The moods at the two Swissair group carriers couldn't be further apart. Uncertainty reigns at Swissair, where a management shakeup started in November with the news that the head of Swissair Associated Companies (SAC), Philippe Bruggisser, would replace Otto Loepfe as chief executive from January 1997. The process continued in December with the chief executive-designate remoulding both management and the corporate structure in preparation for his year-long ascension to the top job. Bruggisser took over the day-to-day running of the group when he took up the newly created post of chief operating officer in January.
At Crossair, on the other hand, the mood is both buoyant and expectant. As part of the group's Win restructuring programme, the Basle-based regional carrier will this year take over around 25 per cent of the mainline European network, amounting to some 1.025 billion ASKs or 12.7 per cent of Swissair's total production, under the ZGB (Zurich-Geneva-Basel) project. Swissair will retain commercial responsibility for a portion of the routes by wetleasing aircraft from Crossair, but both carriers were still working to resolve the hurdles inherent in the transfer of route authorities and slots in mid-January. As a result the final decision on what proportion of the routes would be operated under wetlease by Crossair was still pending.
Irrespective of where the commercial responsibility lies, the move will see Crossair carry some 4.25 million passengers in 1996, an increase of almost 85 per cent on last year. Crossair will also take over full responsibility for the European charter operations of the group's now-defunct Balair/CTA arm; Swissair retains the branding, however, on two A310-300s after taking over the international charter business.
The corporate restructuring and management reshuffle come into effect in March and are a clear move by Bruggisser to impose his own management style on the group at the earliest opportunity. The structural reorganisation overseen by Loepfe in January 1995 broke the group up into separate business units. The latest structural changes are aimed at increasing transparency and laying 'the foundations for a future holding structure.' The functions of finance and development, partnerships/external relations/PR, human resources and the general secretariat will be managed at group level, overseeing four new operating divisions: airline, cargo/logistics, services and catering.
Bruggisser will assume full responsibility for the airline, including all marketing functions. Paul Reutlinger, the current executive vice president marketing and ground services, takes on the partnerships/external relations/PR portfolio, and becomes Bruggisser's deputy. George Schorderet, the former chief financial officer of Alusuisse-Lonza Holding, replaces Peter Nydegger as EVP finance. Rolf Winiger moves from flight operations to head up the services division, including maintenance, ground handling and information technology, while the head of Gate Gourmet, Wolfgang Werle, is promoted to EVP Catering.
Bruggisser appears more than capable of lifting the performance of the group, although his reputation suggests the mood of uncertainty among the employees may take some time to dispel. Moritz Suter, president and chief executive of Crossair, describes the appointment as 'a wise decision.' One banking source points to Bruggisser's track record at SAC, where he 'turned round the associated companies in a very aggressive manner, particularly the catering' and even suggests that if Gate Gourmet were valued properly 'it would be worth more than the airline.' Bruggisser is 'very tough and not wedded to the airline industry like [Otto] Loepfe,' observes the banker. 'He is looking at every part of the business. Nothing is sacred.'
Loepfe has paid the price for the deteriorating group financial performance, mainly due to poor results at the airline. First half 1995 group net losses rose almost 80 per cent to SFr86 million ($69 million) from SFr48 million for the 1994 first half. This followed a decline in 1994 full year group profits of 61 per cent to SFr23 million, along with a 57 per cent fall in net income for the airline to SFr3.2 million, boosted by SFr23.6 million in extraordinary profit. One source confirms Loepfe 'has definitely been kicked upstairs. The chairman [Hannes Goetz] decided it was time for a new face.'
Bruggisser is even rumoured to have been against Swissair's major airline investment last year - the $212 million, 49.5 per cent stake in Sabena. The departure of Alain Bandle, Swissair's chief negotiator in the Sabena talks, may support this speculation, but the offer of a senior position at Hewlett Packard is likely to have been enough to tempt Bandle to leave anyway. In his role as chief executive until January 1997, Loepfe's main responsibility will be to liaise with Swissair's main partner carriers, Sabena and Austrian Airlines, and he is likely to be elected to the board of directors on relinquishing his executive post.
