Published: April 18, 2008
Roland Kern has been Head of Treasury of Lufthansa German Airlines since August 2006. Previously, he was Director of Risk Management Services at Deutsche Bank, consulting large corporates as well as the public sector in risk analysis and risk management organisation. Prior to this, Roland Kern worked as Senior Product Manager and Regional Head of Sales for Deutsche Bank in Germany, Belgium, Spain and the United States.
Our treasury department is separated into two main teams - one team is responsible for Risk, Liquidity and Asset Management and the other team for Cash Management. Both teams currently consist of five employees. Last year the Risk Management Team handled a volume of €16.86bn (4,968 transactions) in FX, €1.151bn (24 transactions) in interest rate transactions and nearly 4 bn of Lufthansa´s liquidity as well as 3.7 bn in the Lufthansa Pension funds.
In 2004, the financial management at Lufthansa Group was analysed and methodically reappraised in a project called ‘Lufthansa Finance Cockpit’. This took into account the diverse requirements of risk management, balance sheet disclosures, corporate credit standing and value management, giving our treasury department and especially our trading lifecycle the highest level of automation and transparency.
As shown in Figure 1, we have realised a real end-to-end IT infrastructure at Lufthansa Group Treasury and we have upgraded the control of financial risk. This was largely achieved by optimising risk analysis and the implementation of risk management throughout the whole LH group.
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We are now in the position of being able to handle every stage with greater transparency, as we receive an overview of the netting opportunities and accumulation opportunities without being involved in a time-consuming manual process. The process works as follows:
All exposures in FX and interest positions relating to the whole group are automatically loaded from Fidax (Financial Data Exchange), which is our web portal, into our Treasury System. Within Fidax the data for liquidity planning is collected and evaluated. Broad information on Lufthansa’s financial status of Lufthansa can also be provided by the system.
The next step is to aggregate it within our Treasury Management System. From there, we receive a balance of our trading needs and once a month the deals are executed via 360T’s multi-bank platform TEX. Our IT system BaSta (Banking Statistic) gives us the two best performing banks over the last three months for each relevant currency pair plus four randomly chosen banks. This information is an almost automatic basis for each selection within 360T. From TEX, all trades go straight into our treasury management system and are then processed to the back office for payment and confirmation, to accounting for booking and to risk controlling for valuation and risk assessment.
All internal hedges for our operational FX exposure are generated once a month by an o/n batch processing, including accounting and risk reporting.
One exception to this process is Airplus Servicekarten GmbH. Because of its different exposure, we decided to use 360T’s intragroup-trading tool, I-TEX, for internal hedge requests, as I-TEX offers the same dealing functionalities as TEX but is designed for internal trading requests and execution.
We tested eFX the first time in May 1999 with a bank’s single-bank platform. Some months later, 360T introduced us to the idea of a multi-bank platform that effectively covered all treasury instruments we were dealing at that time.
There were two main reasons for us to start online trading. Firstly, we wanted to negotiate and execute with our banks via one trading platform to achieve cost savings through price transparency and competitive pricing. Secondly, we were looking for an automated process for the daily workflow, allowing an efficient STP.
One of the key factors why we chose 360T was the variety of instruments. An international company like Lufthansa requires a system that offers different functionality across multi-products in a clear and structured manner. At that time all the other platforms offered only FX products, but no money market or interest rate solutions. We also like the transparency of pricing to the banks, which is conducted in the manner of an auction. Furthermore, 360T is a very flexible provider, offering customized services to client needs. As we played a major role in developing the platform, we have a system that matches all our technical demands at the highest level and which, on top of all that, is easy to use.
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The implementation of both e-trading and STP has certainly shown significant improvements to our entire treasury operation. But the most important benefits we have realised are the following:
1. Workflow reduction up to 80 - 90% across all trading activities due to automated trading, file load and confirmation matching
2. Best execution through added price transparency and competitive pricing
3. Part elimination of error-sensitive manual entries
4. Full audit trail for all transactions
5. High cost savings resulting from all the benefits listed above.
As a result, e-trading has become very important indeed to our treasury department. Our overall Straight-Through-Processing would not be possible without e-trading and we couldn’t cope with the sheer volume of transactions we are currently dealing with our liquidity providers.
At Lufthansa we primarily execute the plain vanilla FX products such as spot, forwards, swaps, forward swaps, but we also execute FX options over the system as well as non-deliverable forwards, deposits and loans.
We are now planning to use money market funds (MMF) via our 360T trading platform.
As we are also trading high volumes in commodities like oil and crack (the price difference between oil and kerosene), we would like to add them to the platform once 360T is able to incorporate these types of commodities onto the system. But at present our fuel department still has to execute these transactions via the phone.
At the outset there were some concerns that joining an online multi-bank portal could cause problems to our existing bank relationships. But which bank is not interested in a more efficient and automated business process? Neither banks nor customers should waste too much time in their daily business if it is not necessary. Most of the banks we were dealing with at that time joined the platform in due course. However, given that this business is customer-driven and that LH is doing the majority of its business electronically, any bank which is not available to LH via the system of 360T is unlikely to see much FX business.
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I would not necessarily call it a ‘must-have’ for every airline company, but it is certainly an extremely valuable instrument for this sector as airlines are dealing high volumes and various currencies. Because of our ‘eternal’ FX risk horizon we implemented a rule-based hedging strategy. Due to this monthly hedging procedure we have a lot of transactions in more than 20 currencies and therefore 360T fits perfectly in this environment.
We share our experience with other airlines and I think it is just a matter of time before some of our competitors follow our e-channel strategy.
Although we are very satisfied with our current business process, we are always looking for new ideas to support the Group’s growth strategy in the long term. Our short-term goal is to achieve nearly full automation by implementing an automated upload to safeguard additional hedging activities via 360T. In addition to that we are working on a connection between 360T’s reporting functionality and our BaSta system to optimise bank selection.
As I said earlier, we have come a long way in recent years and I think we are looking for some proven stability before building further onto this structure.
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