Journal of Air Transport Management 8 (2002) 355–363

Alliance strategy and the fall of Swissair

Wilma W. Suen*
The Fletcher School of Law and Diplomacy, Tufts University, Medford, MA 02155, USA

Abstract

This paper argues that the Swissair Group’s bankruptcy is a direct consequence of mistakes made in implementing its alliance
strategy. While the strategy was sound, analysis of the relative resource-dependence between Swissair and its partners will show that
Swissair did not need equity to bind its partners to it. Moreover, this approach to operationalising the alliance strategy undermined
a corporate level goal to diversify risk beyond the airline business. Financial analysis will show that the airline investments were
unprofitable, increased the Group’s leverage and weakened its cash position. As a result, the Group did not have adequate resources
to recover from external shocks. r 2002 Elsevier Science Ltd. All rights reserved.

Keywords: Strategic alliances; Swissair; Qualiflyer; Power; Interdependence; Financial management

Although the Swissair Group’s bankruptcy in
October 2001 (Swissair Group, 2001) is often associated
with the events of September 11th, the reality is that
management decisions over the course of several years
had so weakened the Group’s financial position that it
no longer had the resources to respond to external
shocks. The primary argument in this paper and
contribution to theory in strategic alliances, is that
Swissair did not need to resort to taking large equity
stakes in its Qualiflyer partners to prevent them from
defecting. This analysis is based on a power and
interdependence model (Keohane and Nye, 2001) of
inter-firm relationships, in conjunction with resource-
dependence theories (Pfeffer and Salancik, 1978), and
will show that many of these carriers did not have the
capability or option to defect, even absent Swissair’s
stake.
This paper further contends that while the Swissair
Group developed a sound strategy to diversify risk from
the air transport business, its equity-based alliance
strategy had the opposite effect. Although the airline
industry’s performance had been negatively affected by
events in the macro-economic environment, analysis of
the Group’s financial statements shows that its airline
alliance and related investment strategy was responsible
for the majority of its losses during 1997–2001. The cash
flow required to invest and support its investments had
to be financed by debt, increasing the Group’s leverage.
*Corresponding author. Fax: +1-617-627-3712.
E-mail address: wsuen@attglobal.net (W.W. Suen).
Moreover, by taking large equity positions, Swissair
made an implicit commitment to its partners’ survival,
and thus became vulnerable to its investments’ financial
performance.
1. Strategic alliances and the airline industry
Strategic alliances have become increasingly impor-
tant elements in a firm’s portfolio of strategies and are
viewed as a source of competitive advantage. Yoshino
and Rangan (1995) and Gomes-Casseres (1996) define
alliance as a cooperative venture between firms situated
on the continuum between markets and hierarchies, and
is distinguished by several characteristics: independent
firms; horizontal or vertical relationships; relationships
which are not solely transactional; partners bring
resources, share risks and benefits but have limited
control; and incomplete contracts. While alliances have
proven to benefit firms, there is also a dark side. Non-
cooperation, whether through competition, opportunis-
tic behaviour (Williamson, 1975), or defection, may lead
to a partner’s or an alliance’s failure.
The airline industry was one of the first to adopt
alliances, although multiparty global airline alliances are
a more recent phenomenon. Holloway (1997) argues
that ‘‘alliances are a vehicle for ‘market share gain
without balance sheet pain,’’’ as well as to bypass
regulatory constraints. Resource contributions include
market power, information technology, reputation, sales
networks, control over routes and hubs, landing rights,

