Failure of SWISSAIR

Learning From Corporate Failures
Final Project Report

Submitted to

Prof. P.D. Jose

Submitted by ABHILASH KUMAR SETHI (1111323) RACHANA DONGRE (1111366) KUNDAN MAL VERMA (1111350) DANIEL BOCHNITSCHEK (11E6102) LEELA BHARATH G (1011032)

Dated: 16 January 2013

................................................................................................................................ 12 Appendix ......................................... 5 Evaluation: Reasons of Failure.................................................................................................................................................................................................................................................................. 13 Table 6: Swissair's equity stakes in other airlines ................. 3 Swissair (SAirGroup): Company Profile ...... 13 References ................................................................................................................. 11 Table 5: Sairgroup company structure ................ 4 Table 2: Choronology of events ................................................................................................................................................................................................................................................................................................................................... 2 Introduction ............................ 11 Takeaways and Conclusions .......................................................................................................................................................................................................................................................................................................................................................................................... 14 Table of Figures: Table 1: Swissair growth at a glance (1931-2000)................................................................................................................... 10 Financial Analysis ................. Crossair . 11 Table 4: Breakdown of EBIT by business unit.................................................... 10 Bad Execution...................................................................................................................................................................................................................................... 8 Conflict Swissair vs.................... 13 ................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................. 8 Flawed Strategy .......................................... 9 Governance and Personalities ........................................... 3 Chronological Overview..................................................................................................................................................... 7 Table 3: Financials for five years ........................................................... 8 Influence of Publicity and Media .......................................................CONTENTS Case Summary..............................................................................................................

Even as it became clear that none of the expected network effects became reality the company stuck to the course. one of the most renowned national airlines worldwide. Weak governance structures and high turnover on top management level were compounded by a strong public discussion about the strategic future of the national carrier. it was not able to effectively coordinate its own operations with those of Crossair. Finally the involvement of the Swiss state made decision making from a pure business perspective more complicated. The small Swiss national airline refused to join the large airline alliances which formed in the industry in the early 1990s as a junior partner and tried to build an alternative model by acquiring small local airlines across Europe and companies in related business fields such as hospitality and catering. Further. was the inevitable result of an overoptimistic alliance strategy which was executed by a management that was incapable to realize the point when it was necessary to switch course.CASE SUMMARY The failure of Swissair. This mismanagement over years combined with the external shock of the 9-11 terror attacks finally led to the grounding of the entire Swissair fleet in November 2011. . its regional subsidiary. Media played a major role by favoring individual executives and their course and thus making them untouchable for the supervisory board.

to reallocate jobs and assets to a new national airlines and to keep the connection lines open to and from Switzerland. It was the very first European flagship airline to get grounded. a very strange incident happened in the global airline industry. a couple of days later. the Crossair. The company since its formation has won many accolades including the Best Airlines award in all decades to come due to its high quality strategy stressing on safety. passenger comfort and punctuality. The Swissair collapse is an exemplar in many ways. before its collapse.55% in August 2001. To prevent the permanent closure of the airlines. to prevent the loss of the valuable slots and gates at Swissair’s Zurich hub and other destinations. The entire Swissair fleet was grounded due to lack of liquidity with its parent company. SAirGroup has increased their liabilities because of incessant borrowing by 40% to 18. For many decades. A month later. Swissair had boasted to have one the industry’s strongest financials due to which the company has earned the reputation and nick name of “Flying Bank” internationally. After World War II. It began its operations on 31st March 2002. 2001. but the speed at which it was grounded was exceptional. although the depreciating financials of the company made its decline pretty obvious. Through this paper we would like to elicit the various reasons that had led to the failure of such a giant organization such as incompetence of both the top management and board which has led to faulty group’s alliance strategy and internal coordination failures along with various external factors. SAirGroup has completely lost its equity count and its equity ratio was plummeted to 2. SWISSAIR (SAIRGROUP): COMPANY PROFILE Schweizerische Luftverkehrs AG. the Switzerland government and two of the largest banks of Switzerland. Subsequently.INTRODUCTION 2nd October. Swissair along with some of its subsidiaries filed for chapter 11 bankruptcy seeking protection from their creditors.25 billion Swiss Francs(CHF) (600 CHF per person in Switzerland) to replace SAirGroup with SWISS. UBS and Credit Suisse had pumped in around 4. It was also the first airline in Europe to employ air hostesses on its passenger flights in 1934. SWISS was developed around the most commercially profitable wing of Swissair and the largest regional airline of Europe. or more famously known as Swissair was formed on 26th March 1931. country’s new national carrier. In the last financial year of its existence ending on December 2000. the SAirGroup to pay to the fuel suppliers. Belgium’s Sabena also has to declare bankruptcy in which SAirGroup had 49.5% stake. More importantly. Swissair has adopted the path of fast growth and had become . Swissair was considered analogous to premium comfort and pride by its passengers and a brand of Switzerland. from the merger of Zurich based Ad Astra Aero AG and Basler Luftverkehr (Balair). However. reliability.59 billion CHF. Swissair was also considered to be a trendsetter in many fields of European aviation which included introduction of high speed Lockheed Orion aircrafts in 1932 and many other aircraft carriers in later years as well like Boeing 747-300 etc.86 billion CHF as compared to the previous year and registered negative PBIT for the first time in their career of the order of 2. before the early 1990s.

