International Financial Management 12

PHILADELPHIA OPTIONS Wednesday, March 21, 2007 Calls Puts Vol. Last Vol. Last Australian Dollar 79.92 10,000 Australian Dollars-cents per unit. 78 June 9 3.37 20 1.49 79 April 20 1.79 16 0.88 80 May 15 1.96 8 2.05 80 June 11 2.29 9 2.52 82 June 1 1.38 2 3.61 IFM-LN.167 Chapter 12 – Managing Economic Exposure (EE) Review from Chapter 10. - EE: It measures how future CFs are affected by changes in St (ef). - Measures: 1) Accounting measures (simulate EAT under different exchange rates) 2) Regressions using CFs or stock market returns. Q: Is EE significant –i.e., should we do something about it? A) Use a regression. Measure an elasticity and make a judgment call. If we determine that EE is significant, then a firm should try to manage it. EE measures how changes in FX rates affect CFs. It is easy to see that importers benefit from a strong domestic currency (the cost of buying foreign goods decreases as St decreases); while exporters benefit from a weak domestic currency (domestic exports become to foreign buyers as St increases). But, not only importers and exporters face economic exposure, many purely domestic firms are exposed too. Example: As the USD becomes stronger, more U.S. tourism goes to visit the active volcano Arenal, in Costa Rica. Restaurants in Cost Rica buy and sell everything in CRC (CRC = Costa Rican Colón), thus having no direct EE. But, as U.S. tourism increases (decreases) in Arenal, the cash flows of restaurants in Arenal will also increase (decrease). Thus, even smaller Costa Rican restaurants (called sodas) face EE. In this case, they behave like an exporter. ¶ 12.1 Understanding Economic Exposure Let’s look at the simplified cash flow of an MNC’s subsidiary, which exports its production, Q, at the international price, P, denominated in foreign currency (FC): Revenue: Price in FC x Quantity = PQ Cost: Variable + Fixed = α PQ + Fixed Costs Gross profits: (1- α) PQ – Fixed Costs EBT = [(1- α) PQ – Fixed Costs] - IE EAT = [(1- α) PQ – Fixed Costs - IE] (1-t) (α: proportion of PQ as VC, 0<α< 1) (IE: Interest Expense) (t: tax rate) Costs & IE have, potentially, two components: a FC & a DC. Say, for VC: αFC & αDC; and for IE=IEDC+IEFC. Usually, Fixed Costs are in DC, not sensitive to FC. EE: How do changes in St affect CFs of the firm (say, EAT)? Let’s take a first derivative: PQ IE FC  EAT   (1   FC )   (1  t ) S t  S  S t t   where we assume the DC components of VC and IE are independent of the FC part. If the derivative is 0, EAT is not affected by changes in St. That is, there is no EE. For example, if αFC=1 & IEFC=0, EAT is not sensitive to changes in St. Obviously, αFC=1 is not a very interesting case! But, as αFC→1, EE decreases. That is, IFM-LN.168 the better the FC match, between Revenue and Cost, the smaller the EE. The degree to which P and Q affect EE depends on the type and structure of the firm and the industry structure in which the firm operates. In general, importing and exporting firms face a higher degree of EE than purely domestic firms do. Also, in general, monopolistic firms face lower EE than firms in competitive markets (monopolistic firms can increase prices in response to changes in St.). Note: The amount exposed is not total revenue in FC, but the difference between Revenue in FC and Cost in FC. If Revenue in FC > Cost in FC, selective hedging of receivables –i.e., no full hedging of receivables in FC- may work well to reduce short-term EE. Example: Foreign Auto Exporters During the last semester of 2014, the USD appreciated against the major currencies (13% against the EUR, and 15% against the JPY). Because of the expected loose monetary policies from the ECB and the Bank of Japan, the strong USD was expected to continue in 2015. According to earnings forecasts, reported by the WSJ, Germany’s three large car manufacturers were expected to increase their (unhedged) earning by EUR 12 billion (USD 14.2 B). On the other hand, according to Nissan Motor Co.’s Chief Executive Carlos Ghosn, Nissan was planning to make more vehicles for the U.S. market in Japan in 2015, but the profit impact was expected to be “marginal,” because it makes