0969-6997/02/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved.
PII: S 0 9 6 9 - 6 9 9 7 ( 0 2 ) 0 0 0 1 7 - 0
356 W.W. Suen / Journal of Air Transport Management 8 (2002) 355–363
and capital. Operationally, airlines cooperate across a
wide range of activities, which can be generally
categorised as: customer service, flights, and operations
support.1 However, the type of resource contributed
and the extent of operational integration is subject to
regulation and competition law considerations, which
may limit the benefits from an alliance.
There have been a number of empirical studies on
alliances’ impacts on performance, including Park and
Cho (1997) and Oum et al.’s (2000), which show that
alliances improve a carrier’s performance on a number
of economic measures, including productivity, pricing,
profitability, and share price. Other studies, including a
number commissioned by competition authorities, have
examined the potential impact on consumer welfare and
competition. In terms of the work on success and failure,
Li (2000) contends that non-lasting alliances tend to
focus on non-core activities, do not increase customer
loyalty, and typically code-share without significant
financial ties. However, financial ties are not sufficient to
keep firms within an alliance; there have been a number
of cases in the airline industry where defections have
occurred in spite of equity exchanges. As a result, the
study of non-cooperation in alliances needs to look
beyond key success factors to a firm’s ability to act on a
desire to defect, and therefore take into consideration
factors external to the alliance, such as viable options.
2. Power and interdependence: the ability not to
cooperate
Each of Swissair’s earlier alliances, European Quality,
Global Excellence and Atlantic Excellence, collapsed
after a series of defections, each of which reduced the
value of the group to the remaining members, thereby
making the alliance increasingly unattractive. In study-
ing non-cooperation in strategic alliances, the concepts
of power and interdependence are a means to measure a
firm’s capability to behave opportunistically (Williamson,
1975) or defect, and the effect on its partners should it
do so.2 All things being equal, the more powerful and
less dependent a party is, the greater its influence over
the alliance and the greater its degree of freedom
(Snyder, 1991). In this case, measures of power and
interdependence shed light on why the early alliances
were plagued by defections, and how Swissair over-
compensated when building Qualiflyer.
1
Oum et al. (2000) delineated 11 areas of joint or coordinated
activities. In ascending order of commitment: coordination in ground
handling; joint use of ground facilities; shared membership for FFPs;
flight code-sharing or joint operation; block space sales; coordination
of flight schedules; exchange of flight attendants; joint development of
systems or systems software; joint advertising and promotion; joint
maintenance; and joint purchase of fuel and other supplies.
2
However, the ability to defect is separate from considerations of
whether a firm defects.
2.1. Defining power and interdependence
Power is commonly defined as control over outcomes,
or an ability to get others to do something they would
not otherwise do, at an acceptable cost to oneself
(Keohane and Nye, 2001). Power has several dimen-
sions. The first is the objective measures, such as market
capitalisation, market share, and the type and impor-
tance of the resource contributed. In the airline industry,
these would include RPKs, ownership of landing slots,
or even the size of a carrier’s domestic market. A second
dimension of power addresses the question of instru-
mentality; the source of a firm’s power in one alliance
may not yield power in another, both because the type
of resources contributed may not be equally important
and depending on the size, structure, and composition of
the alliance. The third dimension is relativity. If power is
about being able to get others to do as you wish, then it
is less about the absolute value of the measurable
variables than what it is relative to the other party.
Interdependence is a question of the extent to which
two parties affect each other and whether the impact is
a/symmetrical. Interdependence has several compo-
nents, two of the most important being degree and
symmetry. Degree measures the impact of one party’s
actions on another, and is further segmented into
sensitivity and vulnerability (Keohane and Nye, 2001).
Sensitivity is the question of how immediately a party is
affected by another’s action, and the magnitude of the
effect, while vulnerability addresses a party’s ability to
respond to an action or changes in the environment. The
symmetry of a firm’s relationship contrasts its impor-
