SwissAir Scandal

Scandals in the corporate world, whether centered around corruption, bribery, fraud, or other
greed tend to have a significant impact on the economy as a whole, and while most companies are
destined to fail at some point, there are a few that do so in such a spectacularly corrupt manner that they
make headlines.
Accounting fraud is intentional manipulation of financial statements to create a facade of a
company's financial health. It involves an employee, account or the organization itself and is misleading to
investors and shareholders. A company can falsify its financial statements by overstating its revenue or
assets, not recording expenses and under-recording liabilities.

Swissair The Flying Bank

Swissair was for many years the national airline of Switzerland.
It was formed from a merger between Balair and Ad Astra Aero , in 1931. For most of its 71
years, Swissair was one of the major international airlines and known as the "Flying Bank" due to the
financial stability of the airline, causing it to be regarded as a Swiss national symbol and icon.
With the beginning of deregulation and liberalisation, airlines felt growing financial pressure. In
1978, Moritz Suter founded a regional airline named Crossair, which put Swissair under stress. To counter
these changes, Swissair invested their large financial reserves into takeovers and into flight-related trades
like baggage handling, catering, aircraft maintenance and duty-free stores. This strategy diversified
economic risks at the expense of the core business of Swissair - commercial aviation.
Swissair Group was the parent company for SAirlines (to which Swissair, Crossair, Balair and
FlightLease belonged), SAirServices, SAirLogistics and SAirRelations.

Swissair hoped to be a major force in European aviation.

Switzerland, situated in central Europe, is not a member of the European Union. In the early
nineties there was a possibility that Swissair would enjoy the same rights as EU community carriers if the
Swiss people voted in favor of joining the European Economic Area. Despite a very active publicity
campaign, partly financed by Swissair, in favour of a yesvote the Swiss people rejected (by a small
majority) entry into the European Economic Area in late 1992. Swissair management was very
disappointed by this decision and faced major strategic choices about how it was to develop its business
from its position outside of the EU.
Until the start of the 1990s the profits of airlines were secure due to the high degree of regulation
and price agreements. Following deregulation in the early 1990s, the results of Swissair came under
pressure. The CEO in the early 1990s, Otto Loepfe, was a man with an airline background who had to face
the competition created by deregulation in Europe. In response to these pressures Swissair first tried to
form an alliance (under the name Alcazar) with KLM, Austrian Airlines and SAS. This project was
unsuccessful and negotiations were terminated in November 1993. As a result, Swissair had to look for
other means to face the\ stronger competition caused by the deregulation in the EU and to circumvent their
aeropolitical isolation.
In the 1990s Swissair initiated the controversial Hunter Strategy, a major expansion programme
devised by the consulting firm McKinsey & Co. Using this strategy, Swissair aimed to grow its market
share through the acquisition of small airlines rather than entering into alliance agreements. Swissair
decided to acquire 49.5 percent of the very successful Italian charter airline Air Europe, the unprofitable
Belgian flag carrier, Sabena, and significant stakes in the carriers Air Libert, AOM, Air
Littoral, Volare, LOT, Turkish Airlines,South African Airways, Portugalia and LTU, and planned to
acquire stakes in Aer Lingus, Finnair, Malv, as well as Brazilian carriers TAM and Transbrasil.[7] By mid2000, it was predicted that Swissair would lose between CHF 3.25 billion and 4.45 billion over the next
three fiscal years.
Until 1990 Swissair(or Swiss Air Transport Company Ltd) only published individual accounts in
Swiss GAAP. From 1991 onwards the Swissair Group published consolidated accounts
On May 4 th , 1995, Swissair acquired a large minority shareholding of 49.5% in the capital of
Sabena, the Belgian state owned national flag carrier. The investment deal between Swissair and Sabena
was structured so that it formally complied with the EU regulation on passenger air transport. Through the
EU approval of this acquisition Sabena still qualified as a community carrier yet it gave the Swiss airline
group access to the EU air transport market. In addition to the investment of 49.5% in the share capital of
Sabena, a loan of 151 million Swiss francs (CHF) was granted by Swissair to the Belgian government
which held the remaining 50.5% of the share capital. This loan entitled Swissair to raise its equity holding
in Sabena from 49.5% to 62.25% when the bilateral agreements between Switzerland and the EU would
change in the future. Then Sabena would no longer lose its community carrier status by having a Swiss
majority owner. At the time of the acquisition in mid 1995 the aim of the investment in Sabena was stated
to be to develop a single airline group concentrated around the two equal hubs of Zurich and Brussels. The
airlines were considered to be the core business of the Swissair group although other airlinerelated
activities were performed.

