Swissair Syndrome

I call it Swissair Syndrome. It implies a peculiar combination of splendid exterior and unhealthy interior. The term Swissair Syndrome is not referring to, or intended to describe the thousands of individuals who have been working in Swissair with quality and dedication, but rather the totality of the company as a business organisation, with its management and Supervisory Board, closely related to banks and political entities, in the political, social, economical and cultural environment of its time in Switzerland and Europe.

Some of the characteristic traits of Swissair story can be found also in many other similar business cases. Bankruptcy of business companies occurs in any place at almost any given time. For general purposes other expressions, like Enron Syndrome, might be equally useful, but this one is a particular case of its kind, and the collapse of Swissair in certain essential ways differs from that of Enron.

Switzerland's biggest corporate trial

On Friday 9 March 2007 public hearings were ended in the trial against 16 former members of the Swissair Executive Board (Supervisory Board, Board of Directors, Board), the company's top management and 3 outside advisors who have worked with the airline. The trial is rooted in the bankruptcy of Swissair in 2001, and the circumstances and consequences of the airline's collapse. The panel of three judges presiding over the case at Bülach (Buelach) district court near Zurich is expected to present the verdict at the end of May. Friday's session was held in a gym in Buelach with a capacity for 1,500 people, accommodating hundreds of journalists, lawyers and other spectators. This show case has become something like a culmination of a national tragicomic soap opera, characterised by a mutual blame game of all central figures involved.

There seems to be little evidence that the defendants have acted with criminal intentions, or have pursued personal gains at the sacrifice of the airline's or its creditors interests. However, the leaders of Swissair and their advisors, by the very nature of their positions, undoubtedly bear a responsibility for their own decisions and actions, and consequently for what happened to their company, and its investors, creditors, employees and customers.

The investigation has taken five years. The Zurich cantonal prosecutor has spent 40,000 working hours on the case, questioning 300 people and searching 20 houses. The prosecution's indictment is 100 page-long. There are 4,150 files (dossiers) in this criminal case. The charges are many, including wasting of corporate assets, damaging creditors, making false business statements, forging documents and mismanagement. There are also ongoing civil indictments in Switzerland and Belgium.

Swissair's liquidator, Karl Wüthrich, has accused defendants of being the only guilty part, and entirely to blame for the collapse of Swissair. The lawyer of the former Belgian national carrier Sabena, Stefan Rutgers, has described Sabena as a victim of Swissair management, blaming it for causing Sabena's collapse by exploiting and abandoning the airline.

All defendants have pleaded innocent to charges. They blame the Belgian government, the big Swiss banks, and the downturn in the aviation market after 11 September 2001 attacks against USA for the downfall of Swissair.

The Rise and Demise of Swissair

Swissair was the national airline company of Switzerland, and one of the most prestigious and venerable airlines in the world. But for the Swiss it was more than that. In addition to its banks, precision watches, cheese, army knife, chocolate, high tech industry and multinational corporations, Swissair was Switzerland's top international calling card, or business card abroad, and an icon of national pride.

Swissair was formed in 1931 by a merger between two local carriers. The new company had 13 aircraft, 64 employees, and flew from Zurich to 4 domestic and 14 European destinations. By early 2001 Swissair Group had 72,000 employees worldwide including 21,000 working in Switzerland. It had 75 aircraft, and served 210 destinations in 75 countries. Swissair was owned by SAirGroup. On 26 March 2001 Swissair celebrated its 70th birthday.

Swissair was known for its safety and good service, which instilled deep loyalty among its travelers. The company was often dubbed "The Flying Bank" because of its solidity and dependability. The Swiss values of high quality, punctuality and efficiency were perceived as inherent to the airline. The unassailable reputation made employees and representatives of Swissair to feel like worldwide ambassadors for Switzerland.

The first big shock was served to the market when Swissair, for the first time in its 70-year history, reported a loss for year 2000, amounting to 2.9 billion Swiss francs ($1.8bn). This loss consumed most of the company's entire capital reserve.

The image most Swiss had of themselves, of their business leaders and their reputation for good business sense, was utterly shaken and cracked on 1 October 2001, when Mario Corti, the company's CEO, announced the unbelievable: Swissair, the pride of Switzerland, was bankrupt. Until this announcement the Swiss public in general had no idea that their national airline was on the verge of bankruptcy.