tance to the alliance versus the alliance’s importance
to it.
2.2. Measuring power and interdependence
Power and interdependence are a function of both
firm- and relationship-specific factors. From a resource-
based perspective (Pfeffer and Salancik, 1978), power is
primarily a function of the ownership of resources, and
of the relative importance of different types of assets to
achieving the alliance’s goal. The resource’s importance
is magnified or mitigated depending on its uniqueness
and substitutability. Power and interdependence are also
a function of relationship-specific factors, which take
into account the structure and size of the alliance, and
the value of a firm’s contribution relative to its partners’.
Measuring a firm’s interdependence with a partner is
a relatively simple question of comparing how much
each needs the resource the other brings, their respective
commitments, and options outside of the alliance.
Sensitivity is influenced by the type of resource
contributed; commitments that impact revenues or cash
flow have an immediate effect on a firm, particularly if
it also affects a significant percentage of revenues.
 W.W. Suen / Journal of Air Transport Management 8 (2002) 355–363
Vulnerability is a combination of firm-specific and
relational factors, which include how important a
partner’s contribution is to the firm’s performance,
its substitutability, the scope of the relationship, and
the extent of the firms’ technological and operational
integration. The expectation is that the deeper the
relationship, the harder it is to unravel, which adds a
temporal dimension to the equation. Symmetry assesses
how valuable a partner is and focuses on the relative
importance of each party’s resource commitments.
Size also enters the equation as it may indicate
how important the alliance is to the firm, and what
options may be available should a firm choose not to
cooperate.
Firms may try to change their relative dependence by
constructing interdependence. Constructed interdepen-
dence consists of contractual terms which bind the
partners more closely together. In airline alliances, one
of the most important provisions concerns exclusivity.
By forcing member carriers to drop third-party relation-
ships, it increases the importance of intra-alliance traffic
as a proportion of a carrier’s total traffic.
2.3. Power, interdependence and behaviour in Swissair’s
early alliances
Swissair’s early alliances varied in terms of the parties’
contributions, and the scope of cooperation, which
impacts relative power and interdependence in an
alliance. If an alliance does not improve a carrier’s
performance beyond enhanced customer service and
minor cost savings, then the parties have little power
over each other since they do not contribute invaluable
resources, and interdependence is shallow because there
is little depth in integration. Table 1 illustrates the
carriers’ respective positions in Global Excellence and
European Quality, and the resulting behaviours.
In Global Excellence, the exchanges of equity between
the Swissair and its partners were largely symbolic. In
terms of power deriving from resource contributions,
Delta was the most important, accounting for the largest
Table 1
Power, interdependence and behaviour
Global Excellence
Power DL far more powerful than SQ, SR
Symbolic equity exchanges
Small alliance
Interdependence Operational integration insignificant
Carriers not dependent
Other partners available
Behaviour Defect to partners with greater potential to benefit
357
share of traffic, revenues, destinations, market and able
to transfer more traffic to its partners than vice versa.
Singapore exited because the alliance was ‘‘unproduc-
tive’’ (Raj, 1997), and Lufthansa could bring greater
benefits by making Singapore its primary hub in Asia.
Therefore, despite an 8-year relationship, the carriers
neither became operationally integrated enough to
benefit from synergies nor interdependent enough to
form natural exit barriers.
In Atlantic Excellence, however, several components
of power were evident: Swissair owned roughly half of
Sabena, and 10% of Austrian, giving more power over
these carriers and a larger voice at the alliance level. But,
Delta was still by far the most powerful and less
dependent. Again, partners defected to relationships
that could bring greater value.
Size differentials in the European Quality Alliance
were far less significant. The group had two larger and
two smaller carriers, whose contributions largely com-
plemented each other. Despite cross-shareholdings,
formal power was not significant as the parties did not
have enough latent power to acquire their partners.
Swissair was probably the most influential member, as it
was the largest carrier, and appeared to be the driving
