Lufthansa Purchasing the Boeing Aircraft

1. Purchasing the Boeing aircraft at the wrong time. The U.S. dollar was at an all-time high at the time of the purchase, in January of 1985.

Business decisions are made based on the needs of business. There would have been a business case for Lufthansa for buying at that time at the prevailing exchange rate. While evaluating the case they should also consider cost of forward cover for evaluation of the deal.

2. Choosing to hedge half the exposure when he expected the dollar to fall. If he had gone through with his instincts or expectations, he would have left the whole amount unhedged (which some critics have termed “whole hog”).

The core business of Lufthansa is airlines and not currency. Choosing to hedge half the exposure is still a risky strategy. Lufthansa should have considered the inflows it gets in USD during that period. The hedged amount should have been the amount of USD it has to pay for the deal over the period less the amount of inflows expected in USD.

3. Choosing to use forward contracts as his hedging tool instead of options. The purchase of put options would have allowed Herr Ruhnau to protect himself against adverse exchange rate movements while preserving the flexibility of exchanging DM for dollars spot if preferred.

As a business Herr Ruhnau was right to stick to the forward. He needs to focus on the business.

Cost if 100% forward : 1.6 billion

Cost if 100 % option : 1.696 billion if dollar is flat. (If it falls then there would a point at which he would better off once the addition premium is covered).

If Ruhana had a business case built on an all-inclusive cost of $1.6 billion he would not have liked to go on the option route.

4. Purchasing Boeing aircraft at all. Germany, as well as the other major European Economic Community countries, has a vested interest in the conglomerate Airbus. Airbus’s chief rival was Boeing in the manufacture of large long-distance civil aircraft.

This is a policy decision which the Board needs to take that should they be buying from Boeing or Airbus. These decisions are primarily more political than economic.

The business will decide based on