so many of its vehicles in North America. Source: Wall Street Journal, Jan 12, 2015. ¶ Example: H&M vs. Zara In late June 2015, Sweden’s Hennes & Mauritz, the world’s second-biggest fashion retailer, warned it expects the strong USD to translate into rising sourcing costs throughout the year after it hurt second-quarter profits. H&M, which buys the bulk of its clothes in Asia on USD contracts while selling most of them in Europe, is more exposed to the strong USD than bigger rival Inditex, the Zara owner which produces more garments in house and sources most of them in or near Europe. And it is harder for the budget brand to pass on costs by raising prices as it faces growing competition from discounters like Primark and Forever 21, which pose less of a threat to midmarket brand Zara. Source: Reuters, July 2015. ¶ As both examples show, a better match  lower EE. Zara has a better match between FC receivables and FC costs than H&M, and, thus, lower EE. Similar situation applies to Nissan relative to the big three German automakers. Moreover, according to Nissan’s executive Ghosn, Nissan has a very good match in USD, creating a very low EE. 12.2 Managing Economic Exposure IFM-LN.169 Q: How can a firm get a good match? Play with αFC to establish a manageable EE. For example, if FC and IE are small relative to variable, then, the bigger αFC, the smaller the exposed CF EAT to changes in St. When a firm restructures operations (shift expenses to FC, by increasing αFC) to reduce EE, we say a firm is doing an operational hedge. Note: In math terms, EE measures a first derivative: δEAT/ δSt. Case Study 1: Laker Airways (Skytrain) (1977-1982) Skytrain: Low cost carrier, no-reservation, nofrills, from LON to NY (1977): GBP 59 one-way ticket ( 1/3 of the competition). Huge success. Rapid expansion, financed with debt. Situation: UK airline expands rapidly: Laker buys airplanes from MD (a DC10-10 in the picture), financing in USD. • Cost structure As most major airlines before Airbus, Laker Airways had three major categories of costs: (i) fuel, typically paid for in USD (ii) operating costs incurred in GBP (administrative expenses and salaries), but with a non-negligible USD cost component (advertising and booking in the U.S.) (iii) financing costs from the purchase of U.S.-made aircraft, denominated in USD. • Revenue structure Sale of transatlantic airfare (probably, evenly divided between GBP and USD), plus other GBP denominated revenue. Currency mismatch (gap): Revenues mainly GBP, USD Payables mainly USD, GBP Q: How did St affect CFs? 1977-1981: USD depreciates against the GBP (from 1.71 USD/GBP to 2.12 USD/GBP). 1981-1982: USD strong appreciation against the GBP (reaching 1.60 USD/GBP).  1982: Laker Airlines files for bankruptcy. Solutions to Laker Airlines problem (economic exposure): - More sales in US - Borrow in GBP - Transfer cost out to GBP/Shift expenses to GBP (increasing αFC/reduce αDC IFM-LN.170 - Diversification (always a good risk management technique) Q: Why operational hedging? Financial hedging –i.e., with FX derivative instruments- is inexpensive, but tends to be short-term, liquid only for short-term maturities. Operational hedging is more expensive (increasing αFC by building a plant, expansion of offices, etc.) but a long-term instrument. Moreover, financial hedging only covers FX risk (St through P), but not the risk associated with sales in the foreign country (Q-risk). For example, if the foreign country enters into a recession, Q will go down, but not necessarily St. An operational hedge will work better to cover Q-risk. Idea: To avoid EE, we would like to have constant CFs at different exchange rates (CFs: Free CFs, EAT). A firm can restructure operations to reduce EE. Typical operational hedges: Move production abroad (build/expand a plant), buy more inputs abroad. Example: A U.S. firm exports to the Australia. Two different FX scenarios: (1) St = 1.00 USD/AUD Sales in US USD 11M in Aus AUD 15M Cost of goods in US USD 5M in Aus AUD 8M (2) St = 1.10 USD/AUD Sales in US USD 12M in Aus AUD 18M Cost of goods in US USD 5.5M in Aus AUD 10M Taxes: Interest: US Aus US Aus 30% 40% USD 5M AUD 1M Sales