The most immediate challenge facing Bruggisser is to complete the implementation of the group's Win programme, which aims to boost operating profits by SFr630-680 million ($545-590 million) in 1997. Reutlinger is not forthcoming on the specifics of the programme but says that 60 per cent of that figure is expected to come in savings and 40 per cent from revenue enhancements. An obvious target for savings is the part of the European network that will be transferred to Crossair under the ZGB project. One estimates says Swissair is losing some SFr100 million on those routes annually, but Suter suggests it's 'a little bit less.'
The pilots, who have been in negotiations over a new contract since management cancelled the old one last March, have already offered labour savings of 20 per cent, or SFr61 million, by the end of 1997, says Roland Born, vice president of Swissair pilot union Aeropers. But a dispute over co-decision rights has so far resulted in an impasse and brought the pilots to the brink of unprecedented industrial action. An independent mediator was attempting to find common ground between both sides at presstime.
Elsewhere, the carrier will make some gains through outsourcing. Swissair has already moved its accounting operations to Bombay and is outsourcing the cleaning of its aircraft cabins in Switzerland. The carrier also intends to outsource all heavy maintenance for the 29 Airbus A319/A320/A321 aircraft, being delivered between 1995 and 1998, to Shannon Aerospace in which it holds a 50 per cent stake. However the contracts will not start until 1997. Further savings will also come from the increase in efficiency and commonality as a result of the renewal of the carrier's short-haul fleet.
Improvements in yield management will be crucial to revenue growth. Swissair is set to introduce an O&D yield management system in three stages from May. When the third stage is implemented by the end of 1997, Hans-Peter Doser, general manager revenue management passengers, believes Swissair will have the most advanced system in existence. The SFr20 million system will offer 26 booking classes and provide a fully automated link between revenue management, pricing, distribution and inventory. Doser expects a boost in yield of 1 to 1.5 per cent.
A steady decline in Swissair's yield has drastically reduced the financial performance of the airline. Swissair has suffered a dramatic drop in yield in recent years, with passenger yield falling by 8.7 per cent in 1995 and a drop of 8.3 per cent overall. The original Win targets of an increase in operating profits of SFr500 million were based on 1993 yields and were made more stringent to allow for this decline. One analyst estimates yield has slipped by 15 per cent since 1993.
But Reutlinger is at pains to stress the effect of the strengthening Swiss franc, which accounted for two thirds of the drop in yield between 1994 and 1995. 'The increased strength of the Swiss franc has "compensated" our achievements [in the Win programme] negatively,' he adds.
Last year the Swiss currency gained 12 per cent against the US dollar and over 4 per cent against the Deutsche mark. Reutlinger suggests the trend could continue and points to the reaction of the financial markets, after the naming of the 'Euro' late last year provided a further focus for doubts about the wisdom of European monetary union. 'It could get worse. With the recent decision on a name for the European currency we have seen a lot of money moving into Switzerland.' Some 60 per cent of Swissair's costs are in Swiss francs, but 60 per cent of revenues are earned in foreign currency.
The banking source says Swissair found SFr90 million in savings through the Win programme last year and will find another SFr300 million in 1996. And he insists 'the 1997 Win target is on schedule.'
Reutlinger says premium class yield did recover in the second half of 1995, although the gains came mainly from intercontinental operations. Hence the decision to hive off a sizeable chunk of the European network to lower cost subsidiary Crossair. The mainline carrier holds a 65.9 per cent stake in Crossair, with 69.4 per cent of the voting rights, but the Basle-based carrier enjoys a significant cost advantage over its larger counterpart. While Swissair refuses to disclose its unit costs, Suter says his carrier has a cost structure of 21 US cents per ASK. This is a far cry from the industry average of 7.5 cents per ASK but Crossair conducts most of its business in one of the most expensive countries in the world and has a truly shorthaul operation.
Reutlinger says the ZGB project is a natural use of synergies within the group. 'Moritz Suter has managed to retain good cost controls and keep costs down, moreover Crossair is a young company compared to this 64-year-old lady.'