1931 13 64 10282 20 1946 16 789 62378 15 1970 35 13280 3. at a time reached a peak of 39% of the total operating cost of the company.2:1 debt to equity ratio. But Swissair has always maintained a better figure than this and only once in all its year of operation has it reached close to the figure of 1. Atlantic Excellence: Delta. duty-free. Air France. catering. However after the formation of European Union. SAS and UTA) for joint maintenance activities of wide body aircrafts. ground handling.3% population of Switzerland vetoed against joining the union. Swissair has taken many steps to maintain its ranking in the European aviation industry. aircraft leasing. hotels etc. Austrian Airlines. Swissair was the very first airline to seek close ties with other airlines. From its formation till its grounding in 2001.2 million 218 75% Size of Fleet Number of Employees Number of Revenue Passengers Number of cities covered Break Even Load Factor TABLE 1: SWISSAIR GROWTH AT A GLANCE (1931-2000) Until early 1990s. the entire company structure changed for Swissair. who are highly paid for their work at Swissair. Austrian Airlines. The very first alliance was KSSU group (KLM. KLM. a very conservative depreciation policy helped the company generate a healthy cash flow and reserves. which has increased the breakeven load factor for the company. Swissair was very risk averse as far as the financials were concerned which provided Swissair with one of the strongest balance sheets in the industry and an excellent credit rating. But the high focus on quality and lack of competition has given rise to the problem of more manpower.2:1. (Appendix 1 & 2). Global Excellence: Delta. one being the company policy of having a maximum 1. SAS. where 50. all of which ultimately by 2001 were accountable of half of SAirGroup’s employees and most of its profit. led Swissair to go for further alliances such as: 1. Singapore Airlines However. Two factors were mainly responsible for this. Sabena 3. Manpower costs. Finnair 2. Again the economic pressures created after formation of EU. SAS and Austrian Airlines) to compete against the big three European airlines. Lufthansa and British Airways and .one of the world’s major international airlines both in terms number of passengers carried and passenger miles available. This included diverging from its core competency and investing into non-aviation activities like maintenance and repair. European Quality Alliance: Sabena. Secondly. the airline has firmly secured the rank of 20 among all airlines globally. the failure of the Alcazar project (Swissair.9 million 75 49% 2000 161 71900 19.