CGS Gross profit CFs under the Different Scenarios (in USD) St = 1 USD/AUD St = 1.1 USD/AUD 11M +15M = 26M 12M + 19.8M=31.8M 5M + 8M = 13M 5.5M + 11M = 16.5M 5M + 7M = 13M 5.5M + 11M = 15.3M Int EBT 5M + 1M = 6M 6M 5M + 1.1M = 6.1M 9.2M Tax EAT 0.3M + 2.4M = 2.7M 4.3M 0.45M + 3.08M = 3.53M 5.67M IFM-LN.171 Q: Is the change in EAT significant? Let’s calculate the CF-exchange rate elasticity: Change in EAT(%)/ef,t = .3186/.1= 3.186  A 1% depreciation of the USD, EAT increases by 3.2% (probably, very significant!). That is, this company benefits by an appreciation of the AUD against the USD. The firm faces economic exposure. ¶ How can a U.S. exporting firm avoid (or reduce) economic exposure? (Short answer: Match!) 1. Increase US sales 2. Borrow more in AUD (increase outflows in AUD) 3. Increase purchases of inputs from Australia (increase CGS in AUD) Note: A U.S. importing firm can reduce EE by taking the reverse steps. Diversification always helps to reduce economic exposure. By diversifying a company takes a portfolio approach to inflows and outflows denominated in different currencies. Example: In the previous (baseline) example, we’ll play with scenarios (one at a time). (A) US firm increases US sales by 25% (unrealistic!) EAT(St = 1 USD/AUD) = USD 6.225M EAT(St = 1.1 USD/AUD) = USD 7.77M  a 1% depreciation of the USD, EAT increases by only 2.48%. (B) US firm borrows only in AUD: AUD 6M EAT(St = 1 USD/AUD) = USD 4.8M EAT(St = 1.1 USD/AUD) = USD 5.87M  a 1% depreciation of the USD, EAT increases by 2.23%. (C) US firm increases Australian purchases by 30% (decreasing US purchases by 30%) EAT(St = 1 USD/AUD) = USD 3.91M EAT(St = 1.1 USD/AUD) = USD 4.845M  a 1% depreciation of the USD, EAT increases by 2.39%. (D) US firm does (A), (B) and (C) together EAT(St = 1 USD/AUD) = USD 6.335M EAT(St = 1.1 USD/AUD) = USD 7.145M  a 1% depreciation of the USD, EAT increases by 1.28%. Note: You can find this example (and play with different values) in my homepage: www.bauer.uh.edu/rsusmel/4386/ee-example.xls ¶ Remark: Some firms will always be exposed. For example, U.S. small firms that only do business in the U.S. and import parts from abroad (say, a store selling Chinese food and goods in Houston’s Chinatown) do not have a lot of opportunities to reduce EE. For them, a strong USD is good for their CFs; while a weak USD is not. Large firms have more leeway in adjusting their business structure to reduce EE. IFM-LN.172 Case Study 2: Walt Disney Co. Four divisions (in 2006): Entertainment, Consumer Products, Theme Parks and Resorts, and Media Networks. S06 = 108.113 TWC/USD Price06 = USD 30.90 (TWC = Trade-weighted currency) Inflows (2006 Revenue: USD 34.3B, Operating income: USD 6.49B, EPS: USD 2.06): - Media (ABC, ESPN, Disney Channel, A&E. Low). Revenue: 14.75B, OI: 3.61B - Parks & Resorts (Disney Cruise Line & 10 parks: Euro Disney, Tokyo Disney + HK park, U.S. (30% from abroad). Medium). Revenue: 9.95B, OI: 1.53B - Studios (Disney, Pixar, Touchstone. 50+% from abroad. High). Revenue: USD 7.2B, OI: 0.73B - Consumer products (Licensing, Publishing, Disney store (Europe). Medium) Revenue: USD 2.4B, OI: 0.62B Outflows - 80% in USD S06 = 108.113 TWC/USD Price06 = USD 30.90 (TWC = Trade-weighted currency index) UPDATE (2006-2013): - DIS bought Marvel for USD 4B in 2009 and Lucasfilm for USD 4B in 2012. - DIS introduced a new division: Interactive Media (Kaboosee.com, BabyZone.com, Playdom (social gaming), etc.) - DIS ordered two new cruises with 50% more capacity each in 2011. - Shangai theme park to be opened in 2016. Economic Exposure? Yes. Probably: Medium • Note: To check our intuition, we can calculate a pseudo-elasticity to check EE. We need data. Let’s use 2013 data: Inflows (2013 Revenue: USD 45.04B, Operating income: USD 10.72B, EPS: USD 3.38): S 13 = 101.923 TWC/USD (USD depreciated by 5.73% against the TWC) Price13 = USD 65.30. Summary: IFM-LN.173 Media Parks & Resorts Studios Consumer Products Interactive Media Total 2006 (in USD) Revenue Operating Income 14.75B 3.61B 9.95B 1.53B 7.2B 0.73B 2.4B 0.62B 34.3B 6.49B 2013 (in USD) Revenue Operating Income 20.35B 6.82B 14.09B 2.22B 5.98B 0.66B 3.56B 1.11B 1.06B -0.09B 