Colin Baker ZURICH / Richard Pinkham BRUSSELS
As he announced annual results that were just as dire as everyone had feared, SAirGroup chairman Mario Corti pledged to concentrate on sorting out the company's financial woes before tackling any major strategic decisions. Although it is perhaps understandable that Corti is refusing to be rushed, given his sudden elevation into the SAir hot seat, analysts warn that drastic action will soon be needed to turn the company around. The key problem is the French airline interests AOM/Air Liberté and Air Littoral, which have been haemorrhaging cash at the rate of SFr80 million ($47 million) a month.
Although it was common knowledge that the French operations were hurting, the extent of the damage took analysts by surprise. And intriguingly, the exact degree of SAir's exposure to its French concerns does not appear to have been fully disclosed to investors.
Analysts were somewhat taken aback to discover that SAir appears to have granted French partner Marine-Wendel a "put option" by April 2004 on the latter's 51% stake, giving it the right to sell the shares back to SAir. This deal was apparently signed back in August last year and means that SAir's French exposure is effectively 100% rather than 49%, with debt guarantees on top of that.
Investors are not impressed. Schroder Salomon Smith Barney halved its target price for the company two days after issuing its initial downbeat, post-results analysis. Additionally, Zürich's director of public prosecutions is investigating the company. The Swiss Government and the cantons of Geneva and Vaud have said they will refuse to approve the group's accounts and a Zürich-based shareholder is calling for an independent audit of the books.
Meanwhile, the French operations continue to act as a cash drain. Although SAir stopped funding Air Littoral in early April, leaving it with just two months before it runs out of money, the more pressing issue is what to do with AOM/Air Liberté.
Marc Rochet, head of SAir's French interests, has presented a plan to labour unions proposing a 25% reduction in operations, 1,500 lay-offs and the appointment of a public mediator. Although the costs here are likely to be covered by provisions set aside in the 2000 results, one analyst warns that the cash drain could continue until November 2001 at a rate of SFr60-80 million per month.
The decision to invest in the French regionals is widely seen as a mistake given the strong competition from Air France and the TGV high-speed rail network. Analysts say that SAir may have been overly concerned with fast-growing neighbour Air France, and may also have panicked at the prospect of an alliance between KLM and British Airways. BA was seen as the long-term partner of choice by SAir management.
Elsewhere, German charter operator LTU is also in bad shape. Corti has said that all SAir carriers must, at a minimum, earn their cost of capital and none of them yet do.
Swissair itself turned in less than impressive results, in part suffering from strong competition from its immediate neighbours. Alitalia's new hub at Milan Malpensa, for instance, saw significant, if not particularly profitable, growth. "This must have been at the expense of someone else," one analyst points out.
Against this background, the group's headline net loss figure of SFr2.885 billion understandably grabbed plenty of headlines, even if it was largely made up of future provisions and write downs of loans and valuations.
The old SAir management team may have be able to tough out these wretched results, but the cash drain appears to have frayed the nerves of at least some board members and investors beyond breaking point. With net debt rising 20% to end the year at SFr6.3 billion, Corti had to move quickly to assemble a consortium of banks to provide a debt restructuring programme and make available a revolving credit facility. Sales of non-core businesses will help the balance sheet, with the Swissotel chain already lined up for disposal.
| SAirGroup financial results ($ million) - 2000 | |||||
| Division | Divisional revenues | Operating result | Operating margin | ||
| $ million | change | 2000 | 1999 | ||
| SAirLines | 4,265 | 11.7% | 21 | 0.5% | 2.9% |
| SAir Logistics | 1,019 | 27.2% | 59 | 5.8% | 0.4% |
| SAirServices | 1,895 | 32.0% | 96 | 5.1% | 6.8% |
| SAirRelations | 3,701 | 28.5% | 179 | 4.8% | 5.6% |
| Others | 92 | 85.5% | 4 | - | - |
| Group total | 9,660 | 24,8% | 359 | 3.7% | 5.2% |
| NOTE: Total after intergroup eliminations. Results exclude provisions and associations | |||||
Amid this confusion, the Qualiflyer alliance strategy is effectively at an end. SAir was trying to build Qualiflyer so it could eventually enter talks with one of the major alliances, probably oneworld, in a strong position. "This was always going to be difficult," notes one analyst. The group is already reverting back to its Swissair group name, but more fundamental changes will clearly be announced in the coming months.
These will include a simplified group structure. "We can't subsidise economic mismanagement," Corti says. "There will be a very small number of units. Not 15 to 20, maybe five or six." While the group's airlines have been piling on the losses, SAir's on-flying businesses have been performing well.
Meanwhile, Sabena announced an operating loss of BFr6.6 billion ($146 million) for 2000, blamed on over expansion and fuel costs. Chief executive Chistoph Müller stated optimistically that Sabena had "reached the seabed". The response of unions and the Belgian Government to further restructuring plans will play a key role in determining whether Sabena's ties to Swissair continue. Of course, Swissair's eventual alliance partners may also influence the outcome. A decision is not expected before the summer, but what is clear is that divorce will not be cheap, given the substantial integration of the two carriers.
At Crossair, interest was focused on the airline's leadership. Chair-man Moritz Suter's return after only six weeks as the head of SAir has led to questions on whether successor André Dosé would be head in name only. While Suter assured listeners that he "no longer owns an office in the building", the jury remains out on whether he will be able to distance himself from the company he founded.
| SAirLines associates | ||
| Operating results $ million | ||
| Airline | 2000 | 1999 |
| Sabena | -30 | 21 |
| AOM | -141 | -62 |
| Air Littoral | -2 | -18 |
| LTU | -296 | -99 |
| Volare Group | -18 | -80 |
| SAA | 10 | - |
| LOT | 4 | - |
| Others | 11 | 12 |
| Total | -463 | -227 |
| SAirGroup results ($ million) 2000 | ||
| 2000 | 1999 | |
| Operating result | 359 | 401 |
| Associated airlines | -463 | -227 |
| Provisions | -1,615 | - |
| Exceptional income | 176 | 208 |
| Exceptional items | -1,902 | -18 |
| Net result | -1,717 | 163 |
| Note: Currency exchanged at constant rate of $1=SFR1.68. Provisions set aside for losses in French, Belgian and German airline investments. | ||
Source: Airline Business