force in the alliance, for example, pushing for greater
integration, a goal not all of its partners shared. The
anecdotal evidence seems to indicate that Swissair
sought greater control, something it clearly could not
achieve in its global alliance, but even so, the depth of
integration and extent of dependence was not strong
enough to hold its partners in. Finnair and SAS exited
because they were not tied to European Quality (and in
Finnair’s case, did not want to become more inter-
dependent), but also because they also had a strong
substitute in Lufthansa.
One of the recurring themes in Swissair’s early
alliances is that they collapsed after a series of
defections. While the reasons behind the exits vary, in
all of the cases, it is evident that interdependence within
the alliance was not strong enough to hold them in when
alternative options became available.
European Quality
Small alliance
Relatively evenly balanced in power
Some equity stakes, but not significant
Some traffic coordination, ops support, some code–share... but
shallow integration
Potential tensions with network overlap
AY exited to LH because did not want to become more integrated
SK exited to LH for greater benefits
358 W.W. Suen / Journal of Air Transport Management 8 (2002) 355–363
Fig. 1. Qualiflyer Members 2000.
3. Qualiflyer: creating dependence
In 1998, Swissair founded yet another Europe-based
alliance, Qualiflyer, with: Austrian, Sabena, AOM
France, Crossair, Lauda Air, TAP Portugal, and THY
Turkish Airlines. Air Europe and LOT Polish joined in
1999, and Air Littoral, Portugalia and Volare Air in
2000. The alliance level goal was to code-share where
possible and cooperate on IT, baggage handling, sales,
training, cargo, and maintenance and to establish a
common Qualiflyer FFP.
According to Chang and Williams (2001), the small
carriers brought a diverse range of assets: Air Europe
and Crossair gave Swissair access to the Italian and
Swiss charter markets. Air Littoral and AOM France
(which acquired Air Liberte! ), gave Swissair access
French domestic market, and in AOM’s case, access to
France’s overseas territories. Volare (which owns Air
Littoral) brought the Italian regional market, while TAP
provided access to the Portuguese market, and connec-
tions to South America. These carriers were also a
captive market since they were required to switch to
Swissair Group-owned companies for aviation services
(A scary Swiss meltdown, 2001).
Structurally, Qualiflyer differed from the earlier
alliances in that Swissair is clearly the largest and most
important party in terms of revenues, RPKs, and the
type of resources provided. It also anchors the rest of the
carriers in the ‘‘constellation’’ (Gomes-Casseres, 1997);
while each member has direct relationships with
Swissair, with few exceptions, they do not have bilateral
ties with each other. This is in sharp contrast to the
other global airline alliances (such as the Star Alliance
and oneworld) that are grounded on a base level of
reciprocal commitments amongst all the carriers which
are strengthened at the bilateral level with deeper
operational agreements to increase interdependence
and raise exit costs (Figs. 1–3).
Moreover, while Airline Business’ annual alliance
surveys show that the use of equity has been declining
throughout the industry, Swissair is an exception to this
trend. Even though it had taken equity stakes in its
previous alliances, in all but Sabena’s case, these were at
more symbolic levels. This was not the case in
Qualiflyer: by May 2000, the Swissair Group had taken
or promised to take equity stakes of between 30% and
50% in all but one of its partners.3 It increased its stake
in Crossair to 70% and agreed to increase its stake in
Sabena to 85%. This gave it formal power over these
carriers, although the extent of its control was still
limited by regulatory restrictions (Table 2).
3.1. Power and interdependence
Since Swissair’s previous alliances had disintegrated
after a series of exits, it learned from experience that it
needed to be able to forestall defections through deeper
integration to create natural exit barriers, or via
ownership and control.
In Qualiflyer, Swissair created an alliance in which it
was clearly the most powerful partner on both informal
and formal terms; it was by far the largest, accounting
for some 30% of the RPKs, and its revenues were over
four times that of the second largest carrier, Sabena.
Thus, it would be able to transfer more traffic, on
3
Some of the recipients were state-owned airlines, whose govern-
ments have been barred by the EU from subsidising money-losing
carriers. Thus, Swissair was likely viewed to be a timely provider of
capital and management skills. (Chang and Williams, 2001).
 W.W. Suen / Journal of Air Transport Management 8 (2002) 355–363 359