Fare and capacity restrictions are further abolished. As a consequence Swissair can’t extend its services to Greece or takeup passengers in Italy. prompted Swissair to reevaluate its alliance strategy.e. intra-European flights with stop-over in a third country and the right to pick-up and drop-off passengers during the stopover. Year 1990 1990 Event Economic Downturn 2nd stage of liberalization of air traffic in Europe Description High oil prices due to the Gulf war induce an economic downturn. It was a series of internal and external events accompanied by severe management mistakes over a period of several years that brought the once innovative and stable airline down to bankruptcy in 2001. After the failure of ALCAZAR Swissair has three options.when most of the previous partner airlines left the alliance to solicit partnership with other big players of European market. The Swiss people vote against a membership in the EEA. This results in an overcapacity of air traffic and competition on price. i. but emotionally not applicable after the ALCAZAR attempt) 1992 Switzerland votes against EEA membership ALCAZAR Alliance fails 1992/ 1993 1993 Strategic decision to form European System under Swissair leadership 1 All used sources listed in References. Also 5th freedom flights. SAS (30%) and AUA (10%) are revealed to the public. After a controversial debate on national levels (“Swissair must stay Swissair”) in all four states. KLM (30%). . the fusion fails due to national discrepancies and public pressure. are allowed to a greater extent. The following table gives a chronological overview 1 of the main events from 1990 onwards and sets the stage for the analysis of failure in chapter four. Details of a planned fusion between Swissair (30%). 1) Continue operations as a single player (difficult due to small domestic market) 2) Merge with a large player such as Lufthansa or British Airways (financially the best option. CHRONOLOGICAL OVERVIEW Swissair did not fail from one day to the other. In 1990 the so-called second package of liberalisation measures allow all European airlines to carry passengers to and from their home countries to other EU Member States (3rd and 4th freedoms).

3) Build a European System / Alliance under Swissair Leadership Swissair Executives decide to go for version three. A new senior management team joins Swissair. Nevertheless. AUA exits the Qualifier Alliance to join Star Alliance under Lufthansa leadership. Swissair aims to grow and gain significant European market share by acquiring small national airlines with a string foothold in their respective domestic market. Swissair rejects to join the Delta . Among others Swissair acquires the German airline LTU which was in severely negative financial conditions. As a consequence Swissair is isolated in its small domestic market. 1995 Swissair acquires 45% stake in Sabena Philippe Bruggisser joins Swissair as COO McKinsey proposes “Hunter Strategy” New senior management team joins Swissair 1998 1999 Formation of the Qualifier Alliance Delta cancels Swissair collaboration and partners with AirFrance AUA exits Qualifier Alliance Swissair acquires equity stakes in the Belgian airline Sabena which has little chances to survive on its own in this very competitive European market and is in a catastrophic financial state. Together with Austrian Airlines (AUA) and its subsidiaries Swissair forms the Qualifier Alliance. Delta Airlines exits the collaboration with Swissair and partners with Air-France in order to establish a Europe hub in Paris. Bruggisser as COO to manage and implement the growth strategy. Before resigning as president of the Swissair Board. Along with a leadership and strategy change. Hannes Goetz signs a contract with the Belgian government increasing the Swissair stake in Sabena to 85%. The Swissair board has little confidence in the current CEO and therefore creates the new position for P.Air-France Alliance as a junior partner. Eric Honegger becomes president of the Swissair board without 1996 1996/ 1997 1999/ 2000 2000 Increase stake in Sabena Eric Honegger becomes new . In their decision they frame risks as challenges. and identify the potential take-over opportunity of the Sabena Airline as “once-in-alifetime” opportunity. management sticks to its course and neglects the offer to join the One-World alliance under the leadership of British Airways.

A study of McKinsey gives complete transparency on the severe financial situation of Swissair. Swissair in unable to pay the required fuel. After joining the struggling airline Mario Conti tries to restructure the airline with his program “Change 01” As a result of the 9-11 terror attacks. Lufthansa grounds 43 of its 300 planes. The entire supervisory board resigns after two independent consultancy reports document the severe financial situation of the firm. Mario Corti (Nestle) takes over. TABLE 2: CHORONOLOGY OF EVENTS Mar 2001 CEO Moritz Suter as well as the entire supervisory board resigns Mid 2001 Sept 2011 Restructuring program “Change 01” 9-11 Terror Attacks 2nd Nov 2011 Grounding of all Swissair planes and cancellation of flights . After discrepancies between CEO and board. After discrepancies with the board about the further development of the Airline Moritz Suter leaves Swissair after a few months. Major US Airlines lay-off people. UBS refuses a credit increase. 2nd largest Swiss airline) takes over. As a consequence. Swissair had to ground all airplanes and cancel all flights. Bruggisser has to leave the company. Also Swissair is affected by drastic decline in demand. air travel declines by 30%. Management does not take action but ends the engagement of McKinsey instead. Further acquisitions are planned. Mr. 39. The board stops the acquisition course. The media praise him as a manager who fought for the sovereignty of the Swiss national airline. Moritz Suter (CEO of Crossair.000 passengers stranded at airports worldwide. Its financial situation becomes worse.president of the board Summ er 2000 Nov 2000 McKinsey’s “Shield” study reveals severe financial situation Board stops further acquisitions and CEO Bruggisser has to leave relevant experience in the airline business. their tickets were not recognised by other airlines.