The ZGB project is the most significant single event in the history of Crossair and is a large feather in the cap of the ambitious and charismatic Suter - a co-founder of the original company. The aim is to 'double business volume by adding a maximum of 20 per cent new overheads [in terms of labour costs],' explains Suter. The expansion will see ATKs rise 146 per cent by the end of 1996 from 1994 levels, against a 60 per cent increase in employees. RTKs per employee will rise from 65,800 in 1995 to 92,200 in 1997. Suter says only a comparison of full year 1995 over 1996-7 will give a true measure of the carrier's success in undergoing such a rapid transition.
By 1997 revenues will have risen to SFr1 billion ($850 million) from under SFr400 million in 1994. But Suter dismisses notions that his airline is fast becoming 'a major' insisting 'that we are still a medium-sized company'. The carrier is expanding its fleet accordingly with an order for 12 Avro RJ100s to replace the 10 Fokker 100s Swissair was using for the ZGB operations and is now phasing out. Crossair was due to have taken delivery of five of the aircraft by the end of January with the other seven arriving at a rate of one per month until August. By May the carrier will also be operating eight of Balair/CTA's former MD-80s with refurbished 'Crossair-standard' interiors. These aircraft will then be used for both charter and scheduled operations. With the addition of a further six Saab 2000s by the end of May 1996 as part of the 'continued development of the original Crossair', the carrier will be operating 61 aircraft by the middle of the year compared to 43 at the end of 1995.
Crossair's total investment in the ZGB project, including the RJ100 financing, is $380 million. As part of the fleet financing plan, Crossair increased its shareholder capital from SFr215 million to SFr328 million last year and on top of that received 'SFr120 million in shareholder premiums to increase its capital base to SFr450 million,' says Suter.
But to maintain Crossair's product integrity all the RJ100s will be liveried in Crossair colours and all wet lease operations will retain the regional's LX designator. This is seen as a major coup for Suter and recognition from the mainline carrier that its smaller sibling has a strong enough identity to forego Swissair branding.
Indeed, Reutlinger admits that Swissair's major concern about transferring the routes to Crossair was the regional's market presence in Europe. But an independent survey carried out among 2,200 regular business travellers across Europe helped dispel any doubts. Airtrack, a customer satisfaction survey conducted by London-based Total Research, rated Swissair and Crossair first and second, respectively, in terms of overall satisfaction among European airlines in 1995.
The biggest hurdle to the transfer of routes lies in Swiss bilateral provisions with some of its neighbours, particularly eastern European states, and the European slot allocation regulation. Some agreements with Eastern European countries are single designation only. Suter adds that, with the exception of Italy and Greece, the agreements with most European Union states are liberal enough on traffic rights.
Indeed, Suter concurs with the view of one analyst that Swissair management's complaint about exclusion from the third package 'is nothing more than a smokescreen'. The analyst suggests it was another attempt to cover for the poor results. This must raise further questions about the wisdom of the Sabena investment, which was flagged as a back door into the single market.
Suter believes the only area the Swissair group is missing out on is the liberal tariff regime but that this would have a negative impact: 'If all those tariffs were liberalised with EU states then yields would go down even more,' he explains, 'so we have to prepare ourselves today for [that eventuality].'
Reutlinger points out that the issue of slot transfer could prove a bigger obstacle to the ZGB project. Under present slot allocation rules, Crossair does not automatically qualify for Swissair slots and at many airports will have to apply for slots as a 'new entrant'. Reutlinger will be hoping that the European Commission adopts a proposal from the recent Coopers & Lybrand report that would allow the unilateral transfer of slots between parents and subsidiaries as long as the companies are linked by a minimum 25 per cent stake. But time is not on Swissair's side and is a commodity the Commission appears to have in ample supply.
Assuming that the split in commercial responsibility with Crossair for the ZGB routes is defined in the first quarter and the dispute with the pilots is settled, Swissair may yet reverse its fortunes in 1996. But Suter warns that he cannot guarantee to return to profitability those ZGB routes that remain under Swissair's commercial responsibility: 'Swissair is saving the substantial difference in the operating costs between them and us but they still have to add on their considerable overheads, therefore it is hard for me to say whether they are going to make a profit.'
Source: Airline Business