A severe shortage of cash made the company unable to pay for fuel and landing fees for its flights. Swissair brand's goodwill disappeared within hours. At London's Heathrow airport two Swissair aircraft were seized. Fuel companies refused to supply its operations. On 2 October the entire fleet of aircraft was grounded. More than 30,000 passengers were stranded around the world, holding worthless tickets. Swissair services and desks were shut down in most airports. Nobody from the company was available to advice or help stranded passengers, who were left without alternative flights, and no cash for paying for a hotel room.

10,000 jobs were lost in Swissair Group worldwide, including 5,000 in Switzerland. Some unions have estimated that the total number of job losses globally, including all suppliers, may exceed 150,000.

Sometime in 1998 the Swissair stock had been worth around 500 Swiss francs ($307) per share. After the official announcement of bankruptcy there were still indications of a possible rescue plan. But on 3 October 2001 the value of Swissair shares fell from 100 Swiss francs ($61) to 1.27 ($0.78).

Countless articles, radio and TV programs have been created, and many books have been published on the subject of Swissair failure. In 2006 a film was released, called "Grounding, Die letzten Tage der Swissair" (The Last Days of Swissair), describing the dramatic end of the 70-year-old company.

New Airlines

Swiss

On 24 September 2001 the company presented its plans for radical change. Swissair and its regional subsidiary Crossair, where Swissair held 70 percent of the shares, would develop a new airline. Crossair was regarded as the most profitable part of the Swissair Group, where pilots were only paid 50% and cabin crews 70% of the salaries of their colleagues at Swissair. For further cost reduction more than 7,000 employees would be dismissed.

After the liquidation of Swissair, Crossair became the new successor airline, which later was renamed Swiss International Air Lines. The company was a division of Swiss, the parent company. The struggling Swiss further cut down its fleet and workforce.

After 3 unprofitable years, in March 2005 Lufthansa Group and Deutsche Lufthansa AG, the flag carrier of Germany, started the process of taking over Swiss, initially with a minority stake of 11%, held by a company set up for this purpose, Air Trust. Lufthansa increased its share to 49% in July 2006, once regulatory approval was granted. Lufthansa has set conditions for the completion of the takeover, including successful negotiation of air traffic rights around the world, and a profit in Swiss at the end of 2007.

Recently Swiss has reported its first-ever net annual profit in 2006. The only barriers to a 100% takeover now are ongoing negotiations for traffic rights in India, Hong Kong, Russia and Saudi Arabia.

Swiss, the Cologne-based airline, seems to be on the right financial track with its cost-cutting measures, such as slashing personnel, renegotiating contracts and moving into cheaper offices. Swiss CEO Christoph Franz has said that the company has made further progress in improving the cost base, but that it is still not sufficiently competitive yet.

Through the merger with Lufthansa, Swiss joined the Star Alliance, where Lufthansa is a member.

SN Brussels Airlines

Sabena, the former national airline of Belgium, was founded in 1923. Sabena was Swissair's loss-making affiliate. The company was declared bankrupt after Swissair failed to pay a promised cash injection. Sabena ceased its operations on 7 November 2001. A group of investors took over Delta Air Transport, one of Sabena's subsidiaries, and transformed it into SN Brussels Airlines.

Causality

The direct cause

The direct cause of the bankruptcy of Swissair and the cease of its flights and operations was the airline's liquidity crisis: negative cash-flow and lack of cash reserves and credit lines.

Mario Corti, the last CEO of Swissair, and Jacqualyn Fouse, the last CFO of Swissair, claim that the airline's financial situation was serious but manageable before the banks' decisions strangled the carrier.

According to Mario Corti, Union Bank of Switzerland worsened the group's situation by dissolving its cash pool, a system used to manage SAirGroup's cashflow.

The airline was practically bankrupt already on September 26, after some small banks cut their lines of credit. On September 29 UBS (Union Bank of Switzerland) and CS (Credit Suisse First Boston) agreed to purchase a 260 million Swiss franc ($160m) share in Crossair, and give Swissair an interim credit of 250 million Swiss francs ($154m) to guarantee flights until a scheduled date. However, the transfer of funds was delayed so much by the banks that the cash arrived too late. Tribune de Geneve, Geneva's largest newspaper, had a headline like "UBS - United Bandits of Switzerland".

