Alliance strategy and the fall of Swissair

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 inOctober 2001 (Swissair Group, 2001) is often associatedwith the events of September 11th, the reality is thatmanagement decisions over the course of several yearshad so weakened the Group’s financial position that itno longer had the resources to respond to externalshocks. The primary argument in this paper andcontribution to theory in strategic alliances, is thatSwissair did not need to resort to taking large equitystakes in its Qualiflyer partners to prevent them fromdefecting. This analysis is based on a power andinterdependence model (Keohane and Nye, 2001) ofinter-firm relationships, in conjunction with resource-dependence theories (Pfeffer and Salancik, 1978), andwill show that many of these carriers did not have thecapability or option to defect, even absent Swissair’sstake.

This paper further contends that while the SwissairGroup developed a sound strategy to diversify risk fromthe air transport business, its equity-based alliancestrategy had the opposite effect. Although the airlineindustry’s performance had been negatively affected byevents in the macro-economic environment, analysis ofthe Group’s financial statements shows that its airlinealliance and related investment strategy was responsiblefor the majority of its losses during 1997–2001. The cashflow required to invest and support its investments hadto be financed by debt, increasing the Group’s leverage.

Moreover, by taking large equity positions, Swissairmade an implicit commitment to its partners’ survival,and thus became vulnerable to its investments’ financialperformance.

1. Strategic alliances and the airline industry

Strategic alliances have become increasingly impor-tant elements in a firm’s portfolio of strategies and areviewed as a source of competitive advantage. Yoshinoand Rangan (1995) and Gomes-Casseres (1996) definealliance as a cooperative venture between firms situatedon the continuum between markets and hierarchies, andis distinguished by several characteristics: independentfirms; horizontal or vertical relationships; relationshipswhich are not solely transactional; partners bringresources, share risks and benefits but have limitedcontrol; and incomplete contracts. While alliances haveproven to benefit firms, there is also a dark side. Non-cooperation, whether through competition, opportunis-tic behaviour (Williamson, 1975), or defection, may leadto a partner’s or an alliance’s failure.

The airline industry was one of the first to adoptalliances, although multiparty global airline alliances area more recent phenomenon. Holloway (1997) arguesthat ‘‘alliances are a vehicle for ‘market share gainwithout balance sheet pain,’’’ as well as to bypassregulatory constraints. Resource contributions includemarket power, information technology, reputation, salesnetworks, control over routes and hubs, landing rights,

*Corresponding author. Fax: +1-617-627-3712.

E-mail address: [email protected] (W.W. Suen).

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

and capital. Operationally, airlines cooperate across awide range of activities, which can be generallycategorised as: customer service, flights, and operationssupport.1 However, the type of resource contributedand the extent of operational integration is subject toregulation and competition law considerations, whichmay limit the benefits from an alliance.

There have been a number of empirical studies onalliances’ impacts on performance, including Park andCho (1997) and Oum et al.’s (2000), which show thatalliances improve a carrier’s performance on a numberof economic measures, including productivity, pricing,profitability, and share price. Other studies, including anumber commissioned by competition authorities, haveexamined the potential impact on consumer welfare andcompetition. In terms of the work on success and failure,Li (2000) contends that non-lasting alliances tend tofocus on non-core activities, do not increase customerloyalty, and typically code-share without significantfinancial ties. However, financial ties are not sufficient tokeep firms within an alliance; there have been a numberof cases in the airline industry where defections haveoccurred in spite of equity exchanges. As a result, thestudy of non-cooperation in alliances needs to lookbeyond key success factors to a firm’s ability to act on adesire to defect, and therefore take into considerationfactors 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, collapsedafter a series of defections, each of which reduced thevalue of the group to the remaining members, therebymaking the alliance increasingly unattractive. In study-ing non-cooperation in strategic alliances, the conceptsof power and interdependence are a means to measure afirm’s capability to behave opportunistically (Williamson,1975) or defect, and the effect on its partners should itdo so.2 All things being equal, the more powerful andless dependent a party is, the greater its influence overthe alliance and the greater its degree of freedom(Snyder, 1991). In this case, measures of power andinterdependence shed light on why the early allianceswere plagued by defections, and how Swissair over-compensated when building Qualiflyer.

2.1. Defining power and interdependence

Power is commonly defined as control over outcomes,or an ability to get others to do something they wouldnot 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 marketcapitalisation, 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 seconddimension of power addresses the question of instru-mentality; the source of a firm’s power in one alliancemay not yield power in another, both because the typeof resources contributed may not be equally importantand depending on the size, structure, and composition ofthe alliance. The third dimension is relativity. If power isabout being able to get others to do as you wish, then itis less about the absolute value of the measurablevariables than what it is relative to the other party.

