COLIN BAKER LONDON

After the events of 11 September put paid to Swissair's recovery plans, there was much public mud slinging as Crossair, the banks and the government picked up the pieces

After spending most of 2001 in a critical condition, Swissair finally had its life support system switched off by the banks in early October after it became clear that the events of 11 September had scuppered any hopes of recovery. With the sudden grounding of the Swissair fleet on 2 October, a plan to create a separate holding company encompassing both Swissair and Crossair was ditched. Instead, the government and the country's two largest banks, UBS and Credit Suisse, are trying to bring the flag carrier back to life through a complex reverse merger.

UBS and Credit Suisse have purchased Swissair Group's 70% stake in regional Crossair and are using the latter as a vehicle to relaunch Swissair. This takeover, described by one analyst as "an unclear set of transactions", has left observers asking many questions.

Crossair chief executive André Dosé made clear early on that his airline would need total new capital of SFr2.3 billion ($1.4 billion) to make the takeover work. What is certain, is that the regional carrier will need major financial support if it is to maintain the bulk of the Swissair short-haul services as it waits to take over the long-haul licence next March. It has currently taken on some 70% of Swissair's fleet and flights.

UBS and Credit Suisse quickly put up SFr350 billion of new capital as well as opening fresh credit lines. The Swiss Government too provided a SFr450 million bridging loan and is preparing to pay more, but wanted first to persuade the Swiss business community to help out. Berne spent much of October begging Swiss multinationals to dig into their pockets to ensure they would continue to benefit from Zurich's hub status and help provide around a third of the additional SFr1.5 billion capital required.

Another potential investor could be Texas Pacific, the US venture capital group headed by entrepreneur David Bonderman. The group, which helped bail out Continental Airlines and America West in the early 1990s, has indicated an interest in the new airline.

Although Switzerland is not within the European Union (EU), if it is not to jeopardise its flying within the European single air market, the Swiss Government will have to pay close attention to the guidelines coming out of Brussels regarding state aid.

Neither is Swissair itself now in any position to go ahead with the cash injections originally planned for its affiliates such as Sabena and the French regional operations. Air Lib, the relaunched AOM/Air Liberté, had already received Fr1.05 billion ($147 million) from Swissair but is due a further Fr250 million. Air Littoral has secured Fr750 million, but is Fr100 million short of the full amount promised. The Belgian Government had agreed with Swissair that it would join in providing a c430 million ($390 million) capital injection for Sabena.After Swissair's collapse it was quick to threaten Crossair with court action if the money did not appear.

In Switzerland, the rump of the Swissair Group, encompassing non-flying businesses, the cargo division and the grounded passenger operations, has filed for court protection. This remnant also holds the huge Swissair debts, which had become a burden long before 11 September. One legal consultant to the airline industry predicts that creditors will be lucky to get ó18 for every dollar they are owed, and noted that this figure is likely to be revised downwards.

Swissair's extensive range of non-flight operations, including catering specialist GateGourmet, ground handler Swissport and lessor Flightlease have had their values slashed since 11 September as their customer base has plunged into a period of crisis. They also have heavy exposure to Swissair's flight operations.

The grounding of the fleet in October was a fiasco and has no doubt severely damaged the Swissair brand. Airports throughout Europe impounded aircraft as doubts emerged about the carrier's ability to pay its bills.

These events were accompanied by much mud slinging. UBS and Credit Suisse are accused of coming up with a crucial bridging loan too late to stop the fleet being grounded. UBS in particular came in for fierce criticism from the Swiss media and its headquarters had to be evacuated on 3 October due to a bomb scare.

Analysts say that it is not particularly surprising that the two sides fell out given that they had different objectives. Swissair desperately wanted to keep flying, while the banks wanted to minimise exposure to what they saw as a very risky investment. "They had fundamentally different approaches," says Chris Avery, airline analyst at JP Morgan.

UBS seems somewhat taken back at the vitriol aimed against it and has put up a staunch defence of its role in the affair. The bank says that:

Senior UBS management warned Swissair chairman Mario Corti at a meeting on 31 March that a restructuring was inevitable. UBS did not participate in a SFr1 billion credit line agreed with other major banks as it doubted the future strategy and development of Swissair. Since early 2001, Swissair viewed its position more optimistically than UBS did. UBS advised Swissair before 11 September that it could not avoid a debt moratorium. On the evening of 23 September a Swissair board member contacted UBS to inform them that the group had acute liquidity problems. UBS advised Swissair that it could only receive a large injection of liquidity if it filed for debt protection

UBS also puts the blame for the events of 2 October on Swissair, claiming that "this came as a surprise since Swissair still had substantial funds in its UBS account". It claims that:

Swissair said on the weekend of 29/30 September that daily liquidity needs to maintain operations were SFr17 million and that many times that amount were held with UBS on 2 October. Corti called UBS at 9:15am and said that SFr100 million of liquidity was needed by 9:45am. UBS claims that Swissair made substantial payments through its UBS account to oil and airport companies and transferred funds from an escrow account only after the fleet had been grounded.

UBS also blames Swissair for the grounding, saying, "a particular issue was the lack of formal approval from the Swissair board". One analyst says that the detailed legal work was simply not completed in time. Some analysts also suspect that the banks may have withheld funds from what they saw as an inviable business, leaving Corti with little choice but to accept their planned reverse takeover by Crossair. For its part, Swissair refuses to comment on the UBS allegations ahead of court hearings.

The situation is still highly fluid and there are no certainties that Crossair will be able to take over the entire Swissair network before the summer season starts in March. But getting the multinationals on board, even if reluctantly, is a start.

Source: Airline Business

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