45.04B 10.72B 13-06 Change in Revenue = USD 10.74B (31.31%) 13-06 Change in OI = USD 10.72B – USD 6.49B = USD 4.23B (65.18%) 13-06 DIS Stock Return = 111.32% 13-06 ef,t = - 0.05725 (or 5.73% depreciation of the USD) CF-elasticity = % Change in OI / % Change in St = .6518/-.05725 = -11.385 If stock market numbers are more trusted than accounting numbers, recalculate CF-elasticity: CF-elasticity = DIS Stock Return/ef,t = 1.1132/-.05725 = -19.445. (Interpretation: a 1% USD depreciation, increases stock returns by 19.445%.) According to these elasticities, both very high, DIS behaves like a net exporter, a depreciation of the USD increases cash flows. • Managing Disney’s EC 1. increase expenses in FC a. make movies elsewhere b. move production abroad c. Borrow abroad 2. Diversify revenue stream a. Build more parks abroad b. New businesses • Let’s revisit the measurement Disney’s EE. Q: Is the pseudo-elasticity informative? Is St the only variable changing from 2006 to 2013? A: No! DIS added assets, then more revenue and OI are expected. Also the economy and the stock market grew during these dates. We need to be careful with these numbers. We need to “control” for these changes, to isolate the effect of ef,t. A multivariate regression will probably be more informative, where we can include other independent (“control”) variables (income growth, inflation, sales growth, assets growth, etc.), not just ef,t as determinants of the change in OI (or DIS stock return). IFM-LN.174 We can also borrow from the investments literature and use the popular 3 Fama-French factors (Market, Size, Book-to-Market) as controls. Say: DIS Stock Returnt = α + β ef,t + θ Assetst + δ FF Factorst + ... + εt Example: Disney’s EE. Using Disney’s monthly excess returns from the past 35 years (1984:Jan, 2019:June), we run a regression against ef,t (using USD/TWC) and the Fama-French factors (Market, SMB, HML): R2 = 0.4188 Standard Error = 1.6115 Observations = 424 Intercept ef,t Market - rf SMB HML Coefficients Standard Error t Stat P-value -0.18460 0.19250 0.51853 -0.02080 0.10089 0.13040 0.23412 0.03068 0.04377 0.04647 -1.4160 0.8223 16.900 -0.4750 2.1708 0.1576 0.4114 >.00001 0.6348 0.0305 Note that the coefficients corresponding to ef,t is 0.1925. That is, a 1% depreciation of the USD, increases stock returns by 0.1925%. A substantially smaller, and more realistic, figure than the one implied by the elasticity above. After controlling for other factors that also ffect Disney’s excess returns, we cannot reject H0, since |tβ =-0.82| < 1.96 (at 5% level, no EE). The results do not change if we use a longer sample (1973-2019) or a shorter sample (1993-2019). The β coefficient is not statistically (the t-stat is never bigger than 1 in absolute value). Q: Why is economic exposure not showing up? Disney has been diversifying and taking a lot of the measures discussed above to reduce economic exposure for many years. It seems to be working. ¶  EE: Evidence Using a regression like the one above for Disney, Ivanova (2014) estimates the EE for 1,231 U.S. firms. She finds that the mean β is 0.57 (a 1% USD depreciation increases returns by 0.57%). However, only 40% of the EE are statistically significant at the 5% level. In general, large firms have lower exposures (average β is 0.063). He and Ng (1998) and Doukas et al. (2003) find that only 25% of Japanese firms have significant EE. Interesting result: Ivanova reports that 52% of the EEs come from U.S. firms that have no international transactions (a higher St “protects” these domestic firms). 