Swissair crises
Chaos ensued when all Swissairs European flights were grounded on the morning of October 2,
with all other international flights being cancelled the same afternoon. Swissair desks in all the major
airports were shut down, with nobody from the company being available to give advice to stranded
passengers, who were offered neither alternative flights nor cash to pay for a hotel room.
The following days were marked by a contradictory and confusing mish-mash of mutual
recriminations, as management, banks and politicians blamed each other for the collapse.
Communication difficulties between the banks and management, and also the crisis in aviation
following the September 11 events in the USA were given as the main reasons for the debacle, with the
banks being presented as the chief culprits. But for this small circle of bankers, business leader and
politicians, the collapse of Swissairone of Europes largest and most renowned airlinesdid not come
as a surprise.
Sabena was declared bankrupt on November 7, 2001. Thousands of employees lost their jobs in
Switzerland, Belgium and in other countries in which the two airline groups were active.
A crisis had been building up at Swissair since the end 1999. For the first time in its 70-year
history, the company recorded a loss in 2000, amounting to 2.9 billion francs ($1.8bn) and which
consumed almost its entire capital reserves. The companys debts exploded over the course of this year,
reaching 15 billion francs ($9.2bn) by September 28, up from 6.8 billion francs ($4.2bn) at the end of
December 2000.
Subsequently came out that Swissair has no money even for kerosene, and this was the critic
moment when its share price crashed from 61$ to only 0.78$, predicting the company's bankruptcy.
Why did this happened?
There are many causes:
- The market liberalization on 1978,
- Higher costs with personnel- employee wages were higher then in other airlines
- The incapacity of management to reduce costs
- Negative context for airlines after September 11, 2001 The terrorist attacks in the U.S. led to a slump in
demand and consequently to an extreme tightening of liquidity.
- The indebtedness created by an uncompromising and too little adapted to the realities of implementation,
"Hunter strategy" and the lack of monitoring by the Board.
- Difficulties in communicating with banks
- The management underestimated the dangers and difficulties in acquisitions and investments of partially
ailing airlines. So the Belgian Sabena and the German LTU were taken despite the significant capital
requirements. In addition, the investments in France (AOM, Air Libert and Air Littoral) required much
capital restructuring. Sabena ultimately ceased operations, due to the aforementioned financial crisis.

- An orderly transfer of operations at Crossair was denied by the failure to reach a bridging loan and the
delayed transfer of the share purchase price.
Advised by McKinsey & Co, Swissair followed the so-called "hunter" strategy: it bought stakes in
small European airlines, and this was one of biggest mistake that they made. The condition of each deal
was that partners switched to Swissair for all their retail, catering and aviation service needs. Swissair
spent $1 billion on such purchases, on top of similar amounts spent building up its catering operations.
However, nearly all the airlines Swissair was buying had financial difficulties: they had high costs
and active trade unions, which prevented any meaningful action, so Swissair had to put money into them
while restructuring.
When Swissair made a large minority investment in Sabena (Belgium), it failed to judge the
difficulties associated with transforming a government-controlled company. Often a lack of adequate due
diligence, whether building a new plant or making an acquisition, exacerbates the problems. Tyco did not
research the cable market adequately.
The airline, once the pride of Switzerland, was grounded in October 2001 after oil companies and
airports refused to extend any more credit when the airline couldn't pay its fuel bills and landing fees.
According to the financial press and airline specialists the cause of the collapse was the growth
strategy followed by the SAirgroup in the second half of the nineties. Their conclusions was that the group
had succeeded in creating a perception about its corporate financial performance that was substantially
different from the underlying economic situation, and that accounting choices and disclosures1 had played
a major part in this deception.
In the individual accounts published by Swissair in the 1980s we notice that in all years except
1986, substantial amounts of supplementary depreciation had been recorded and hidden reserves were
created when the actual aircraft load factor was above the breakeven aircraft load factor. These hidden
reserves were released in the opposite situation,which occurred in the early nineties (19911994).So the
flexibility of Swiss GAAP thus allowed Swissair management in the 1980s and early 1990s to smooth
income and to shift earnings into the later years, providing the perception of smooth and continuing good
performance.(pag 25 26 din pdf destop).
In January 2007 it was a trial the trial, expected to last into March 2007, where defendants(exexecutives of Swissair Group) face charges of breach of fiduciary duties for fraudulent authorizations,
false reporting of business and creditor preference, dishonest management and personal income tax fraud
among others. Former Swissair directors, managers and advisers face charges including breach of
fiduciary duties for fraudulent authorizations, false reporting of business and creditor preference,
dishonest management and personal income tax fraud.
Throughout the 1990s, Swissair utilized several methods, including income increasing accounting
accruals, to create an inaccurate perception of financial strength. This perception of strength allowed the
company to pursue a growth strategy instead of addressing its problems. This strategy ultimately resulted
in bankruptcy and liquidation for the airline

In a January 2003 report, Ernst & Young stated that Swissairs management and board approved
accounts that contained grave errors and pursued a careless expansion strategy, according to
Bloomberg. The Wall Street Journal observed that the company bought interests in unprofitable carriers
including Belgiums Sabena, as well as in France and Portugal, that weakened its balance sheet

Conclusion
SwissairSwissair, a former national airline of Switzerland and major international airline,was
grounded in October 2001 due to a bad expansion move. With 30% of its shares in stocks owned by the
Switzerland government, the company implemented the Hunter Strategy, a major expansion program.
However, this resulted in a financial crisis that also affected its parent company, SAirGroup, which was
already hurt by the September 11 attacks. As the entire Swissairfleet was grounded and officially
dismantled in March 2002.

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