Fig. 2. Oneworld Alliance 2000.

Fig. 3. Star Alliance 2000.

Table 2 Swissair was also the most powerful because it had

Swissair’s equity stakes (%) in other airlines 2000 taken significant equity stakes in most of its partners,
Air Europe 49.0 Austrian Airlines 10.0 giving it a large voice in the running of these airlines,
AOM France 49.0 Balair/CTA Leisure 100.0 despite constraints on managerial control.
Crossair 70.5 Cargolux 33.7 On the other hand, its partners were not completely
LOT Polish Air Littoral 37.6 LTU Group 49.9
Portugalia 42.0 South African Airways 20.0
powerless. They also brought revenue to the Group’s
Sabena 49.5a Ukraine International Airlines 5.6 other businesses. The partners gave it access to markets
TAP Air Portugal 34.0b it did not have an automatic right to enter, and they
Volare Air 34.0 strengthened its network. However, the partners,
a
Commitment to increase to 85%. individually, were not powerful, since they only con-
b
Committed, but transaction had not taken place yet. tributed a fraction of the benefits Swissair derived from
the alliance. Swissair’s partners also detracted from it: in
Global Excellence, Swissair chose partners who did not
absolute terms, to its partners than vice versa. It also dilute its brand value—however, the bevy of struggling
contributed the most important resources, such as IT, second-tier carriers in Qualiflyer took away from its
maintenance, operations support, and reputation. premium image.
360 W.W. Suen / Journal of Air Transport Management 8 (2002) 355–363
Given the resources that it contributed, the Group
ensured that its partner airlines were dependent on it. In
terms of firm-specific factors, the dependence was
almost entirely one way. Swissair’s partners were
sensitive and vulnerable to its actions because the
resources it provided were mission critical and would
have an immediate and widespread revenue effect if
Swissair ceased to provide them. The more cash-
strapped carriers were also sensitive because Swissair
provided the capital they needed to continue operating
and its service contributions affected flight operations.
Furthermore, since Swissair’s resources permeated its
partners’ operations, switching and exit costs would be
relatively high. The extreme case is Sabena, which was
being managed by a Swissair-owned company, in
addition to cooperating on sales, reservations, ground
handling, IT, cargo operations, and code-shares.
Conversely, Swissair was not dependent on a specific
partner’s resources. Swissair’s airline operations were
only somewhat sensitive to the smaller carriers in terms
of revenues from transfer traffic, code-shares or block-
space agreements, since European traffic only accounted
for half of its revenues and Qualiflyer’s contributions a
fraction of that. Its partners’ actions could affect its
other businesses, but again, Qualiflyer carriers were not
their primary customers. Given the scale and scope of
the Group’s operations, a single partner’s actions would
not have a significant impact on it.
Given the nature of its resource contributions, and its
partners commitments to utilise its services, Swissair
clearly had power over its partners and they were clearly
dependent on it. In such a case, Swissair did not have to
take such large equity stakes in its partners.4 Aside from
LOT Polish, where Swissair outbid BA and Lufthansa
for its stake (Bobinski, 1999), it is not evident that the
other European partners had many options outside of
Qualiflyer. Unlike Swissair, the other global alliances all
had members who were allowed to operate in the EU
without restrictions.
Instead, despite the fact that Swissair was clearly the
most powerful party in the group, and the fact that its
partners depended on its resources, when it constructed
interdependence, it not only bound its partners, but also
itself. Swissair’s commitments to increase its equity
holdings, guarantee its partners’ debts or serve as a
lender of last resort, increased its exposure to its
partners’ financial performance. Swissair, therefore,
weakened its own position by creating a situation of
mutual dependence: even though its partners depended
on Swissair for operational support, this was balanced
by their potential impact on Swissair’s profit and loss
and cash flow. Moreover, the structure of the alliance
4
While it can be argued that the equity approach was an insurance
policy to give it access to the EU market, Switzerland signed a treaty
with the EU to be included in the common aviation regime.
commitments meant that Swissair faced significant exit
costs.
4. The environment, the alliance, and the fall of Swissair
The Swissair Group was assumed to be a profitable
operation by the public, given the airline’s stellar
reputation. However, as the data in Table 3 shows, the
Swissair Group was barely profitable throughout the
1990s. Although its net margins were positive, they
never exceeded 2% between 1989 and 1994, despite that
fact that operating margins were hundreds of basis
points higher. This indicates that the Group incurred
significant loses in its investments and financial activ-
ities. For the period 1995–2000, where comparative data
is available from Airline Business’ annual surveys, the
Group’s operating margins underperformed the indus-
try average every year, and underperformed on a net
margins basis in all but 2 years. This is in spite of the
fact that the volatile passenger transport business only
accounted for about half of its operations, and that it
had pursued a diversification strategy aggressively in
order to smooth out its earnings.
However, Swissair’s financial problems cannot
all be attributed to financial mismanagement. As
stated in its Annual Reports, a number of external
factors affected its revenues including the ‘‘Asian flu’’
(1998–99), disruptions to transport due to a new
European air traffic control system, and military
operations in the former Yugoslavia, which resulted
in reduced demand and excess capacity. Fuel prices also
increased from around $0.40 per gallon in 1999 to
almost $1 per gallon by the end of 2000 (O’Toole, 2001).
The decline in the value of the Swiss Franc against
the US dollar also played a role—despite the fact that
the Group hedged its foreign exchange exposure.
(SAirGroup, 2000b, 2001b). The weakening macro-
economic environment had also put downward pressure
on the demand for corporate travel. Finally, Swissair’s
competitive environment was changing rapidly, with the
establishment of truly global airline alliances with
European, North American and Asian partners, which
provided a better value proposition to customers than
Qualiflyer’s regional focus.
However, although external factors played a role in
weakening its financial position, the majority of its
problems are the direct result of how it implemented its
alliance strategy. As the analysis of the parties’ relative
resource dependence demonstrated, Swissair did not
need equity to hold its partners to it. More significantly,
in terms of the inadvisability of these managerial
decisions is the fact that the majority of the large equity
stakes were taken in 1999–2000, in the beginning of a
global economic downturn. The negative impact of this
approach is clearly evident in the analysis of the Group’s
 W.W. Suen / Journal of Air Transport Management 8 (2002) 355–363 361