12.3 Should a Firm Hedge? There are two views with respect to hedging at the firm level: IFM-LN.175 - Based on the Modigliani-Miller Theorem (MMT). It states that hedging adds nothing to the value of a firm. - Exploits some of the basic assumptions underlying the MMT. This second view analyzes specific situations where hedging might add value to a firm. 1. MMT: Hedging is Irrelevant When we value a firm, the financing source of those good investments is irrelevant. Different mechanisms of financing determine how the CFs are divided among the different classes of investors (shareholders or bondholders). The MMT depends on a set of assumptions about financial markets. These assumptions basically require that a firm operates in perfect markets (i.e., no transaction costs, no distortions, etc.). Implications for hedging: If the methods of financing and the character of financial risks do not matter, managing them is not important, and, thus, should not add any value to a firm. On the contrary, since hedging is not free, hedging might reduce the value of a firm. Modigliani and Miller also show that if investors want to reduce the financial risks associated to holding shares in a firm, they can diversify their portfolios by themselves. 2. Hedging Adds Value The assumptions behind the MMT are routinely violated and, then the MMT does not hold. Under these circumstances, hedging adds value to a firm. The added value of hedging is still open to discussion. 2.1 Investors might not be able to replicate an optimal hedge Investors might not be big enough to have access to optimal hedges. Or investors might not have enough information about CFs, denominated in different currencies, of the firm. 2.2 Hedging as a tool to reduce the risk of bankruptcy If CFs are very volatile, a firm might be faced with the problem of needing cash to meet its debt obligations. Thus, firms, like MNCs, with good access to credit markets have no need to hedge. (Surprisingly, U.S. largest corporations are the biggest hedgers.) 2.3 Hedging as a tool to reduce investment uncertainty Firms should hedge to ensure they always have sufficient cash flows to fund their planned investments. 2.4 Hedging as a tool to reduce investment uncertainty Tax convexity –i.e., tax liability is progressively increasing with income– works in favor of hedgers. Thus, firms that hedge can expect to reduce their taxes by reducing income volatility. In addition, given that firms that hedge can borrow more, they can take advantage of the tax deductibility of interest.  Hedging: Some Conclusions • We have seen two extreme views: IFM-LN.176 (1) Hedging adds no value (actually, may decrease value). In practice, this view understands the potential benefits (lower distress costs and taxes), but diversified investors can manage risk exposure by themselves. (2) Hedging adds value. In practice, this view understands that markets are efficient, but the reduction in uncertainty improves stock prices. • There is an intermediate view: - Hedging is likely to add value for: ⋄ Small firms with undiversified ownership. ⋄ Firms with a lot of debt. ⋄ Firms with limited growth opportunities if financially constrained. ⋄ Firms with risk that cannot be hedged by market instruments.  Who Hedges? And How? U.S. Evidence A 1998 Wharton U.S. survey on hedging reported the following main findings: - Size matters: 83% of big firms hedge, while on 12% of small firms hedge. - Industry matters: primary product firms (68%) and manufacturers (48%) hedge more than service firms (42%). - Hedge only a fraction of the total FX exposure. The average firm hedges less than 50% of the perceived FX exposure. This practice is called selective hedging. - Short-dated hedges: 82% of firms use FX derivatives with a maturity of 90 days or less. - Standard options most popular. Firms use standard European-style or American-style options much more than such exotic options as average rate, basket, or barrier options. - Speculation: 32 % of firms that use FX derivatives reported that their market view of exchange rates leads them to “actively take positions” at least occasionally. More Results: - For equity markets, FX hedging in the long run does not significantly improve returns –see Statman and Fisher (2003), Thomas (1988). - For equity markets, FX hedging does not increase well-diversified portfolio returns, nor always reduces risk. MSCI Barra Research Paper No. 2009-12. - For bond markets, fully FX hedging is the best policy for risk-minimizing investor. Schmittmann (2010), IMF Working Paper 10/151. - For the gold industry, firms engaging in selective hedging do not add to their performance. Brown, et al. (2006) "Are firms successful at selective hedging?" Journal of Business, 79, 2925-2949. - For the gold industry, firms