Price risk


The major price risks to which the Lufthansa Group is exposed are exchange rate fluctuations between the euro and other currencies, interest rate fluctuations in international money and capital markets, and price fluctuations in the crude oil and oil products markets. Hedging policy for limiting these risks is laid down by the Executive Board and documented by internal Group guidelines. It also provides for the use of financial derivatives. The corresponding financial transactions are concluded only with first-rate counterparties.

For US dollars, Lufthansa is mainly in a net payer position as regards currency risks from its operating business, as fuel payments are dollar-denominated. For other currencies there is always a net surplus. The main risks in this respect stem from the pound sterling, the Swiss franc and the Japanese yen. Currency risks from projected operational exposure are hedged gradually over a period of 24 months by means of futures contracts. The aim is to reach an average hedging level of 50 per cent.

At the end of 2011 exposure from operations for the next 24 months was as follows:

 

in million

USD

JPY

GBP

CHF

Exposure (currency)

–13,339

178,839

671

1,441

Exposure (EUR at spot rate)

–10,309

1,784

803

1,186

Hedges (currency)

5,320

–79,992

–505

–707

Hedging level

40%

45%

75%

49%

Currency risks from capital expenditure on aircraft are 50 per cent hedged when the contract is signed. The hedging level is increased if, over the lifetime of the contract, the exchange rate goes significantly above or below that used to calculate the investment. In the last 24 months before payment the hedging level is increased in semi-annual steps of 10 per cent, to reach 90 per cent at the end. Spread options and futures are used as hedging instruments.

From the position at year-end 2011 exposure for capital expenditure was as follows:

 

 

 

in million

2012

2013

2014

2015

2016

Exposure from net capital expenditure (USD)

–1,926

–1,261

–1,002

–982

–291

Exposure from net capital expenditure (EUR at spot rate)

–1,489

–975

–775

–759

–225

Hedges (USD)

1,764

1,070

863

887

258

Hedging level

92%

85%

86%

90%

88%

Lufthansa aims to finance 85 per cent of its financial liabilities at floating rates of interest. This proportion recognises the need to both minimise long-term interest expense and reduce earnings volatility.

At the end of 2011 the ratio of floating to fixed interest rates for long-term borrowing was as follows:

Exposure

in €m

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Fixed

1,064

809

614

500

408

332

313

252

176

109

39

Floating

5,238

4,941

4,214

2,912

2,515

1,494

940

623

416

319

210

Floating/fixed ratio

83%

86%

87%

85%

86%

82%

75%

71%

70%

75%

84%

In contrast, foreign currency risks from financial liabilities are always hedged to 100 per cent by means of interest rate/currency swaps. These hedging transactions are treated almost exclusively as trading in accordance with IAS 39.

In 2011 fuel costs accounted for 20.6 per cent of the Lufthansa Group’s operating expenses (previous year: 17.8 per cent). Significant changes in fuel prices can therefore have a considerable effect on the Group’s result.

Fuel price risk is generally limited by the use of crude oil hedges. The hedging level and the time horizon depend on the risk profile, which is derived from the business model of a Group company. As a rule up to 5 per cent of exposure is hedged monthly for up to 24 months by spread options and other combinations of hedges. This means that the maximum hedging level reached in month seven is 85 per cent.

Deviations from the rule-based hedging policy described above are permitted within the scope of a pre-defined system of limits.

From a year-end perspective fuel exposure was as follows:

Fuel exposure

 

 

2012

2013

Fuel requirement

in 1,000 tonnes

9,569

10,467

Hedges

in 1,000 tonnes

6,723

2,606

Hedging level

in %

70.3

24.9

At the balance sheet date, exchange rate, interest and fuel price risks are hedged by means of the following hedging transactions:

 

 

Fair value hedge

Cash flow hedge

in €m

Market value
31.12.2011

Market value
31.12.2010

Market value
31.12.2011

Market value
31.12.2010

Interest rate swaps

119

145

Spread options
for fuel hedging

1

43

Hedging combinations
for fuel hedging

139

268

Futures contracts
for currency hedging

–2

–6

120

–152

Spread options
for currency hedging

45

82

Total

117

139

305

241

The market values stated for financial derivatives correspond to the price at which an independent third party would assume the rights and/or obligations from the financial instrument.

The fair values of interest rate derivatives correspond to their respective market values, which are measured using appropriate mathematical methods, such as discounting expected future cash flows. Discounting takes market standard interest rates and the residual term of the respective instruments into account.

Currency futures and swaps are individually discounted to the balance sheet date based on their respective futures rates and the appropriate interest rate curve. The market prices of currency options and the options used to hedge fuel prices are determined using acknowledged option pricing models.

From a current perspective, the fuel price and currency cash flow hedges will have the following effects on the result for the period and/or on the acquisition costs of hedged capital expenditure:

 

Financial year in €m

Result for the period

First-time measurement of acquisition costs**

Total

*

Rounded below EUR 1m.

**

Minus signs mean increased acquisition costs.

2012

192

58

250

2013

38

43

81

2014

–0*

5

5

2015

–0*

–5

–5

2016

–1

–24

–25

2017

–1

–1

Total

228

77

305

In the 2011 financial year, EUR 800m was transferred for maturing interest rate swaps from equity including deferred taxes to fuel expenses, reducing these expenses. For currency hedges EUR 414m was transferred from equity including deferred taxes to other operating income and EUR 516m to other operating expenses. A further EUR 63m was recognised by increasing acquisition costs for aircraft.

Changes in the market values of derivatives which do not qualify as effective hedging transactions under IAS 39 can be seen in the income statement, “Note 13”.

The following sensitivity analyses as prescribed in IFRS 7 show how net profit and equity would change if the price risk variables had been different from the perspective of the balance sheet date.

 

 

 

in €m

Effects on net profit *

Effects on equity *

*

All amounts after deferred tax effects;+/– signs relate to net profit and/or equity.

Fuel price

 

 

+10%

+37

+146

–10%

–82

-88

Currency – USD

 

 

+10%

–134

+645

–10%

+131

–519

Currency – JPY

 

 

+10%

–2

–66

–10%

+2

+54

Currency – CHF

 

 

+10%

–3

–126

–10%

+1

+103

Currency – GBP

 

 

+10%

+3

–49

–10%

–3

+40

Interest

 

 

–100 basis points

+10

+32

+100 basis points

–10

–30