Table 3
Swissair Group Returns 1989–2000 versus the industry average 1995–2000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Op Mar % 9.6 6.7 7.8 10.3 8.9 2.0 3.4 4.2 6.2 6.2 4.9 16.0
Industry 5.7 5.0 7.2 6.8 5.3 4.2
Net Mar % 2.0 0.1 0.9 1.8 0.9 0.4 2.2 6.1 3.1 3.2 2.1 17.8
Industry 2.1 1.5 3.2 3.1 3.0 1.1

financial statements from 1997 to 2000 (SAirGroup, Table 4

1999, 2000b, 2001b). Swissair Group Returns 1997–2001-1H

1997 1998 1999 2000 2001-1H

(%) (%) (%) (%) (%)
4.1. Profit and loss
Operating margin of 5.3 5.34 5.18 3.72 2.52
Despite net losses in 1995 and 1996, it appeared that underlying business
EBIT 6.23 6.2 4.95 15.97 0.53
the Swissair Group had turned the corner by 1997, Net margin 3.1 3.2 2.1 17.78 2.88
although its net margin of 3% was still below the
industry average. Indeed, the Bloomberg database
shows that its performance was rewarded by the market.
Table 5
The Swissair Group’s share price on the Zurich Breakdown of EBIT by Business Unit
exchange (SRN.VX) rose from CHF 226.4 on 3 January
1997 to CHF 509 by 17 July 1998; this was followed by a EBIT By Division 1997 1998 1999 2000 2001-1H
gradual decline, although the price remained above the SAirLines 264 354 188 35 138
January 1997 level until February 2001. SAirServices 127 145 165 162 6
The Group’s margins remained positive until it faced SAirLogistics 43 33 6 99 17
SAirRelations 181 153 269 300 56
catastrophic losses in 2000. What is more telling are the
SAirGroup 43 15 95 68 111
differences between the operating margins from the SAirLines investments 80 3256 137
underlying business (before profits/losses from opera- EBIT 658 700 643 2592 43
tional investments and exceptional costs and income),
operating margins including profits/losses from operat-
ing investments and exceptional income/costs (EBIT),
and net margins, which include financial investments/ activities, which includes items such as interest, income
activities and minority interests. (Table 4) Although its from securities, exchange rate differences, and the cost
investments brought almost CHF 200 M in additional of hedging transactions. Thus, while the Group’s
income in 1997 and 1998, these gains were completely operations were profitable, financial management and
overshadowed by a CHF 31 M loss in 1999 and more investment strategies were conducted at a loss.
significantly, a CHF 3195 M loss in 2000. While the loss
in 1999 does not appear significant, exceptional income 4.2. Balance sheet and cash flow
hid a CHF 401 M loss from the airline investments.
After exceptional income and costs are taken into The alliance strategy’s impact was also evident in the
account, the investments in other airlines reduced EBIT Group’s balance sheet and cash flow statements. From
by CHF 80 M in 1999 and CHF 3256 M in 2000.5 1997 to 2000, the Group’s debt-to-equity increased
Breaking down EBIT according to the Group’s business dramatically: debt-equity ratios rose from 81:19 to 97:3.
units shows the impact of the investment strategy more Although the net loss of CHF 2885 M in 2000 was
clearly. (Table 5) At the same time, it appeared that the largely responsible for eroding shareholder’s equity by
diversification strategy was working, as the analysis of some 72% from the previous year, the Group’s liabilities
the return on invested capital (ROIC) by business unit had also doubled during this period. The most
shows that the SAirLines was by far the poorest significant increases came from current liabilities,
performing, with returns of 3.3% in 1999 and 0.9% in primarily bank loans, and provisions to cover expected
2000, compared to up to 32.6% for SAirLogistics. liabilities from its airline investments.6 As a result,
In addition, over the same period, the Group lost interest payments during this period also doubled.
CHF 601 M from financial investments and financial Although airlines are generally highly leveraged, given
5 6
Exceptional costs included writing down CHF 506 M in loans to Provisions for airline investments were CHF 2423M; these do not
Air Littoral, AOM, Volare, and the Belgian government, for Sabena. cover any future operating losses.
362 W.W. Suen / Journal of Air Transport Management 8 (2002) 355–363
