March 2004

Swiss International Air Lines

Swiss International Air Lines is constantly in the news since the start in 2001. And here is another report about the airline. But this article is different - we take the facts and look at the situation from a different angle. A report by Michael Meier.

The story of Swiss International Air Lines is well known and very present. The airline was started out of the regional carrier Crossair after the demise of Swissair and its parent company SAir Group in 2001. The SAir Group has terribly failed with their expansion strategy. They invested into a lot of loss-making airlines all over Europe to build a global airline group. A lot of money was pumped into the new group members such as Sabena, AOM, Air Liberté, LTU and others to get them working. But in the end, the SAir Group was running out of cash and the company collapsed.

As a consequence, Switzerland lost its national airline. To save a part of the jobs and to keep the links into the world, Swiss International Air Lines was initiated by the government and a number of Swiss corporations. I often hear people saying that the airline wasn't based on local traffic expectations but more on prestige and the wish to keep the famous Swiss cross flying all over the world. Prestige was certainly involved, but there really is a demand for long-haul flights out of Switzerland. Swiss citizen are travelling a lot and Switzerland is a very international and dynamic business centre. Another important point is that a lot of workplaces were be saved. Without Swiss, a lot of people would have lost their jobs. Not only at the airline, but also with contractors, suppliers and at the local airports.

A SWISS Airbus A330 after departure from Zurich Airport. (Picture: Celway Group/Michael Meier)

Swiss is now flying since 2001 and they're still flying! Despite all those rumours and scare stories, the airline is still going. That might surprise a few people, especially after all the bad news which originated from the press during the last years and months.

Fact is, the airline has its problems and they might be deeper than the challenges faced by other national carries in the present business environment. But to understand the individual problems, we have to go back to the beginning and have a look to the happenings in 2001. And more important, we have to review the base, where the new airline was built on. The base, that was Crossair.

Crossair was a fine airline within its niche. Flying small aircraft into small airports all over Europe. The concept worked very well and the carrier expanded rapidly. For many years, Crossair was associated with Swissair, carrying a lot of Swissair transfer passengers to their final destinations within Europe. As a compensation, Swissair paid a fixed price per passenger and leg. A continuous cash flow to finance Crossair's further expansion.

And Crossair aimed for more. A hub in Basle was established, with connections to a large number of European destinations. The so called Eurocross was an expensive idea. It has never reached the breakeven point, Crossair was loosing a lot of money with this concept.

Margins are very small when you are operating short-haul flights via hubs. And with more and more low-cost carriers offering point-to-point connections throughout Europe, it is hard to guess that the Eurocross would have been viable in the long term.

When André Dosé, then the CEO of Crossair, started to work on a concept for a new intercontinental carrier with his team, they could take the profitable and good routes out of the Swissair network and leave the rest. But they had to keep all the Crossair routes, including the loss-making Eurocross flights out of Basle. It has never been publicly discussed to cut routes and capacity in the regional network - looking back, that was probably an error.

But even so, it is easy to say that this was a wrong step. Due to the political pressure, there was probably no other choice than to take over these routes including the full regional network. Politicians from Basle and the Crossair staff would have opposed to any other decision. The public would not have understood it. There was the impression that Crossair was a fine little airline with no problems! In fact, Crossair was a fine little airline, but they had their problems too.

And beside that, it is also fair to say that time was not on their side. The whole planning had to be done within a very short time to allow a seamless transition from Swissair and Crossair to Swiss International.

A SWISS Saab 2000 after departure. (Picture: Celway Group/Michael Meier)

Old problems and new challenges

That's about two years ago. As you know, Swiss International is still flying today. But what's the perspective for the future? During the two years, the airline industry has been hurt by massive traffic slumps due to the SARS virus and the war in Iraq. The long awaited economic upswing is nowhere near yet. And the recent terror attacks in Madrid won't help too.

Beside the global challenges, the airline is already carrying its own burden of problems. Swiss International didn't start from a white piece of paper. It is not a new airline, it is the former Crossair with a new name, more planes and a larger structure.