It started as a regional carrier but slowly it went on expanding its routes in Europe. But it failed to understand the importance of European market for its very survival as it was the firm base from which it operated. Cooperation between the two could have provided them with much large economies of scale and potentially save Swissair from its collapse. negative media coverage. To counter this negative impact. In 1992. This led to both airlines running parallel strategy with same kind of implication. But Swissair top management never cared for going ahead with such strategy. It made partnership agreements with Delta. Instead of operating freely in key European destinations. Alcazar project (Alone Carriers Zigzag At Random) was a secret negotiation among Swissair. SAS and Singapore Airlines etc. Swissair decided to go ahead with its “Alcazar project”. Switzerland declined entry into EEA (European Economic Area). At last. Insight: Swissair put all its eggs in one basket without worrying about other alternatives. While Swissair was pursuing its “Hunter strategy”. Crossair was working on its “Eurocross strategy”. SAS. Swissair acquired a minority stake in Crossair which it increased to majority stake later. As Crossair was operating on some of the same routes where Swissair was already present. CONFLICT SWISSAIR VS. Austrian airways and KLM to form an unprecedented alliance. it gave Swissair an opportunity to consolidate both airlines on such specific routes to lower operating costs and increase efficiency. CROSSAIR Crossair was established in 1978. It required cooperation from both airlines. to get its hold in other important markets as well. This hit Swissair badly. This resulted in Crossair competing with Swissair in its small Swiss market. . It led to cumbersome renegotiation process which deprived it of its early advantages. it could not sustain the ambitions of other partners in the project. So an organization should not concentrate all its efforts on one initiative. It was to start with a greater level cooperation where merger of all entities to form a large airline was the ultimate motive. But there were lot of organizational issues. ownership problems and political pressure which finally led to termination of this project. This failure resulted in significant loss of time and efforts on Swissair’s part. it had to go for individual cooperation treaties with regional airlines of respective countries. it should diversify the risk so that it does not fall flat in case of failure. The failure of strategy resulted in time and efforts loss for the management of Swissair and this gave some advantage to rivals.EVALUATION: REASONS OF FAILURE FLAWED STRATEGY Swissair was the first European airlines which tried to collaborate with other regional airlines in other continents to make its presence felt there.

Two examples shall demonstrate this issue. a pure business decision is radicalized and lifted to the level of politics. During the debate.geschichte-schweiz. Swissair is not just the most beautiful bride. In the article2 “Swissair muss Swissair bleiben” (Swissair must stay Swissair) the chief editor of the paper stated: “In the planned wedding between the four airlines. This short chapter will certainly not argue that this was a main cause of the company’s failure. Supporting the option to join the alliance is framed as treason. The second example points out how the media (again “Der Blick”) tend to personalize news coverage. It is the prey. the newspaper made it hard for the company’s managers to take a free. but public pressure on individual managers and management teams certainly limits their freedom in decision making and contributes to bad management choices.” 3 Although the statement is completely unqualified from a business perspective. but it is worth to recognize the media-induced pressures executives of large and prominent firms are exposed to whenever there is a crisis and they are responsible to make the final call. This shall not count as an explanation why the company failed. 2 3 http://chronik. it makes it hard for members of the supervisory board to find convincing arguments supporting the change in strategy. at least he tried: creatively and persistent. Cooperation instead of competition should be the moto in such industries for all the players to be profitable in these kinds of markets. When it became clear that CEO Bruggisser had failed with the Hunter Strategy and the supervisory board stopped his course and even considered selling the airline. Swissair executives were constantly under pressure having to comment on the company’s shape and further development. Both examples demonstrate how big the pressure of public awareness can get and one can image that sound decision making certainly becomes very difficult if the reaction of publicity and media always needs to be considered. The first example relates to the plans on forming the ALCAZAR alliance. “Der Blick” again provoked national sentiments by stating: “Philipp Bruggisser fought like a lion.html http://chronik. non-biased decision. In the case of Swissair there were many similar incidents. a management hero. a newspaper comparable to the English yellow press with a high national circulation. In particular “Der Blick”.ch/swissair-debakel-grounding. He is a hero. There a too few people like him… even if he should fail.geschichte-schweiz. went beyond its pure information function and gave the discussions a clear spin towards national interests and sentiments.” Through such comments. full utilization of resources alone can give competitive advantage.html . INFLUENCE OF PUBLICITY AND MEDIA The fact that Swissair was a national airline raised the attention of the media and publicity extraordinarily.ch/swissair-debakel-grounding.Insight: In capital intensive industries like airlines.