engaging in selective hedging are closer to financial distress. Adam et al. (2012) “Why do Firms engage in selective hedging?” SFB 649 Working Paper, Humboldt University. Canadian Evidence The Bank of Canada conducts an annual survey of FX hedging. The main findings from the 2011 survey are: • Companies hedge approximately 50% of their FX risk. IFM-LN.177 • Usually, hedging is for maturities of six months or less. • Use of FX options is relatively low, mainly because of accounting rules and restrictions imposed by treasury mandate, rules or policies. • Growing tendency for banks to pass down the cost of credit (credit valuation adjustment) to their clients. • Exporters were reluctant to hedge because they were anticipating that the CAD would depreciate. On the other hand, importers increased both their hedging ratio and duration. Australian Evidence The National Bank of Australia also conducts a survey, every four years since 2001, to gauge Australia’s aggregate foreign currency exposure. • The banking sector hedges all of its net FC liability exposure, while other financial corporations hedge only part of their net FC exposure. • Overall, financial sector liabilities in FC (bonds, loans and deposits) had a hedge ratio of 60%, while assets in FC had a hedge ratio of 30%. • 80% of FC denominated debt security liabilities was hedged using derivatives, reflecting a hedge ratio of 84% for short-term debt liabilities and 77% for long-term debt securities. • Non-financial corporations hedged close to 30% of FC denominated liabilities, while there was almost no hedging of FC denominated assets. IFM-LN.178 CHAPTER 12 – BRIEF ASSESMENT 1. Padres Company does business in the U.S. and Australia. In attempting to assess its economic exposure, it compiled the following information: • Its U.S. sales are somewhat affect by the Australia dollar's value because it faces competition from Australian exporters. It forecasts the U.S. sales based on the following exchange rate scenarios: Revenue from U.S. (in million) St (USD/AUD) .70 USD 180 .85 USD 250 • Its AUD revenues on sales to Australian residents invoiced in AUD are expected to be AUD 400,000,000. • Its anticipated cost of goods sold is estimated at USD 60 million from the purchase of U.S. material and AUD 100 million from the purchase of Australian materials. • Fixed operating expenses are USD 20 million. • Variable operating expenses are estimated at 15 percent of total sales (including Australian sales, translated to a USD amount). • Interest expense is estimated at AUD 30 million on existing Australian loans, and USD 20 million on existing USD loans.  Income tax is paid at the U.S. effective tax rate of 27%. A. Create a forecasted income statement for Padres under each of the two exchange rate scenarios. B. Explain how Padres' projected earnings before taxes are affected by possible exchange rate movements. C. Explain how Padres can restructure its operations to reduce the sensitivity of its earnings to exchange rate movements, without reducing its volume of business in Australia. 2. In the previous exercise, calculate the CF-elasticity under the following scenarios (one at a time): (A) Padres Co. increases US sales by 25% (unrealistic!) (B) Padres Co. only in AUD: (C) Padres Co. increases Australian purchases by 30% (decreasing US purchases by 30%) (D) Padres Co. does (A), (B) and (C) together. 3. Below, we report GE’s net income (in millions, USD) and earnings per share, EPS, along the USD/TWC exchange rate for the period 2012-2016. (Whole income statement on my homepage: http://www.bauer.uh.edu/rsusmel/4386/ GE_Income_Statement.csv). Does GE face EE? Net income (in M) EPS USD/TWC 2016 8,175 0.89 1.044244 2015 -6,126-0.61 1.05869 2014 15,233 1.5 1.114673 2013 13,057 1.27 1.308284 IFM-LN.179 2012 13,641 1.29 1.361726 CHAPTER 12 - BONUS COVERAGE: Brief Laker Airways Story After a legendary six-year battle won in the courts, Freddie Laker obtained a permit for his Laker Airways, established in 1966, to operate the Laker Skytrain service on both sides of the Atlantic, using two DC-10 planes. The Skytrain was a no-reservation, low cost air service, which revolutionized the