Cost savings, Audit trail, Best execution and STP at Lufthansa Group Treasury
TMI Magazine talks with Roland Kern, Head of Treasury at Deutsche Lufthansa AG about the impact of e-trading and STP within their treasury team.
1. Mr. Kern, can you please give us an overview of the structure and trading activity at Lufthansa Group Treasury?
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 consist of five employees at present. The Risk Management Team handled last year a volume of €16.86bn (4968 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 project 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.
2. Can you give us a brief description of your automated trading process?
As visible on the image below, we have realised a real end-to-end IT infrastructure at Lufthansa Group Treasury and we 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.
We are now in the position 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. Furthermore, broad information on the financial status of Lufthansa can 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 will be executed via 360T’s multibank platform TEX. Our IT system BaSta (Banking Statistic) shows us the best performing 6 banks over the last 3 months for each relevant currency pair. 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. Due to 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.
3. When did you start e-trading and what was your motivation for it?
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.
4. Why 360T?
One of the key factors why we chose 360T was certainly the variety of instruments. For such an international company like Lufthansa, it requires a system that offers different functionality across multi-products in a clear and structured manner. At that time all other platforms offered only FX products, but no money market or interest rate solutions. We also like the transparency of pricing to the banks - it’s not only that it’s auction-like. Furthermore, 360T is a very flexible provider, offering customized services to client needs. As we played a major role in development process of the platform, we have a system that matches all our technical demands at highest level and which, on top of all that, is even easy-to-use.
5. What are the key benefits of e-trading & STP for your day-to-day-operations and what role does it play at Lufthansa Group Treasury?
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:
- Workflow reduction up to 80 - 90% across all trading activities due to automated trading, file load and confirmation matching
- Best execution through added price transparency and competitive pricing
- Partly elimination of error-sensitive manual entries
- Full audit trail for all transactions
- High cost savings resulting from all the benefits listed above
As a result, e-trading has become very important to our treasury department indeed. 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.
6. What instruments are you commonly trading online and do you have plans to add new ones in the near future?
At Lufthansa we are primarily executing the plain vanilla FX products such as spot, forwards, swaps, forward swaps, but we are also executing FX options over the system as well as non-deliverable forwards, deposits and loans.
We are just planning to use Money Market Funds 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 will be able to these types of commodities on the system. But at present our fuel department still have to execute these transactions via the phone.
7. Did e-trading have an effect on your bank relationships?
At the very beginning, there were some concerns that joining an online multibank 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 not necessary. At the end of the day, most of the banks we were dealing with at that time joined the platform over time. 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.
8. Do you think that e-trading is a “must-have” in the airline sector?
I would not call it necessarily a “must-have” for every airline company but it is certainly a highly 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 perfect in this environment. We share our experience with other airlines and I think it is just a matter of time that some of our competitors will follow our e-channel strategy.
9. Can you give me a brief outlook on your future plans at Lufthansa Group treasury?
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. Furthermore, we are working on a connection between 360T’s reporting functionality and our BaSta (Banking Statistic) system to optimise bank selection.
As I already mentioned, 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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