Kaspar Villiger was responsible for finances in the Bundesrat (the national government, with a poresident and a cabinet of 7 ministers). He has told the media that Bundesrat had underestimated the internal dynamics of such a liquidity crisis and thus the speed with which the situation could come to a head.

But Corti has indicated that before the crisis meeting he held on 1 October, he had already informed the Bundesrat about Swissair's additional financial needs of some 500 million francs ($308m) for preventing an imminent crisis and bankruptcy. Bundesrat decided not to intervene to help Swissair at the crucial time for preventing a crash, thereby giving the banks an essential signal.

Corti has also criticised Project Phoenix, the rescue plan drawn up on 30 September 2001 by the company's Executive Board, UBS and CS. Project Phoenix intended to release the regional airline Crossair from the group, complete restructuring and recapitalisation, so that the activities of the struggling national carrier could be taken over by Crossair. UBS and CS were supposed to buy Swissair's 70% shareholding in Crossair. Corti says that the banks had foreseen Swissair's bankruptcy and grounding of the fleet in their plan, and that it was developed behind his back.

UBS, led by Marcel Ospel, has rejected Corti's accusation in a comprehensive statement. UBS claims that Corti missed the best possible opportunity to restructure the group. It declares that part of Swissair could probably have been saved, if its management had the willingness and courage necessary to go through with a proper restructuring in good time.

From the moment Mario Corti became SAirGroup chief in March 2001, it has been difficult to establish dialogue between UBS and the SAirGroup.

Debt

Swissair is the biggest bankruptcy in Swiss economic history. By the end of September 2001 the company's debt had reached enormous 17 billion Swiss francs (SFr17 billion, $13.7 billion), up from SFr6.8 billion ($4.2bn) at the end of December 2000.

UBS says that at the end of March 2001 it had presented a document to Swissair CEO Mario Corti, estimating the group's debts to be SFr3 billion ($2.41 billion) more than the value of the company, which Corti has denied.

The "Hunter Strategy"

Some of the major international aviation alliances at the time were Oneworld, which included British Airways, American Airlines, Cathay Pacific and Aer Lingus; Star Alliance with United Airlines, Lufthansa, Air Canada and Singapore Airlines; and the Wings Alliance with KLM Royal Dutch Airlines and Northwest.

In the 1990s Swissair initiated a large expansion program named the "Hunter Strategy". The plan consisted of acquiring stakes in smaller airlines and related businesses instead of forming alliances with larger rivals. Swissair wanted to build an alliance big enough for challenging competitors such as Deutsche Lufthansa AG. An integral part of this strategy for Swissair was to become the fourth largest European airline, and to become the nucleus of its own alliance, the so-called Qualiflyer Group.

The Hunter Strategy was formulated by the company's former CEO Philippe Bruggisser and McKinsey & Company. Among the Board members at the time were some of the best known businessmen of Switzerland, including Schmidheiny, Hentsch, Mühlemann (CEO Credit Suisse and former Head of McKinsey Switzerland), and Eric Honegger who succeeded Götz as Chairman of the Board.

Swissair invested in Belgium's Sabena, Delta Air Lines, French Air Liberté, AOM, Volare, Air Littoral, Air Europe, Austrian, TAP Air Portugal, LOT Polish Airlines, Turkish Airlines, South African Airways, German charter carrier LTU, Singapore Airlines, and many other smaller airlines, which faced similar problems as Swissair due to international competition.

The vast majority of the Qualiflyer Group airlines were unprofitable, and had major financial problems. Some were making huge losses.

Swissair acquired 49.5 percent of Sabena, the Belgian national airline with the Belgian state as the majority shareholder. With such a stake Swissair was unable to force through the changes necessary to bring Sabena into economically viable state. Sabena had made a profit only once in its long history. On 3 April 2001 Sabena announced a loss of SFr497 million. The Belgian government was putting pressure on Swissair to conclude the misguided investment in Sabena, which was on the verge of liquidation. Swissair was also required to urgently come up with a large cash injection into Sabena as a financial emergency solution.

Labor unions and the companies' management often have a cooperative relationship in Switzerland. This is not the case in many other European countries. European airlines are not able to quickly cut labor costs in response to a downturn, as e.g. US companies can do. Swissair executives had little experience dealing with European unions.