Interdependence is a question of the extent to whichtwo parties affect each other and whether the impact isa/symmetrical. Interdependence has several compo-nents, two of the most important being degree andsymmetry. Degree measures the impact of one party’sactions on another, and is further segmented intosensitivity and vulnerability (Keohane and Nye, 2001).Sensitivity is the question of how immediately a party isaffected by another’s action, and the magnitude of theeffect, while vulnerability addresses a party’s ability torespond to an action or changes in the environment. Thesymmetry of a firm’s relationship contrasts its impor-tance to the alliance versus the alliance’s importanceto it.

2.2. Measuring power and interdependence

Power and interdependence are a function of bothfirm- and relationship-specific factors. From a resource-based perspective (Pfeffer and Salancik, 1978), power isprimarily a function of the ownership of resources, andof the relative importance of different types of assets toachieving the alliance’s goal. The resource’s importanceis magnified or mitigated depending on its uniquenessand substitutability. Power and interdependence are alsoa function of relationship-specific factors, which takeinto account the structure and size of the alliance, andthe value of a firm’s contribution relative to its partners’.

Measuring a firm’s interdependence with a partner isa relatively simple question of comparing how mucheach needs the resource the other brings, their respectivecommitments, and options outside of the alliance.Sensitivity is influenced by the type of resourcecontributed; commitments that impact revenues or cashflow have an immediate effect on a firm, particularly ifit also affects a significant percentage of revenues.

1Oum 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.2However, the ability to defect is separate from considerations of

whether a firm defects.

W.W. Suen / Journal of Air Transport Management 8 (2002) 355–363356

Vulnerability is a combination of firm-specific andrelational factors, which include how important apartner’s contribution is to the firm’s performance,its substitutability, the scope of the relationship, andthe extent of the firms’ technological and operationalintegration. The expectation is that the deeper therelationship, the harder it is to unravel, which adds atemporal dimension to the equation. Symmetry assesseshow valuable a partner is and focuses on the relativeimportance of each party’s resource commitments.Size also enters the equation as it may indicatehow important the alliance is to the firm, and whatoptions may be available should a firm choose not tocooperate.

Firms may try to change their relative dependence byconstructing interdependence. Constructed interdepen-dence consists of contractual terms which bind thepartners more closely together. In airline alliances, oneof the most important provisions concerns exclusivity.By forcing member carriers to drop third-party relation-ships, it increases the importance of intra-alliance trafficas 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, whichimpacts relative power and interdependence in analliance. If an alliance does not improve a carrier’sperformance beyond enhanced customer service andminor cost savings, then the parties have little powerover each other since they do not contribute invaluableresources, and interdependence is shallow because thereis little depth in integration. Table 1 illustrates thecarriers’ respective positions in Global Excellence andEuropean Quality, and the resulting behaviours.

In Global Excellence, the exchanges of equity betweenthe Swissair and its partners were largely symbolic. Interms of power deriving from resource contributions,Delta was the most important, accounting for the largest

share of traffic, revenues, destinations, market and ableto transfer more traffic to its partners than vice versa.Singapore exited because the alliance was ‘‘unproduc-tive’’ (Raj, 1997), and Lufthansa could bring greaterbenefits by making Singapore its primary hub in Asia.Therefore, despite an 8-year relationship, the carriersneither became operationally integrated enough tobenefit from synergies nor interdependent enough toform natural exit barriers.

In Atlantic Excellence, however, several componentsof power were evident: Swissair owned roughly half ofSabena, and 10% of Austrian, giving more power overthese carriers and a larger voice at the alliance level. But,Delta was still by far the most powerful and lessdependent. Again, partners defected to relationshipsthat could bring greater value.

Size differentials in the European Quality Alliancewere far less significant. The group had two larger andtwo smaller carriers, whose contributions largely com-plemented each other. Despite cross-shareholdings,formal power was not significant as the parties did nothave enough latent power to acquire their partners.Swissair was probably the most influential member, as itwas the largest carrier, and appeared to be the drivingforce in the alliance, for example, pushing for greaterintegration, a goal not all of its partners shared. Theanecdotal evidence seems to indicate that Swissairsought greater control, something it clearly could notachieve in its global alliance, but even so, the depth ofintegration and extent of dependence was not strongenough to hold its partners in. Finnair and SAS exitedbecause they were not tied to European Quality (and inFinnair’s case, did not want to become more inter-dependent), but also because they also had a strongsubstitute in Lufthansa.

One of the recurring themes in Swissair’s earlyalliances is that they collapsed after a series ofdefections. While the reasons behind the exits vary, inall of the cases, it is evident that interdependence withinthe alliance was not strong enough to hold them in whenalternative options became available.

