to use one strategy to respond the changeable demand due to the dynamic external environment, so the organization should change their strategies to adapt the market. 1. Strategic change program According to Balogun and Hailey (1999)...
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...purpose may be to assess: profitability, survivability, growth, stability, dividends, risks and other factors which may affect your investment in that company. This paper focuses upon five aspects of reporting within the companies’ annual reports that were the most relevant to me as a user: geographic segmentation, the auditor’s report, presentation, fuel risk, and the letter to the shareholders. Delta Airlines was chosen as the base airline to compare the other three airlines to; China Southern Air, Emirates Air, and Lufthansa Air. The analysis resulted in a very distinct successor. Emirates Air lead all subcategories with nearly a perfect total score and ultimately provided a very user-friendly document based on the criteria assessed. Lufthansa Air and Delta Airlines rounded out the middle with average scores. Slumps in presentation were mostly responsible for Delta Airlines average score. A slouch in the ease of access to information within the Lufthansa Air’s letter to...
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...low-cost player providing the distinctive ―JetBlue experience.‖ In its efforts to boost revenues, the airline began charging $10 to $20 for seats with extra legroom, doubled its ticket-change fee to $100, and introduced refundable tickets that cost more than nonrefundable ones. Further, the airline began charging $7 for a pillow-and-blanket kit, an amenity usually provided free of charge by other airlines.2 Breaking another low-cost rule, JetBlue moved away from ticket sales through its own Web site and signed up with travel agencies and the Galileo and Sabre global distribution systems in August 2006 and with online travel agencies such as Orbitz in January 2008. Further, it sold approximately 42.6 million shares of common stock to Deutsche Lufthansa, the German carrier, in January 2008 which indicates a move away from its ‗growing alone‘ strategy3 and also forged an interline agreement with Virgin Atlantic. With the interline agreement, passengers on JetBlue will be able to connect through Boston, New York, Washington to catch flights to London Heathrow on Virgin Atlantic. JetBlue customers connecting in Orlando will be able to fly to London's Gatwick...
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...Lufthansa 2000: Maintaining the Change Momentum Prepared for: Business 497a Professor Don Fujitani Section # 15663 Prepared by: Amiel Traynum Elin Ghadimian Josh Sherriff Ross Zalavsky Ryan Neal External Environment: Global: Worldwide events such as the Gulf War, followed by a recession, put a burden on the airline industry and on Lufthansa as a company. These events caused a major decrease in the amount of seats filled in the airline industry. In 1991 the Seat Factor decreased to about 57 percent in Europe, compared to 65 percent worldwide. Socio-Cultural/ Demographic: You can infer from the case that the growing alliances in the airline industry have been increasing due to globalization. In 1991, Lufthansa had an increase of passenger numbers by 11% due to German re-unification. Legal/Political: The airline industry was strongly regulated by the government in the US and most of the airline industry was owned by the government in Europe. This changed in the US when deregulation of the industry began in 1978 as airlines gained more lenience in operating their business. Before becoming privately owned and profitable in 1997, Lufthansa was a state-owned, national airline carrier of Federal Republic of Germany and the government had strict control over both routes and landing slots. Regulations for the rest of Europe were not as strict. Economic: In the past, an economic recession contributed to the major problem...
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...Lufthansa; An analysis of SWOT and KSF’s Table of contents: 1.0 Terms of reference: 2.0 Procedure: 3.0 Findings: 3.1 SWOT: 3.1.1: Strengths: 3.1.2 Weaknesses: 3.1.3 Opportunities: 3.1.4 Threats: 3.2 KSF’s: 3.2.1 KSF by industry: 3.2.2 KSF by Organisation: 3.2.3 KSF by Customers: 4.0 Recommendation: 5.0 Conclusion: 6.0 Bibliography: 7.0 Appendix A – Critical Source Evaluation 1.0 Terms of reference: This is a 1000 word report by me analysing the Strengths, Weaknesses, Opportunities, Threats and key success factors for the German airline giant (€17bn turnover) Lufthansa. The report will be handed in on October 25th in the BUS101 1-hour seminar. 2.0 Procedure: This report is based solely on secondary research, which in hand is based predominately on the most current information accessible, i.e. the internet and news articles. It has been attempted, as far as possible, to rely solely on acclaimed sources, but more on this issue can be found in Appendix A. 3.0 Findings: 3.1: Strengths: One of the major strengths of Lufthansa is brand recognition. Lufthansa has one of the strongest airlines names in Europe and China; being “the leading European carrier in the Chinese market” (“Eighty Years Lufthansa in China, 2006). This is obviously a big advantage pertaining to customer loyalty, since its name is one of the first to come to the customer’s attention when booking a flight. Besides from the commercial part of flights, Lufthansa...