And those old problems had to be addressed. It was only a question of time. With SARS and the Iraq issues, the time was running much faster and in early 2003 it became very clear that the goals in the original business plan couldn't be achieved anymore. Some action was urgently needed.

There were - and still are - cultural problems too. Swissair people were not happy to work in the former Crossair. And Crossair people were unhappy with the new co-workers in their company. Especially the Crossair pilots showed their disagreements. That wasn't a problem, the Crossair management had a hard time to deal with their cockpit union for years, but after the construction of Swiss, the negotiations went much harder. Luckily, those issues could be solved now, even if the price was very high. Swiss International had to abandon the idea of splitting the airline into two parts, a regional airline and an intercontinental one. Furthermore, the pilots for the charter fleet have to be picked out of the group of former Crossair people now.

Almost every group - including the management - saw cuts in their workforce and had to make concessions in the ongoing restructuring. That's never an easy task, but it is still better than to destroy all the jobs.

As I said before, the short haul network was really hurting. If you look to large network carriers, you will see that almost all of them are making good money on their long haul routes but loose it again on the short hauls. There is less competition on the long-haul routes, and there are no real low-cost airlines making you a hard time. Furthermore, the airlines can carry a few tons of cargo to generate more revenue out of a flight.

Fine, that sounds easy, just drop the short haul flights and your numbers are back in the black. The problem is, without a feeder network, you can't fill the planes which depart to destinations far away. The Swiss home market is small, and other carriers such as Lufthansa, Air France or KLM have their own feeder network to bring passengers from Switzerland to their own hubs and networks.

Each route has its value. Sometimes, it is necessary to have a route or a product in order to sell another one, where you're making the money to finance both ones. You'll find such a product in many companies, not only in the airline industry. For most airlines, it is the feeder flight. The challenge is to find the right ration between them.

A SWISS Airbus A330 at Zurich Airport. (Picture: Celway Group/Michael Meier)

What Swiss did in the reorganisation is the following. They needed to get rid of unprofitable flights, and they wanted to become less reliant on transfer passengers. Each single route was been reviewed and many are no longer part of the network.

Basle lost the most flights. 68% of the routes have been withdrawn from the timetable. That meant the end to Crossair's ambitious Eurocross hub. Basle was left with a few connections to destinations across Europe.

Geneva had to take reductions too, about 46% of the connections were lost. In the old years, Swissair didn't care that much about Geneva and many intercontinental routes were cut during the nineties. As a consequence, Geneva saw many new low-cost connections by foreign carriers. After all these years, it's hard to win the market back. Even today, not all the routes out of Geneva are profitable, but they are an important cornerstone in the network, as Swiss wants to win a large portion of the market back.

Routes out of the airline's most important hub in Zurich were also narrowed, by 28%. And not only on the European network. The intercontinental network has been reduced by the same degree too. Previously, we pointed out that the feeder flights were causing headache, so why is there a cut on the intercontinental routes too? As mentioned, Swiss wanted to become less reliant from the feeder flights, that's still valid. But to do so, they reduced the intercontinental routes too, to concentrate on the more important origin and destination traffic out of Switzerland.

If a passenger is flying Vienna-Zurich-New York at a cheaper price than the passenger who booked Zurich-New York, it is no question which one is more important to the airline. Swiss International's priority is on customers which are flying out of Zurich.

With less feeder flights out of Europe, the airline cannot expect the same number of transcontinental passengers. A reduction was therefore necessary. The long haul fleet (MD-11, A340 and A330) has been reduced by 8 planes, from 26 to 18. But almost no intercontinental destination was completely withdrawn, expect of very few. Teheran was one of them. And Beijing, where Swiss didn't restart operations after flights were halted due the SARS threat. The airline has reduced frequencies on many destinations, and the utilisation of the remaining planes has been improved in order to keep the network with less equipment.

Cancelling destinations is always a risky task, especially if you would like to transport business class passengers. If you take too many frequencies away, the route will no longer be interesting for those high-yield passengers. A route with only four frequencies per week is not that interesting if Lufthansa is pulling in with double daily flights at the same time. A business passenger will most likely chose the flight according to the most convenience schedule.

