Nevertheless, Godfroid deserves some credit for getting Sabena into the sort of shape to allow financially prudent Swissair to invest a total of some $370 million, gaining a 49.5 per cent stake. A workforce reduction of over 20 per cent since 1990 and substantial salary cuts, added to passenger numbers growth of 41 per cent in the last three years, have boosted Sabena's productivity by an overall 25 per cent, placing it respectably among its European rivals. Passenger surveys confirm a significant improvement in Sabena's service quality and image - it is no longer one of Europe's laughing stocks.
This will have impressed Swissair, but would not in itself have been enough to justify its investment. Godfroid's development of Brussels as Europe's only true US-style hub-and-spoke operation, in the face of much scepticism from analysts who felt the strategy would not cross the Atlantic, is the clincher. While it is probably premature to toast the final success of this strategy - Sabena is not yet profitable - Swissair has been impressed enough with progress so far to want a significant part of it. And, as Godfroid points out, this is a worthy vote of confidence. 'Four years ago, Swissair would never have accepted [our invitation] to get in touch with us,' he says.
That progress chiefly rests in the restructuring of Sabena's intra-European operations at Brussels whose aim is high passenger growth to improve productivity further. As Godfroid readily admits, there are no more spectacular gains to be made through cheeseparing. European flights are now grouped into three US-style morning, early afternoon and late afternoon waves, allowing a minimum level of one-day return flights to almost 60 cities, including all major capitals and regional centres. The hub strategy, says Godfroid, allows Sabena to connect destinations which could not support point-to-point services. Bald figures suggest he is right - European traffic grew 17.3 per cent in 1994, and over 21 per cent in the first half of 1995, while load factors have also improved.
How has Sabena confounded the critics? Godfroid offers three key factors: 'First, Brussels is the headquarters of Europe - this is a privilege. Second, the geographical position is ideal. Third, there is still capacity available at Brussels - we have the same runway capacity as London/
Heathrow, although we still need better road access.' This allows Sabena to pursue its ultimate aim of offering three daily connections to each national and regional capital via Brussels.
But Brussels still lacks inter-continental services, whose presence would boost further the economic performance of Sabena's European operation and plug the mid-day gap between Brussels' morning and early afternoon waves. 'This would make our hub profitable,' he says. Swissair and partners Delta Air Lines and Singapore Airlines enter the equation here - the alliance trade-off is Sabena's European presence for Swissair's inter-continental potential. And, of course, its money.
Experience from previous false starts and alliance failures (Sabena with Air France and British Airways/KLM; Swissair with Alcazar and the European Quality Alliance) have helped shape the systems and objectives this time. 'What we learned is that it's difficult to build an alliance with two partners, and with three or four it's almost impossible', says Sabena's leading official charged with developing the alliance, executive vice-president Patrick du Bois. 'Also, state influence played a part; with Sabena this has now disappeared, and we and Swissair are both guided only by the bottom line and market shares, so we have a common objective.' Crucially, alliances only work if middle managers understand these objectives and believe in them; senior executives define the mission, but line managers apply it. Du Bois hints that this is chiefly where the Air France link failed; the bulk of Air France gave priority to integrating UTA and Air Inter rather than working with Sabena.
The new alliance's management structure is headed by a steering committee of Godfroid and Swissair chief executive Otto Loepfe. Below this is a 10-man project management group, headed by the duo of du Bois from Sabena and Swissair vice-president Alain Bandle, equally split between the partners and including a representative from consultants McKinsey. This group channels down the corporate mission to 13 sub-committees, each consisting of equal numbers of senior managers from each airline. The sub-committees are: route networks, including fleet planning; alliances and antitrust (chiefly concerned with possibilities relating to Delta); product design; distribution; sales organisation; ground operations; maintenance; information technology services; cargo; catering; corporate centres; human resources; regional airlines - Crossair and Delta Air Transport (Dat); charter traffic; and flight operations.
Little concrete alliance activity will be possible before the summer 1996 schedules. At presstime, only one aspect had been agreed and was in process; the integration of the two airlines' frequent flyer programmes, and bringing Delta and Austrian into the FFP loop. Other firm decisions taken include: upgrading Sabena service closer to Swissair standards (although, du Bois stresses, this does not mean matching Swissair at any cost); strengthening the Brussels-Zurich and Brussels-Geneva routes by adding sixth frequencies and rescheduling into a shuttle operation in time for the winter 1995 season; moving Sabena to Swissair's terminal at Zurich; transferring Sabena groundhandling in Switzerland to Swissair, and Swissair handling at Brussels to Sabena; examining regional and charter collaboration; and standardising electronic data operations, with Sabena contracting into Swissair's systems.
