January 10th, 2018
Lufthansa Financial Strategy| Objectives
Operating in economically diverse regions, Lufthansa has been forced to establish a financial strategy to ensure sustainable growth. The financial strategy at the airline is aimed at “securing freedom of action for the Group at all times in terms of operating, financial and strategic performance” (Lufthansa 2010, p. 50). With a strong financial basis the company envisions an un-interrupted progress in its development activities aimed to boost performance even when faced with harsh economic environment (Lufthansa 2010, p. 50).
The financial strategy encompasses a number of aspects that are integrated into its financial decisions. The features of the strategy include having a liquidity of at least EUR 2.3 billion at any particular time “to hedge against volatility in customer and financial markets”; working towards a sustainable 30 percent equity ratio and gearing ratios within 40 to 60 percent range inclusive of pension liabilities; and sustaining a good credit rating with lending institutions and agencies (Lufthansa 2010, p.50). Other aspects of the financial strategy are “securing the financial and operating flexibility” by ensuring a high percentage of aircraft are unencumbered at any particular time; and controlling for financial risks through an integrated management process aimed at making even the effects of price fluctuations on the firms performance (Lufthansa 2010, p.50).
One of the risks management process at the company is to control for fluctuations in market prices of oil – an important resource for the company’s performance. The strategy for the company to reduce effect of oil price fluctuations on its costs is pursuing a continuous hedging practice (Lufthansa 2010, p. 53). By using floating rates to value 85 percent of its liabilities, the entity also aims to mitigate the impact of foreign exchange fluctuations on its annual performance (Lufthansa 2010, p.53). The entities financial strategy further extends to aspects of investor return such as dividend policy. The current trend in dividend payment has for instance been to distribute 30 to 40 per cent of the earnings to the entity’s stock holders but subject to ability to pay dividend amounts from the year’s performance. After the 2009 financial performance for instance the entity did not propose any dividends to its share holders after failing to recording any profits (Lufthansa 2010, p.50). Go to part 4 here.