Lufthansa : Case Study : Finance

FinanceLufthansa is a Deutsch airlines group created in 1926 and it is based in Cologne. With its 550 subsidiaries, its 648 fleets and its 104,9 million passengers carried, the group is the European leader and the third group in the world. Its shareholding is overwhelmingly German and top management is made up of people who have made their careers in the group, such as Carsten Spohr, CEO. The mission of the group is “to be the first choice in aviation for customers, employees, partners and shareholders”. For this, the group decided to strengthen its airlines network, the point-to-point airlines transportation and the aviation services. The objectives of this strategy are to improve margins and build profitable growth. Thus, each strategic activity (passenger transport, MRO, logistics, catering) serves to realize the vision of enterprise. Offering 301 destinations in more than 100 countries, the group is influenced by the international context. The low prices of oil, the opening of Asian markets and the development of low-cost were all opportunities that the group has seized. Otherwise, the increase in the number of mainly Eastern competitors, the aggressiveness of low-cost airlines and the political uncertainty were threats that the group had to manage. Nevertheless, the market is growing strongly, +40% in a decade. The group enjoys good financial health. With a turnover of 31.6 million Euros, the group increases its margin rate to 7%, which is the average low of the sector. This improvement is due to a restructuring of the group, that has reduced fixed costs. The group creates benefits that requires investment, which is done mainly through a steady negative working capital around 4 million Euros. However, the low-cost activity Eurowings, which is still in deficit, alters the effectiveness of the group. Asset turnover decreased by 20% in three years. To finance its investments, the group uses less and less debt. Its debt represents 38% of equity. Moreover, all the ratios show that Lufthansa bankruptcy is unlikely. For example, the current ratio is equal to 0,93 in 2016. Finally, the group sees its profitability greatly increased. Its operational activities generate 17% of return on capital employed. In three years, this ratio was doubled. But the return on equity decreased lightly. The stock market analysis reflects the health of the group. It is mature and stable. But, because of the low-cost competitors and the risk of social movements, the market capitalization decreased by 10%, even if the market undervalues the book value of the group