air transport industry. It was the first low-cost transatlantic operation. Skytrain flew from New York to London and back for USD 236 (USD 400 less than the going rate). Breakfast was USD 1.25 extra. On September 26, 1977, the first Skytrain flight departed London for New York, and subsequently went on to carry over 50,000 passengers before the end of the year with each flight over 80 percent full. The success was such that the Skytrain service was expanded to include a London to Los Angeles service in 1978, London to Miami in 1980 and London to Tampa in 1981. During this time of expansion, the USD was weak against the GBP, and U.S. trips were relatively cheap for U.K. residents. Freddie Laker was able to expand the Skytrain concept by buying more DC-10s, financing them in USD. Thus, Skytrain's debt payments were in USD, while Skytrain's revenues were primarily in GBP. Although popular with the public, Laker Airways became embroiled in price wars with more powerful companies. (Rumors and stories of collusion against Laker Airways are still told today.) The start of the Reagan presidency, with a consistent USD appreciation against European currencies, did not help Laker Airways’ fortunes. On February 5, 1982, Laker Airways was forced to file for bankruptcy, owing GBP 270 million. Thousands of pounds poured into a “Save Laker” fund, set up by members of the public sympathetic to the flamboyant tycoon. The “Save Laker” fund collected over GPB 1 million in donations. But it was too little too late. Within weeks Sir Freddie was attempting to re-launch an airliner by transferring the Laker Airways licenses to a new company. The Civil Aviation Authority officially blocked his efforts in May after objections from other airlines and the public. Freddie Laker retired to Florida, then the Bahamas. He died in Miami aged 83 on 10 February 2006. Richard Branson, founder of Virgin Atlantic, credited Freddie Laker for some of the success of Virgin Atlantic. “Perhaps his best advice was to make sure that I took British Airways to court before they bankrupted us — not after, as he (Laker) did.” Taken From “A brief history of price-fixing,” by Simon Calder The Independent (London), Jun 24, 2006 In the bad old days when airlines were run by, and for the benefit of governments and civil servants, colluding on fares was not illegal - it was compulsory. National airlines cosily agreed fares between themselves. Indeed, when the inspectors called on airlines, it was to uncover evidence of cutting fares, rather than artificially inflating them. Airlines from Laker Airways to British Caledonian were fined for the heinous practice of lowering their prices to allow more people to fly. Indeed, it was one such raid at Gatwick that prompted the late, great Sir Freddie Laker to start his Skytrain enterprise. IFM-LN.180 One day in 1970, Laker was summoned to the airport because Civil Aviation Authority staff were interrogating his passengers. His airline was involved in "affinity group charters", which at the time represented the only way for an ordinary working man or woman to travel the Atlantic. The big airlines had the scheduled business sewn up, and governments had imposed such a stranglehold on charters that only genuine clubs and societies were allowed on board transatlantic flights at reasonable rates. You can guess the result: all sorts of spurious associations were created to circumvent the stifling regulations. Everyone knew somebody who knew a dodgy agency that dabbled in cheap transatlantic air fares, and issued specious membership cards to the "Left Hand Club" to go with the tickets. Which made these flights prime targets for government inspectors seeking to stop people traveling - as happened to a Laker Airways departure from Gatwick to New York in 1970. Sir Freddie later told me he was more appalled by the fact that they were "chucking old women off the aeroplanes" than by the hefty fine that he had to pay for the temerity of trying to take people across the Atlantic at an affordable price. That episode led directly to the creation of the Laker Skytrain, which was allowed to cut prices and transform travelers' lives. IFM-LN.181