took unnecessary risks of alleviating the financial condition of the members of the alliance and also targeted some of the bigger players in the aviation industry (Italy). kept in pouring more money (4. Board members were often chosen because of their political or banking connections. Swissair in desperate attempts to capture market share. Apart from that. Swissair CEO Phillippe Bruggisser came under attack from outsiders for taking an acquisition strategy instead of that of making regional alliances since whatever new airlines Swissair had acquired were having serious financial difficulties and operating in lower market segments. Many times management took rash decisions which were motivated by political and social compulsions rather than economical ones. National symbol and pride became more important than shareholder’s interests. This compelled management to work in congruence of political and societal agenda of Swiss government which ignored economic implications. This allowed entry of non-professional into Swissair which led to bad decisions and ultimately its collapse. They should have implemented the strategy at a slower pace with pilot studies in between to know the effectiveness of the strategy. This strategy stemmed from the need of political control of this organization which represented Swiss national pride. The day-to-day decisions were taken by executives but the real power rested with board which was mostly appointed by political elites. this led to failure of organization Insight: public sector enterprises should give more emphasis on meritocracy within the organization.GOVERNANCE AND PERSONALITIES Swissair went for “Hunter strategy” of acquiring small players instead of seeking for alliances. BAD EXECUTION Bad Execution of Hunter Strategy has led to the failure of Swissair. This significantly degraded Swissair brand name. it must push for strong corporate governance within the organization. At last. If organization wants to avoid failure. Addition to this.1 billion CHF when the maximum was set to 300 million CHF). Many political appointees who had little knowledge of aviation industry spoiled the chances of any growth by making illogical decisions. They thought that Bruggisser was playing power control game instead of worrying about company’s profitability and image. Corporate governance of Swissair was also ruined by intervention of Swiss law. system of corporate governance in Switzerland at that time was such that political and societal norms were given priority over financial and economic norms. Swiss government had 30% stake in Swissair which allowed it to decide who the CEO was and how he was to conduct business. . This has put more pressure on Swissair financials which has ultimately led to its failure. For example. Strength of corporate governance decides the effectiveness of checks and balances in the system. It was CEO’s decision which even board members were also not happy with. There was no clear segregation of power between management and board.

Even worse for Swissair was that. Moreover. In September 2000.FINANCIAL ANALYSIS From the financial data it can be seen that. Swissair spent around 4. Before that. the EBIT for the company has seen a sudden depreciation in 2000. majority of the investments made by Swissair during this period were making huge losses. Swissair realized that the hunter strategy has failed and the board has to strategize the exit scenario of several of its loss making investments. which has led to huge cash outflow from Swissair. led to the dilution of brand image of Swissair as well as it also eradicated their ability to charge price premium from their consumers. the pride of being the national airlines of Switzerland and the hunger to capture European market share has led Swissair to take full responsibility for its partner’s financial obligations. In fact. with an aim to capture 20% of the market share in Europe. in all its alliances. Swissair also was forced to pump in liquidity to keep many of its financially struggling airlines afloat so that the alliance is maintained. who had always considered Swissair as a premium airlines. All this factors along with the terrorist attacks had led to consumers not opting for Swissair which had caused SAirGroup to see negative EBIT (111 million CHF) for the first time in the FY2000. In million CHF Total Operating Revenue EBIT Net Profit(loss)/year Liabilities Shareholder’s Equity EBIT by division (million CHF) SAirLines SAirServices SAirLogistics SAirRelations SAirGroup SAirLines Investments Total EBIT 1996 8212 344 (497) 1997 10556 658 324 1998 11297 700 361 1999 13002 643 273 13673 4181 2000 16229 (2592) (2885) 19055 1160 Liabilities and Shareholder Equity 9708 10191 11181 2109 2439 3549 TABLE 3: FINANCIALS FOR FIVE YEARS 1997 264 127 43 181 43 658 1998 354 145 33 153 15 700 1999 188 165 6 269 95 (80) 643 2000 35 162 99 300 68 (3256) (2592) 2001 138 (6) 17 56 (111) (137) (43) TABLE 4: BREAKDOWN OF EBIT BY BUSINESS UNIT . Swissair enjoyed a very strong financial status and is considered as the flying bank of the world. the alliance with low cost airlines just to capture market share. The Hunter strategy was adopted in 1997 and was implemented in 1998 when the Qualifier alliance was created. Till 1999.1 billion CHF for purchasing significant shares in variety of airlines. The huge amount of loss caused in the FY2000 can be accredited to the widespread equity based alliance forming Hunter Strategy adopted by Swissair.