Table 6
Swissair Group: Abridged Cash Flow Statement 1997–2001-1H
1997 1998 1999 2000 2001-1H
Net cash from operations 969 1427 2196 1809 1809
Net cash from investments 677 1021 3172 2237 2237
FCF 292 406 976 428 641
Net cash from financing 431 153 1291 933 n/a
the need for large capital investments, Swissair was
consistently more highly leveraged than a sample of
other carriers. According to one measure of leverage
found in the Bloomberg database, total debt/total
capital, Swissair ranged from 63.18% to 88.20%.
Singapore Airlines lay at the other extreme, with total
debt/total capital ranging from 4.65% to 6.53% during
the same period.
The diversification and alliance strategy’s effects were
also evident in the Group’s cash flow statements. Over
the period 1997–2000, free cash flow (FCF) was negative
CHF 1347 M. Net cash inflow from operating activities
was CHF 6129 M. As Table 6 illustrates, positive cash
flow would not have been maintained absent significant
financing activities, which increased the Group’s lever-
age and interest paid to support its investments. While
some of these outlays were made to diversify and
strengthen its portfolio, Swissair was also propping up
its French partners by an estimated CHF 80 M7 per
month in 2000, while Sabena had to be restructured and
recapitalised.
4.3. Exit
By the end of 2000, the Swissair Group’s management
recognised that its strategy was a disaster, and that its
airline investments were responsible for the very
substantial losses. The President and CEO responsible
for the Hunter strategy, as it was called, resigned,
followed by the Board of Directors. In its 2000 Annual
Report, the Group admitted that given the existing
economic environment, and the carriers’ drain on
its resources, it did not have the ability to finance its
strategy, particularly as it was meeting resistance in its
attempts to force some of its associated companies to
restructure. Therefore, its only choice was to restructure
the Group itself: stem cash outflow by exiting loss-
making investments and focus on its core business—the
airline. Its new Chairman stated that, ‘‘any future
partnerships must clearly be based on mutual interest
and little or no capital links’’. (SAirGroup, 2001a) Thus,
7
The figures for the outlays were reported in US$ in the business
press, and have been translated back into CHF on the basis of the
average CHF:US$ rate in 2000 of 1.685:1 used in the Group’s own
reports.
while Swissair had succeeded in preventing its
partners from defecting from the alliance, it now had
to defect.
However, Swissair found that it had raised its own
exit costs. Some of its commitments could not be
abrogated without financial compensation. Although it
backed out of a commitment to purchase 34% of TAP
Portugal, it had to guarantee a CHF 61 M loan instead.
To exit from its French carriers, Swissair had to inject
more capital to keep them from becoming bankrupt. It
ultimately sold its French interests, but at a price:
Swissair paid some CHF 340 M to help support AOM/
Liberte! ’s operations and leased four aircraft on favour-
able terms.
Sabena proved to be the stickiest investment to
exit from, since it teetered on the brink of bankruptcy
throughout 2001, requiring further funds from its
owners, Swissair and the Belgian government. More-
over, its unions protested attempts to restructure
with sporadic strikes, and Belgium’s promises of aid
were subject to EU investigations. Belgium also
threatened to sue the Group for reneging on its promise
to increase its stake to 85%. To forestall this, it agreed
to finance 60% of the Government’s CHF 620 M bail-
out package, in addition to CHF 235 M contributed
earlier in the year.8
Extricating itself from its alliance commitments was
just one element of the restructuring plan; the Group
began disposing of assets, such as its stakes in Galileo
and Equant, in order to generate cash and reduce its
debt burden. However, given the economic downturn,
these airline-related assets were unlikely to be as
valuable as during a boom. It also had to restate its
balance sheet to include off-balance sheet items and
found that the Group’s debt had risen to some CHF