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...1) Which of Drunker's "7 tasks of tomorrow's manager" does Wolfgang Mayrhuber undertake? Are there any he doesn't undertake and should? ANSWER Manage by Objective : He is expecting operating profits of €1bn in 2008. As part of the treatment, Mr Mayrhuber acquired Swiss, the national airline, in 2005, and improved Lufthansa’s business and first class offerings with better seats and a raft of extra services, including a bespoke first-class terminal at its Frankfurt hub. As a result, premium revenues are up by 50 per cent. Take more risk : 1) Mr Mayrhuber ordered big cost cuts and the sale of non-core units 2) Mr Mayrhuber revised the airline’s financial reporting to identify loss-makers as a prelude to remedies, even if this made it easier for investors to grumble about the business mix. The less transparent Air France group faces no such complaints, he notes. Take strategic decisions : 1) Mr Mayrhuber acquired Swiss, the national airline in 2005, and improved Lufthansa's business and first class offerings with better seats and raft of extra services. As a result, premium revenues are up by 50%. 2) He hived non-core businesses and improved transparency. Build an integrated team : He helped a flight attendant get the in-flight entertainment system running. His engineering expertise has allowed him to help his customers on more than one occasion. Communicate quickly and clearly : When he took charge of Lufthansa's passenger business in 2001, he wanted to gauge...
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...Problems: 1. Was not prepared for competition it started getting after the liberilastion of the economy in 1990. 2. Bloated workforce. Air india has 28000 permanent work staff , doubles jets head count. It operates 127 aircraft , compared with jets 115. 3. Highest employees per aircraft in the world. 200:1 whereas desirable is 130-170 :1 4. Bad management and faulty policies has brought air india to this crisis level. 5. A culture of complete sloth in administration. 6. Complete lack of ownership. 7. Lack of responsibility for results and failures. 8. Deeply ingrained corruption in all levels. 9. Instead of renting out unused iconic portions of Nariman point building , for the huge sum the debt ridden airline is paying Rs. 22 lakh each month for its upkeep , 15 of its 23 florrs are lying vacant. 10. Old gas guzzling aircrafts still running 11. Poor marketing and campaign management competitiors like spice jet and kingfisher do effective marketing. 12. Employees not paid salaries. 13. Employee strikes further taking it out of business and competitors taking advantage. 14. The airline has not posted a profit since merging with duopoly partner Indian Airlines in 2007 and relies on hand outs from new delhi to survive. Flight to survival: It needs to 1. Secure a massive debt and operational overhaul if it is to survive in a market growing at 20% a year. 2. $ 4 billion of working capital debt 3. Privatisation...
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...Jet Blue Airways: Analysis of a Company The airline industry serves not only as a means of transportation to millions of people on a daily basis, but also a huge customer service industry. Customers analyze every aspect of air travel from the food services offered and convenience of completing business transactions, to the airline’s safety results and ratio of on-time departures. Many customers become brand loyal, where others will do business simply based on price. It is also vital to note that, like any company, brand perception plays a large role in the success or failure of a company within the airline industry. Because of the number of individuals impacted when a flight goes awry, it only takes one incident to completely destroy an airline company’s credibility for safety, which can also lead to reduced sales and ultimately profit. Airlines must also now adapt to the world of technology as many consumers are looking for airlines that provide high tech amenities, such as paperless boarding passes and the ability to use cell phones while in flight. To keep their customer’s content, airlines must use their Research and Development teams to meet these expectations or they will lose those customers to competition. At the creation of Jet Blue, its Chief Executive Officer, David Neelman, wanted to “combine the low fares of a discount airline carrier with the comforts of a small cozy den in people’s homes” (Thompson, Strickland, Gamble, 2009). He wanted leather seats...
