Financial opportunities and risks

As an international aviation company, the Lufthansa Group is faced with financial risks in the form of changes in fuel prices, interest rates and exchange rates. The principally conservative approach towards financial and commodity risks is reflected in systematic financial management. We use suitable management and monitoring systems to do this, with which we measure, control and monitor the risks. The functions of trading, settlement and controlling of financial risk are strictly separated at an organisational level. Lufthansa uses internal guidelines which are laid down by the Executive Board and permanently developed. The Group Financial Risk Controlling and Corporate Audit departments monitor compliance with these guidelines. Furthermore, the current hedging policies are also permanently discussed in management board meetings across the business areas. The Supervisory Board is regularly informed of the amounts at risk. Detailed information on currency, interest rate and fuel hedges can be found in the Notes to the consolidated financial statements, „Note 47“.

Derivative financial instruments are used exclusively for hedging underlying transactions. The market value of the derivatives must therefore be seen in connection with the hedged items. Depending on the way it is put into practice, the planned regulation of OTC derivatives could create a significant liquidity risk for industrial companies and therefore also for the Lufthansa Group; see also „Regulatory and other factors“.

The main aim of fuel price and currency hedging is to reduce earnings volatility. This is achieved by forming averaging prices by means of layered hedging. Interest rate hedging has the aim of reducing the cost of interest and minimising fluctuations in interest expense at the same time. All hedged items and hedging transactions are tracked in a treasury system so that they can be valued at any time. For this type of transaction we only work with counterparties that have at least a long-term „BBB“ rating or similar.

The credit rating given to Lufthansa by the rating agencies has been stable since 2009. Lufthansa is rated by Standard & Poor’s as investment grade and by Moody’s as non-investment grade. If in future a rating agency were to downgrade the credit rating, in particular if Standard & Poor’s were also to downgrade the credit rating to non-investment grade, this could lead to a distinct deterioration in funding terms and financial risk management and restrict access to new funding and hedging instruments. We are not currently anticipating a downgrade, however. On the contrary, Standard & Poor’s confirmed its rating in late 2011. For the current assessment of the rating agencies see „Development of rating“.