'Back office' marketing operations in Belgium and Switzerland will be integrated but each airline will retain separate brands and have separate sales points and staff - an acknowledgement that the partners have different markets and brand images. Codesharing in Europe is likely from the summer 1996 schedules, while the network sub-committee is examining the issue of codeshare rights between Switzerland, Belgium and third party states.
The route sub-committee, suggests du Bois, will be more concerned with identifying new opportunities than eliminating duplication. 'The objective is definitely to make more sales and increase joint market share, together with Delta and SIA. The clear goal is not to drop services, but to increase them.' The airlines view their networks as complementary, given Sabena's long-haul cutbacks since 1991 and focus on European hubbing. The network fit will work primarily through a series of two-leg flights, with Sabena's European network feeding via Brussels to Swiss cities, and Swissair's long-haul services feeding Brussels via Zurich and Geneva. Swissair's existing European network will run parallel with services via Brussels to Sabena's coverage of capital cities and regional centres, scheduled to expand by 20 or so new destinations on the current 58 over the next three years. Swissair is weaker in western Europe but stronger in eastern Europe and northern Italy - areas where Sabena is relatively weak.
In long-haul markets, Sabena is limited in North America, offering joint services with Delta to New York, Atlanta, Chicago, and Boston (some linking with Sabena services to Germany), while Swissair and Delta offer 10 destinations, a strength Delta extends to the US hinterland. Sabena has no presence in central and south America, and in Asia only serves Tokyo. Swissair remedies these deficiencies, and adds the Middle East and Indian sub-continent. Even in Africa the overlap is minimal; Sabena is primarily in the north, east and south, while Swissair is strong in west and central Africa.
'While there is room for schedule changes in markets where we both fly, the objective is definitely to strengthen market presence,' stresses du Bois. He confirms that alliance services are likely to represent most inter-continental growth into Brussels over the next two years, although Sabena will develop some long-haul services in its own right as its A340s return from Air France. 'North America is certainly a priority, together with Delta, while with Swissair we can do, say, Zurich-Brussels-Rio, or Brussels-Geneva-Caracas.'
The frequency with which Delta's name surfaces confirms that Sabena will do its utmost to strengthen ties with Swissair's Atlanta-based partner. 'We would love to convince [Delta] to develop their activities in Brussels. We have to build on the strength of each partner, and Delta's strength is the US domestic market, and ours is home markets,' says du Bois.
Synergies and rationalisation are certain in cost areas such as maintenance and catering. 'New aircraft are more reliable, and there are good independent repair shops, so we have to examine our own efficiency,' says du Bois. 'Independent shops can offer very good quality and service at maybe 15 per cent to 20 per cent lower cost than our home repair shops. We have to decide whether we can afford to maintain technical services which are not competitive with others. Quality, yes - but not at any price. For example, we both have Airbus A310 D-check shops; do we need them?' Similar 'value-for-money' decisions will be made in catering, where Sabena's operation will collaborate closely with, and bring its standards up to, Swissair's Gate Gourmet.
Each airline is making no firm claims about the overall financial benefits of their link - a case of once (or even twice) bitten, twice shy. And Sabena is not entering the deal with any sense of inferiority, recognising that their side of the trade-off is (aside from the equity investment) probably more vital to Swissair than Swissair's is to Sabena. And Swissair might learn something from Sabena about radical restructuring, claims du Bois. 'We carried out our revolution over the past four years, but Swissair has still to do this - to make themselves competitive on a value-for-money basis.'
Sabena's new-found confidence is unmistakable, but some cautionary notes should be sounded. Its 'revolution' was considerably helped by the 1991 recapitalisation which, including significant state aid, was worth some $1.8 billion and helped ease the pain of staff cuts. While it has closed the productivity and service gap on its rivals, it has not achieved anything like a competitive advantage. And profits remain elusive - Godfroid predicts group operating profits in 1995 about the same as 1994's BFr1.3 billion (US$38.9 million) on sales of US$1.8 billion, but a net loss is still likely, due to excessive interest charges and delays in closing the Swissair deal. Last year group net losses dropped to $38.1 million from 1993's $131.3 million.