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...AIR CANADA Introduction: Air Canada was founded in 1937, it was privatized in 1989. After facing net losses from 1990-1993, entered into profits in 1994. It was a founding member of star alliance in 1997, which has 27 partners headquartered in Montreal. Air Canada’s mission was to connect Canada and the world. For this it followed an international growth strategy. Making partnerships with Lufthansa and united/continental, helped its growth strategy and connection mission. To reach the goals it followed a strategy involving engaging with customers, mainly focusing on passengers and products. Air Canada mainly depends on IT for their activities. The IT department of Air Canada was made of both recent applications and the back-end applications. In 2007, Air Canada introduced electronic boarding passes for the passengers and in 2009 it introduced iPhone and blackberry application which allows passengers to track flights, and also introduced a rebooking tool allowing the passengers to rebook the flights in case of emergency. For this in 1994, Air Canada made a seven-year contract with IBM. Dual strategic objectives and challenges: Along with IBM Air Canada selected telecom as its provider for telecommunication In 2003 Air Canada started to follow multiple-vendor strategy to get best services available in the market and to reduce cost. For that it selected operation SYS, a company which provides several applications’ which Air Canada need. But, dealing with multiple vendors...
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...sector Finance and Accounting Information systems used in Aviation sector SUBMITTED BY: BHAVIK K. VORA 421 MBA (Tech.) Telecommunications Contents | SR. NO. | TOPICS | PAGE NO. | 1 | Aviation Sector: An overview | 3 | 2 | Effect of information system in aviation sector | 3 | 3 | Finance and accounting information system | 4 | 4 | Sirax Airfinance platform by Lufthansa systems syssystesm | 4 | 5 | Sirax Revenue Accounting | 5 | 6 | Sirax Cost Accounting | 8 | 7 | Sirax Business Intelligence | | Aviation industry: An overview The aviation industry traditionally grew due to increase in demand of business travellers as the companies started expanding their operations in different places all over the world. Moreover rise and income of the people had a positive effect on the tourism industry and thus leading to the growth of aviation industry. Deregulation and Privatisation of the aviation industry provided further impetus to its growth. Since 1970, the growth rate in the aviation industry has been about 6-7% Sirax Airfinance platform by Lufthansa systems With respect to the uncertainties that airlines are facing today, Sirax Airfinance platform can prove to be of great help to the airlines as it provides the right information at the right time. It keeps the airline updated about their operations and financial condition. It provides the airline with timely, accurate and valuable information that can not only help the particular...
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...Jet Blue Airways JetBlue Airways took to the skies in 2000 under a novel concept: bringing humanity back to air travel. Based at New York's Kennedy International Airport, JetBlue, a non-union airline, distinguished itself from other low-fare carriers such as Southwest Airlines by offering seat-back entertainment systems with live television, comfortable seats and blue corn chips. During the last six years, when traditional airlines were piling up more than $40 billion in losses, JetBlue grew to $1.7 billion in annual revenue and became increasingly popular with travelers. But now that fuel prices have pushed up expenses for all airlines, and older carriers have sharply cut their own labor costs, the advantage JetBlue enjoyed as a start-up is greatly reduced. JetBlue — too new to have built up excessive costs that can now be trimmed, is trying mightily to raise fares in a bid to restore profits after surging fuel prices caused it to lose $42.4 million during the fourth quarter of 2009. The trends in the U.S. airline industry and how these trends might impact a company’s strategy The airline industry is susceptible to upturns and downturns with the trends in the economy. A growing economy and booming business mean greater demand for air travel, and a slow-down in the economy means reduced demand, consequent unutilized capacity and intensified competition. The availability of venture capital and other capital sources have an impact on the number of new entrants...
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