The expansion program had further increased the already complex group structure. In the beginning of 2001 SAirGroup had about 270 business units.

The financing of the Hunter Strategy proved to be too costly. Rapidly increasing losses in investments for Hunter Strategy and the company's other investments, combined with the high cost of financing those investments, Swissair parent SAirGroup faced a cashflow crisis.

Heitz, a Swiss activist, organised 100 small shareholders demanding an independent audit of the company's 1999 results, which they claim had understated SAirGroup's problems associated with its investments and alliances.

The Market, and Economic Nationalism

Transforming unprofitable or inefficient European regional airlines into success stories is obviously difficult for the large airlines, especially in the face of competition from Europe's fast-growing budget carriers.

The liberalisation and deregulation of aviation markets, which started in late 1970' in the USA, has led to increasingly harsh competition for becoming profitable enterprises, no longer requiring government subsidies, privileges and routes guaranteed by the state.

New cheap flight operators and no-extras, lowering the standards, such as EasyJet, Ryanair, Buzz and Go, pay much less than the wages of the traditional airlines.

The EU countries also relaxed their rules on airline operations in the early 1990s, aimed at creating a more competitive environment. As a result, many European airlines joined together in partnerships such as OneWorld, Sky Team and Star Alliance. In the ensuing "musical-chairs game" Swissair was initially left out in Europe.

The creation of so-called "hubs" caused bitter struggle. High number of passengers could be transported through the hubs by linking intercontinental and regional feeder flights. International and intercontinental alliances were developed. European airports, including London Heathrow, Paris Charles de Gaulle, Amsterdam and Frankfurt/Main were substantially improved and expanded. Zurich-Kloten was also prepared to become one of the largest European airports, and received more than 2.3 billion Swiss francs ($1.4bn) in investments during two years.

However, passenger numbers were well below expectations. The beginning of world recession in 2000, and later the sharp market drop caused by 11 September 2001 attacks against USA, made Swissair unable to finance its ambitious plans of "empire-building", the creation of Gualiflyer Group with itself at the centre of it.

Many of Swissair's European competitors still continued to receive valuable state support in different forms. For most European countries it has been a matter of national pride to have a national airline. There were more airlines in Europe than the market could support. Economic nationalism also forces many airlines to operate primarily from their national facilities. A more efficient system could be to use hubs like it is done in the USA. Perhaps further integration between the countries in the European Union can lead to a development similar to that in USA.

Recovery Efforts

In February 2001 concrete steps were taken to save Swissair. Several follow-up investments and other investment decisions were cancelled, including previously planned 34% stake in TAP Air Portugal, and 51% of Turkish Airlines.

In March 2001 Mario Corti became the new Chief Executive Officer of Swissair and Chairman of the parent company SAirGroup. Some people affectionately nicknamed him "Super Mario", believing that Corti would save Swissair. There was a general belief that the company would again become profitable within 3-5 years.

Swissair sold its hotel chain Swissôtel to Raffles Hotel Group for SFr520 million. Among new cost saving initiatives was the internal magazine "Voice", which encouraged and co-ordinated cost saving measures by employees. Swissair pilots accepted a 5% pay cut for 2 years.

Mario Corti announced a major restructuring plan on September 24. Swissair and Crossair would merge, creating a new entity called Swiss Air Lines, while at the same time maintaining each airline's individual brand. 10,000 jobs would be lost in this consolidation, including 3000 at Swissair's catering company, Gate Gourmet.

Despite many obstacles, Corti was making some progress in the spring and summer 2001 for reducing expenses. Some observers believe it would be better if Corti would unload the airline and focus the business on its big catering, airport-retail and baggage handling operations. But if the airline would be cut out, reduced or closed down, its hub in Zurich would likely be reduced to a feeder for larger European airports. That could be a major blow to Swiss national pride. Without top-quality air service Switzerland might lose its position as an attractive business and tourism location. Perhaps therefore, Corti decided to preserve the airline and sell off some other assets.

Key Individuals

Many people had essential roles and responsibilities in the development of the financial crisis of Swissair and its subsequent crash. Among these are the company's top level managers, Board members, corporate advisors like those engaged from McKinsey, and certain bank executives like Marcel Ospel in UBS. Some politicians were directly involved in governing the business through their participation on the Boards, while others have exercised more indirect, but nevertheless considerable influence.