Alliance development aside, fleet renewal and standardisation is the major task facing Godfroid before his term of office ends in 1998. On 30 August, Godfroid was set to make his choice of a new regional fleet between the Fokker 70 and Avro 85, to replace the mix of 25 older Boeing 737s, F28s and BAe 146s now used by Sabena and regional subsidiary Dat. The 23 firm orders (to be delivered over five years) are worth around $400 million, on top of 15 options. Sabena requires the winning manufacturer to offer some instant short-term capacity, so that Godfroid can, from October, start getting rid of the ancient BAC1-11s and F28s hired to cope with the intra-European traffic boom, and which have undermined Sabena's costs and image. Sabena will also speed up aircraft refurbishment.
The regional fleet decision is a major component of Sabena's development of the Brussels hub. In 1991 Godfroid decided to use Dat in the same way that Swissair uses Crossair - as a lower-cost supplier to the major for specialised markets, yet offering the same level of service under a joint brand. Dat's costs are between 35 and 40 per cent lower than Sabena's, and it now generates over one-third of group income; fixing on one new regional type will bring a profits boost of at least BFr500 million ($17 million) a year, says Godfroid. Union agreements allow Dat's cost structure to apply on all services by aircraft of up to 80 seats.
That will be followed by medium-haul renewal of the current Boeing 737-based fleet, and Godfroid hints strongly that Sabena will follow Swissair and opt for the Airbus A320. In the long-haul sector, Sabena is taking back the four A340s now sub-leased to Air France, two in summer 1996 and two in 1997. Further long-haul decisions depend on alliance progress. Godfroid sees the group as basically standardising on one type each for the regional, medium-haul and long-haul sectors, replacing the current mix of nine types.
At last, he stresses, Sabena has the capital structure and depth of 'financial know-how' to back up these plans. Swissair's BFr6 billion share investment plus BFr500 million purchase of non-voting certificates, together with the BFr1.5 billion invested by a state-owned entity and BFr2 billion from a consortium of Belgian investors, add up to an equity injection of BFr10 billion ($339.3 million). Long-term debt, already cut from BFr40 billion to BFr30 billion ($1 billion) in four years, is being renegotiated, while cash and equity together now total 30 per cent of balance sheet value. 'We are in a position to compete' in the financial markets, says Godfroid.
Two problems continue to afflict Sabena's prospects. First, the strengthening of the Belgian franc is eroding the value of the airline's revenues, of which 70 per cent are in foreign currencies. This is now costing Sabena around BFr2 billion a year, says Godfroid. But there is little he can do apart from continually reminding economic policy-makers that the entire Belgian export sector is hurting, and that each franc of airline revenue generates another five francs of spin-off production.
Second, there is the old European bug-bear of 'social costs' - that state-required element of payroll costs over and above gross salaries. The usually urbane Godfroid becomes positively animated when he says that, for Sabena, social costs add 36 per cent to payroll costs, compared with 10 per cent for British Airways and just 5.7 per cent for new partner Swissair (although, of course, Swiss basic salaries are much higher, especially in Geneva and Zurich).
A leaked suggestion that Sabena would 'delocalise' some staff costs outside Belgium caused controversy last year. Godfroid, asked if this is still a possibility, is very careful. 'If Europe wants us to compete, then Europe must allow us to do what we can to use our assets - including human assets - and not land us with artificial handicaps. Can you imagine our profits if we had to pay, not 36 per cent, but just 5.7 per cent?' he asks. 'It's heaven - I can take two years holiday!' he adds.
Can Swissair help? No details are offered, but Godfroid seems determined to explore the full potential of Sabena's new partnerships. 'The opportunity is historic, with Swissair, Delta, SIA and Austrian. I think we should be audacious, and try to question a lot of things. I think Swissair has the same view of the possible structural and financial results; we will see what each can do with some of the other's assets.' Perhaps he has in mind nothing more audacious, say, than rationalising maintenance or catering operations. But, beyond these cryptic hints, he will not be drawn.
There is one immense incentive for Sabena to make the alliance work. Switzerland is likely in the not-too-distant future to become an associate EU member in transport matters, possibly solving the market access problems. If the partnership is less than successful - and for both partners, that means the European hub strategy - there may be a fallback position for the Swiss which would leave Sabena vulnerable. After the Air France divorce, Sabena's second marriage just has to work.
Source: Airline Business