There are a lot of things to learn from the case of Swissair: 1. Thus brand communication and a good brand image is very much necessary for success. 5. But Swissair took the risk and pumped in 4. knowing that it is a very small airline considering the liberalization of European aviation sector where Switzerland is not a member nation. the perception of the brand changed among consumers.1 billion CHF into the Hunter Strategy and also targeted bigger economies like Italy. Prevent cannibalization Swissair managers allowed Crossair to set up another hub at Basel and start its operations independently. It cannibalized the operations of Swissair which had hub in Zurich. Managerial Hubris: Managerial hubris is one of the main reasons of a lot of corporate failures. who are the business class people who generally are ready to pay more money for better services. . the strategy failed miserably creating a situation where the airline was not even able to fund refueling of its fleet. This has led Swissair to make desperate attempts to gain market share and was grounded completely. 4. Proper implementation of strategy As per the Hunter Strategy suggested by the consulting company. Instead they went in and created alliance with several smaller airlines where they could be treated as the undisputed leader. Swissair denied forming the alliance and instead chose to compete against them for market share. 3. That is the reason they did not accepted the alliance with bigger airlines like Ari France and Lufthansa with the fear that they will be treated as a feeder airlines.TAKEAWAYS AND CONCLUSIONS The case of Swissair can be considered as an amalgamation of corporate faulty decision making and a collusion of many external factors as well. The pride of being the national carrier of Switzerland has made the management over confident about the airlines. Grab opportunities When the big airlines approached Swissair for alliance after the formation of EU. But as is the case in front of us. started dumping Swissair for other airlines. The regular consumers of Swissair. Proper brand communication and strategizing accordingly Swissair is positioned as a premium brand in the mind of the consumers. When the company started forming alliance with low cost struggling airlines. Instead Swiss air should have worked in association with Crossair in developing their business. 2. Thus proper implementation of strategies is a key driver in success. Swissair was supposed to target only the small countries and the maximum investment was set to a maximum of 300 million CHF.

APPENDIX TABLE 5: SAIRGROUP COMPANY STRUCTURE TABLE 6: SWISSAIR'S EQUITY STAKES IN OTHER AIRLINES .

5.de/unternehmen/artikel/0. Markus: Das Swissair Dabakel.co. URL: http://ec.wikipedia. and Arndt. A.REFERENCES BBC News: “Swissair grounds all flights”. Bd.org/wiki/Alcazar_(airline) Nwabueze.geschichte-schweiz.ch/swissair-debakelgrounding.bbc.europa.html (German) Wikipedia: Alcazar. URL: http://chronik. Materialien des Wissenschaftsschwerpunktes „Globalisierung der Weltwirtschaft“.html (German) Knorr.co. U.stm European Commission: “History Market Integration”. September 2003 Manager Magazin: „Der Absturz der "fliegenden Bank" .160189.: “Swissair’s Collapse – An Economic Analysis”. 2008 . No.eu/transport/modes/air/internal_market/integration_history_en. URL: http://news.00.eine Chronik“.2828. 8.uk/2/hi/business/1574658. A.htm Jud. in Corporate Governance. URL: http://en. Vol. URL: http://news.: “The challenge of effective governance: the case of Swiss Air”.stm BBC News: “Thousands stranded in airline crisis”.manager-magazin.bbc. and Mileski. J. URL: http://www.uk/2/hi/europe/1577609. 28.