The following is just a short summary about few of the people who have participated in the management of Swissair.

Philippe Bruggisser

Philippe Bruggisser, 58, Swissair's CEO, the predecessor of Mario Corti, and one of the defendants in the case, was sacked on 23 January 2001 after losing support for his Hunter Strategy. He was fired by the new Chairman of the Board, Eric Honneger, with whom he had co-operated about 10 years in the Board, and who had backed the Hunter Strategy. Bruggisser received a compensation worth SFr2.2 million after being dismissed, plus another SFr3.75 million from the company's pension fund. Bruggisser, his wife and son have moved to France, allegedly because of death threats. Bruggisser began working for Swissair in 1979.

Mario Corti

Mario Corti, 60, who now lives in Boston, is a Swiss-Italian. Corti was lured from his job as Chief Financial Officer at Swiss giant food company, Nestle, to take charge of Swissair in March 2001, when nine of 10 Supervisory Board members left Swissair amid the company's biggest loss in the airline's 70-year history.

Most defendants in the case have exercised their right not to answer questions in court, but Corti have used the proceedings as a springboard for launching a passionate self-defence. Corti has said he had done everything in his power to rescue the airline. Witnesses say that after his extraordinary speech in the court about justice, honour and his pride in Swissair, the hall broke out in applause. Corti has been crying, and even hard-boiled journalists have been fighting back their tears. Many people sympathize with Corti, partly because he is an emotional and good communicator, and fighter, and also because he had entered Swissair when the financial situation in the company already was pretty gloomy.

During his 11 years at Nestle Corti has greatly improved Nestle's relations with its investors. He has served once as deputy head of banking at the Swiss National Bank. He also holds a pilot's license.

Jacqualyn Fouse

Jacqualyn Fouse, 45, is also charged in the case. She was Nestle's treasurer before joining Swissair as CFO in July 2001 to replace Georges Schorderet. Fouse lives in Texas. Since July 2002 she is the Senior Vice President, Chief Financial Officer and Corporate Strategy Manager in Alcon Inc., one of the biggest eye-care companies in the world. Alcon is majority owned by Nestlé SA, incorporated in Hünenberg, Switzerland, with US operations based in Fort Worth, Texas.

Moritz Suter

Moritz Suter was the CEO and Head of the Board of Crossair. He later briefly replaced Philippe Bruggisser in Swissair. On 7 March 2001 Suter left the airline, saying that the structure of the Swissair Group would not allow him to restructure Swissair in any meaningful way. Two days later 9 of 10 Board members also resigned, including Chairman and interim CEO Eric Honegger.

George Schorderet, Eric Honegger and Vrena Spoerry are also among top defendants in the case.

Conclusions

Swissair, like many other airlines, was hit hard in 2000 by high fuel prices and slow US economy, which cut deeply into air travels. Also like other airlines, Swissair's operations and profitability were disrupted in the wake of the 11 September 2001 attacks on USA. These factors have, of course, aggravated the ailing financial health of Swissair. But such economic problems did not cause bankruptcy of all airlines. It is necessary to look at other factors as well, especially the company-internal and national situation.

Growth by mergers and acquisitions (M&A) and strategic alliances is used successfully by many companies. Lufthansa has thrived by implementing such a strategy for building a vast network of airline alliances, combined with selective equity investments.

The Hunter Strategy, and especially its implementation, was deeply flawed. It was a disastrous expansion plan. SAirGroup invested heavily in second-tier, unprofitable companies, many of whom were in serious trouble, with big debt, low revenue and large losses. In many cases acquisitions were overpriced. Also the speed and extent of acquisitions were too high, making it impossible for SAirGroup to properly restructure and improve the loss-making companies. Another problem with this strategy was its method of financing, which caused an accumulation of huge debt, overburdening the company, and effectively handing over the strategic management and destiny of the business into the hands of banks.

It is natural that banks are playing a crucial role for many large projects in corporations, especially those related to M&A, restructuring and recapitalisation. But in this case the dependency of the business from its creditors was so great, that the creditors could practically decide the fate of Swissair at any for them suitable time. And they did. When UBS refused to extend Swissair's line of credit, there was not much the company's new management could do for preventing grounding.