16565 M9, against only CHF 3519 M in cash and
investments. Its total financial exposure worsened
during the first half of 2001, with debts of CHF
17112 M against CHF 2130 M, forcing it to put core
business up for sale, including its Nuance retail stores,
and a majority stake in its Swissport ground handling
operations.
Whether these measures could stave off bankruptcy
became moot after the terrorist attacks in the US
fundamentally altered the industry’s operating environ-
ment. The Group, the Swiss government and several
major banks tried to work out a rescue plan, but when
the funds did not materialise, Swissair was forced to halt
operations, as its aircraft were being seized for unpaid
bills.
8
Swissair’s failure to meet a CHF200 M payment in October after it
ran out of cash may re-ignite the lawsuit. Separately, the Portuguese
government may sue Swissair as they have yet to reach an agreement
on compensation for pulling back from its investment.
9
This was 3 times the amount in 2000.
 W.W. Suen / Journal of Air Transport Management 8 (2002) 355–363
5. Conclusions
This paper argues that although the events of
September 11th precipitated the Swissair Group’s fail-
ure, management decisions over a period of several years
already brought the Group to the brink of bankruptcy.
Although it encountered a number of external factors,
from economic crises to military conflicts, which
depressed its revenues and increased its costs, the fact
is that these types of shocks are part of the very nature
of the airline industry. Swissair recognised this, which is
why, at the corporate level, its strategy was to diversify
its operations in order to give investors a ‘‘safer and
steadier earnings flow’’. (SAirGroup, 2000a) While
many of these businesses were still strongly airline-
related, the financial analyses illustrated that these were
more profitable than the airline operations.
This paper contends that the Swissair Group’s bank-
ruptcy is the result of failures in implementing its
alliance strategy. As the power and interdependence
model illustrated, large equity investments were not
critical to its goal of preventing its partners from
defecting. This resource-based analysis showed that the
relationships were asymmetrical in Swissair’s favour,
even absent equity stakes: Swissair contributed re-
sources which were critical to the others’ operations,
which required operational integration on its partners’
parts, and which had high switching costs, constraining
defection. The use of large equity stakes, along with
promises to increase its stakes, guarantee loans, or act as
a lender of last resort made the Group sensitive, and
ultimately, vulnerable to its partners’ financial perfor-
mance because this had a direct impact on its cash flow.
Making equity investments in other carriers undermined
its diversification strategy by increasing its exposure to
the volatile airline business, during an economic down-
turn. Additionally, its partner choice was also question-
able: not only were these carriers weak, they were from
the same geographic region as Swissair, and would be
exposed to the same macro-economic environment.
Thus, these partners would increase rather than
diversify its risk.
While the Swissair Group recognised the volatility
inherent in the airline industry and devised a strategy to
reduce its exposure to macro-economic and political
effects, the implementation of this strategy was funda-
mentally flawed. In building a cage to prevent its
partners from exiting, Swissair locked itself in as well.
As a result, the Group was weakened, rather than
strengthened, by the new strategy. Although it was still
weak in August 2001, when it presented its half-year
results, some equity analysts believed that its restructur-
ing plan had potential. But given its precarious financial
position, it ultimately could not respond to the crisis
created by September 11th.
363
Acknowledgements
This work is being supported by the SSHRC (Social
Sciences and Humanities Research Council of Canada).
The views expressed are those of the author and are
not necessarily shared by the Fletcher School, Tufts
University or SSHRC.
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