Swiss didn't axe a lot of frequencies, some destinations lost one flight per week, most of them will be adjusted according to seasonal demand. But in the end, the passengers will decide whether they like the new schedule.

A SWISS Avro Jet at Zurich Airport (Picture: Celway Group/Michael Meier)

No more frills in Europe

If we look back to the European network, there was another significant change in 2003. The fare structure has been reworked and the concept has been modified. Swiss took some goodies - such as free food - out of the economy class product to lower the ticket prices. It is now much easier and attractive to book a cheap ticket on a Swiss flight in Europe.

That sounds like a great deal for passengers. Who cared about free food anyway, as long as the ticket price is low? But with more cheap tickets per cabin, the new concept will also generate lower yields. To become profitable on these routes and to keep the revenue per flight attractive, Swiss International needs to sell many more tickets now.

Sure, Swiss will also safe a few bucks on ticket distribution and food, as they don't have to serve it anymore. But is that enough? Food will be sold on these flights, not by Swiss but by Gate Gourmet, the airline's catering partner. That means that Swiss will not take any risks from the food sales. At the same time, revenues out of the sold products will go to Gate Gourmet. In exchange, Swiss has apparently negotiated a much better deal for the business class catering, where the service level stays unchanged and food is still free.

During the first months, passengers were already very interested in the new product, ticket sales raised. October was the first month when the increased ticket sales outperformed the effects by lower yields.

Swiss was the first European flag carrier to stop serving free food, but I'm sure many more will follow. We saw similar developments in the USA and the trend came over to Europe now. Since Swiss announced the new concept, Austrian Airlines, Iberia and AerLingus were already following with the implementation of similar products. And a lot of other airlines are currently looking into it.

Intercontinental Upgrade

While the European product has been reduced, Swiss is investing on the service of their intercontinental flights. With the acquisation of Airbus A340-313Xs, Swiss introduces new seats in all classes. The Airbuses are currently deployed on the Swiss network as a replacement for the former Swissair MD-11 aircraft. As mentioned, the new Airbusses will feature more comfort in all classes.

The First Class seat can be converted into a totally flat bed that is a generous 203 centimetres long and 60 centimetres wide for a truly restful sleep. The Business Class is equiped with lie-flat seats, Business Class travellers also enjoy more space than ever. The unpopular middle seat has been eliminated, and seat pitch has been increased to 152.5 centimetres.

Even the Economy Class product has been upgraded. The new seats offer an extra five centimetres of valuable seat pitch. And the cabin also features the biggest individual inflight entertainment screens of any airline, located in the seat in front.

Despite the investment costs, the SWISS A340s will be saving money. Compared with the current MD-11s, the operating costs are about 10 per cent lower. But it should be considered that the Airbus has a bit less seats than the MD-11. Taking that into consideration, the cost per seat-mile is about the same on both types.

The new Airbus A340-313X. (Picture: Celway Group/Michael Meier)

Finally... an alliance

[Editor's Note, 3rd June 2004] Swiss International will not join Oneworld. A solution about the merger of the frequent flyer program with Britsh Airways could not be reached. Due that, Swiss International canceled its membership application. The following text is therefore outdated!

There will be more changes for passengers within the next months. Swiss has finally managed to join the Oneworld alliance. [see our report] It has been a goal since day one, but they couldn't get it done yet. British Airways, the doorkeeper for Europe wasn't really ready to speak to Swiss until they found out it's now or never. Swiss was looking for other options, and with a pending takeover offer from Lufthansa, it became obvious that British Airways couldn't wait any longer.

Beside the membership in Oneworld, Swiss had one more option. A takeover by Lufthansa. Oneworld certainly is a wise choice. The Lufthansa option would have been a safer harbour in the short term, but Swiss would not have last long. Lufthansa does already have two large hubs in Germany, Frankfurt and Munich. Why should they need another one? If they were interested in Swiss, they were primary interested in the market. They were not bidding because of the planes, they just wanted the passengers.