Economic nationalism and inefficiency of airlines in Europe are also factors which exacerbated Swissair's great challenges caused by its bad investment and growth strategy.

Politicians have also contributed to the case, especially when it was urgently needed, and reasonably expected of them, to intervene and act, but which they failed to do in time. Some politicians also directly participated in the Boards of the companies, and thereby had the privilege of first hand information and power of action. Politicians make laws, govern the country and influence all major developments in the society. Revelations of faulty corporate governance in the country's national airline clearly indicate unhealthy symptoms in the political culture and corporate laws.

Too much has been dependent upon too few individuals, and their interrelations. UBS was led by Marcel Ospel. When Mario Corti became the CEO of Swissair, a good dialogue and co-operation between Swissair and UBS did not materialize. The lack of good communication adversely affected the course of actions and events at a critical time for Swissair. Boardroom intrigues and the character of personal relationships between the big bosses can prove fatal for an organisation.

However, there is another fundamental problem in the case of Swissair, which has prevented the company and its shareholders to identify bad decisions in time, and to make necessary corrections in its strategy and management.

It is a cultural problem, and the apparent lack of good corporate governance is only part of it. In an atmosphere of insufficient openness, accountability and control mechanisms, potentially destructive situations may develop, which may not be fully detected and swiftly handled in due time.

It is the responsibility of the Board to endorse the organisation's strategy and to supervise its implementation. The Board is accountable to the company's owners and authorities. But in this case conflicts of interests and boardroom nepotism have prevented a healthy course of actions. The Board, the most central organ of corporate governance, has become inherently defective, its quality corrupt, and it has failed.

It is therefore I believe that at a deeper level the actual cause of the demise of Swissair was a cultural problem, distinguished by the Swiss exceptionalism, conceit, nepotism, and the top leaders' feeling of being infallible and invincible. These are ingredients in the recipe for fallacy.

Other heavy blows to Swiss self-image

The end of Swissair was definitely a hard shock for the Swiss self-image. Sadly this was not the only one. Several tragic events and revealing scandals happened within a short period of time. Few of them are mentioned below.

Murder in Zug Parliament, known for its openness, safety and availability for the public

On 27 September 2001, 57-year-old Friedrich Leibacher stormed into the Zug Parliament Assembly Hall. He opened fire with his machine gun and killed 15 people and seriously wounded 10 others. There are almost 1 million guns in private possession in Switzerland, a country with 7 million inhabitants.

Accident in Gotthard Tunnel, a proud piece of Swiss engineering, known for its safety

On 24 October 2001 Gotthard Road Tunnel (17 kilometres), the second longest tunnel in the world, a major link from Germany and Switzerland into Northern Italy, was blocked by a collision of two trucks collided inside the tunnel, and by resulting fire. 12 people died, many were injured.

Crossair and Swissair flight accidents

On 24 November 2001 a Crossair plane from Berlin crashed into woods near Zurich airport, claiming the lives of 24 people. Crossair was previously 70% owned by Swissair.

Just 3 years before that accident, on 2 September 1998, a McDonnell Douglas MD-11 plane, Swissair Flight 111, plunged into the Atlantic Ocean, southwest of Halifax International Airport, with the loss of all 229 onboard.

Swiss banks involved in blood money and plunder of war-victims

In 1996 plaintiffs representing thousands of survivors of crimes committed by the Nazis during Second World War and the victims' heirs filed class-action lawsuits in a New York federal court against several Swiss banks.

When Union Bank of Switzerland (UBS) tried to shred documents related to Swiss-Nazi financial arrangements, this led to a series of investigations and revelations.

In 1997 the US government made public a shocking report, according to which Swiss banks had knowingly received gold looted by the Nazis from the countries they conquered. The banks also took in melted-down gold from jewelry and dental fillings that the Nazis had taken from concentration camp victims, including Jews and Poles. The Swiss banks also have profited from converting this Nazi gold into national currencies, used by the Nazis for financing their crimes.

Originally the defendant banks fiercely resisted opening any account records. But in 1998 the Swiss banks agreed to a settlement of 1.25 billion USD to several classes of war victims, including persons claiming ownership of dormant accounts and others demanding compensation for stolen property and forced labor. US-led investigation of the Swiss banks identified up to 54,000 of such dormant accounts.