For some time, Swiss would have operated as a separate unit with its own brand out of Zurich, but more and more intercontinental flights would have been withdrawn and concentrated to the other hubs. Sure, that's just speculation, but it doesn't need a lot of fantasy. Lufthansa would not have bought Swiss just for fun, they wanted to get something out of the deal.

The MD-11 fleet is being replaced with A340s. (Picture: Celway Group/Michael Meier)

But as mentioned, Lufthansa's offer was rejected in favour of full membership in the Oneworld alliance with British Airways, Iberia, Finnair, American Airlines, Cathay Pacific, Qantas and others. This option includes a lot of uncertainties, but also a lot of chances. Swiss is expecting to see addition sales in the region of 100 Million Swiss Francs, and that doesn't even include any cost savings due to the combined distribution and other alliance benefits.

The alliance membership does also help to rebuild confidence and faith in the public. It is now possible to see a clear direction again. And that was really needed.

Anyway, an alliance will not solve internal issues. One of the two big pending problems is an additional credit line. The airline is looking to close a deal with a group of banks for this additional credit line of 300 Million Francs. The money would be needed in case of any new unexpected developments like SARS.

Unfortunately, the airline couldn't secure the deal yet. One thing about additional funds has always been clear. The state will not give any more money. That has been clear for both sides since the first days and Swiss International has never asked for any state money.

The two big issues

There are a lot of discussions about this credit line. It certainly isn't a good sign if it takes that long to find the money. But it went quieter about that now. Obviously, the cash situation went better in the meantime. Swiss has reduced its costs and sold assets like a part of the regional fleet. The credit line isn't needed immediately, the company still has around 503 million Swiss Francs cash, but they would probably sleep better with the confirmation on the desk, especially in today's tough times.

Flying into uncertain skies. An A319. (Picture: Celway Group/Michael Meier)

Another challenge arrived last week. André Dosé, the Chief Executive Officer left the company with immediate effect. He took the decision to resign due to media reports which claimed that the Swiss Confederation could extend its investigations relating to the loss of a Crossair aircraft near Bassersdorf, Switzerland in November 2001 to individual persons, including André Dosé. He was the CEO of Crossair when the accident happened. The Swiss International's Board of Directors offered him to take a leave for the time of the investigations but Mr. Dosé chose to make room for someone new.

Chairman of the Board Pieter Bouw will assume the function of company CEO in addition to his existing duties. To assist Pieter Bouw effectively in his new dual role, the Board of Directors has also appointed a second Deputy Chairman from its ranks. Walter Bosch has been designated to serve in this capacity. Bosch has also been named as independent Lead Director, to ensure full compliance with all good corporate governance requirements. But this solution is just temporary. The company is now searching for a new Chief Executive Officer.

A lot of people keep saying that Crossair would have been better off without the former Swissair routes. But honestly, Crossair would probably not be on the market anymore. They were much more depending on the SAir Group than Sabena or other members of the group. A large part of Crossair's passengers connected from Swissair flights. Crossair didn't have to fight for those customers, Swissair did that for them. The combined distribution was also a plus, Crossair didn't need any sales offices around Europe. Swissair did already have the infrastructure.

In any case, Crossair would have had to scale the flight schedule back. The airline was in the middle of an ambitious expansion. As sad as it sounds, but they would most probably not have been able to do it on their own.

But again, this is not a discussion to find out whether Crossair was better than Swissair, or whatever. That's the past. Today, there is Swiss International. They are in trouble, as many other airlines around the globe. The problems at Swiss are probably a bit deeper and there's also much more media coverage, especially in Switzerland.

An A320 after take off. (Picture: Celway Group/Michael Meier)

During the last months and weeks, I have been in a lot of discussions about Swiss, not only in Switzerland. I am getting a lot of information out of different sources every day. And when I take all of that in consideration, I'm again much more confident that they will manage their challenges and emerge as a much strong company.

Michael Meier

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Final approach to Zurich. (Picture: Celway Group/Michael Meier)

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