Table 1

Power, interdependence and behaviour

Global Excellence European Quality

Power DL far more powerful than SQ, SR Small alliance

Symbolic equity exchanges Relatively evenly balanced in power

Small alliance Some equity stakes, but not significant

Interdependence Operational integration insignificant Some traffic coordination, ops support, some code–share... but

shallow integrationCarriers not dependent

Other partners available Potential tensions with network overlap

Behaviour Defect to partners with greater potential to benefit AY exited to LH because did not want to become more integrated

SK exited to LH for greater benefits

W.W. Suen / Journal of Air Transport Management 8 (2002) 355–363 357

3. Qualiflyer: creating dependence

In 1998, Swissair founded yet another Europe-basedalliance, Qualiflyer, with: Austrian, Sabena, AOMFrance, Crossair, Lauda Air, TAP Portugal, and THYTurkish Airlines. Air Europe and LOT Polish joined in1999, and Air Littoral, Portugalia and Volare Air in2000. The alliance level goal was to code-share wherepossible and cooperate on IT, baggage handling, sales,training, cargo, and maintenance and to establish acommon Qualiflyer FFP.

According to Chang and Williams (2001), the smallcarriers brought a diverse range of assets: Air Europeand Crossair gave Swissair access to the Italian andSwiss charter markets. Air Littoral and AOM France(which acquired Air Libert!e), gave Swissair accessFrench domestic market, and in AOM’s case, access toFrance’s overseas territories. Volare (which owns AirLittoral) brought the Italian regional market, while TAPprovided access to the Portuguese market, and connec-tions to South America. These carriers were also acaptive market since they were required to switch toSwissair Group-owned companies for aviation services(A scary Swiss meltdown, 2001).

Structurally, Qualiflyer differed from the earlieralliances in that Swissair is clearly the largest and mostimportant party in terms of revenues, RPKs, and thetype of resources provided. It also anchors the rest of thecarriers in the ‘‘constellation’’ (Gomes-Casseres, 1997);while each member has direct relationships withSwissair, with few exceptions, they do not have bilateralties with each other. This is in sharp contrast to theother global airline alliances (such as the Star Allianceand oneworld) that are grounded on a base level ofreciprocal commitments amongst all the carriers which

are strengthened at the bilateral level with deeperoperational agreements to increase interdependenceand raise exit costs (Figs. 1–3).

Moreover, while Airline Business’ annual alliancesurveys show that the use of equity has been decliningthroughout the industry, Swissair is an exception to thistrend. Even though it had taken equity stakes in itsprevious alliances, in all but Sabena’s case, these were atmore symbolic levels. This was not the case inQualiflyer: by May 2000, the Swissair Group had takenor promised to take equity stakes of between 30% and50% in all but one of its partners.3 It increased its stakein Crossair to 70% and agreed to increase its stake inSabena to 85%. This gave it formal power over thesecarriers, although the extent of its control was stilllimited by regulatory restrictions (Table 2).

3.1. Power and interdependence

Since Swissair’s previous alliances had disintegratedafter a series of exits, it learned from experience that itneeded to be able to forestall defections through deeperintegration to create natural exit barriers, or viaownership and control.

In Qualiflyer, Swissair created an alliance in which itwas clearly the most powerful partner on both informaland formal terms; it was by far the largest, accountingfor some 30% of the RPKs, and its revenues were overfour times that of the second largest carrier, Sabena.Thus, it would be able to transfer more traffic, on

Fig. 1. Qualiflyer Members 2000.

3Some 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).


absolute terms, to its partners than vice versa. It alsocontributed the most important resources, such as IT,maintenance, operations support, and reputation.

Swissair was also the most powerful because it hadtaken significant equity stakes in most of its partners,giving it a large voice in the running of these airlines,despite constraints on managerial control.

On the other hand, its partners were not completelypowerless. They also brought revenue to the Group’sother businesses. The partners gave it access to marketsit did not have an automatic right to enter, and theystrengthened its network. However, the partners,individually, were not powerful, since they only con-tributed a fraction of the benefits Swissair derived fromthe alliance. Swissair’s partners also detracted from it: inGlobal Excellence, Swissair chose partners who did notdilute its brand value—however, the bevy of strugglingsecond-tier carriers in Qualiflyer took away from itspremium image.

Table 2

Swissair’s equity stakes (%) in other airlines 2000

Air Europe 49.0 Austrian Airlines 10.0

AOM France 49.0 Balair/CTA Leisure 100.0

Crossair 70.5 Cargolux 33.7

LOT Polish Air Littoral 37.6 LTU Group 49.9

Portugalia 42.0 South African Airways 20.0

Sabena 49.5a Ukraine International Airlines 5.6

TAP Air Portugal 34.0b

Volare Air 34.0

aCommitment to increase to 85%.bCommitted, but transaction had not taken place yet.

Fig. 2. Oneworld Alliance 2000.

Fig. 3. Star Alliance 2000.


Given the resources that it contributed, the Groupensured that its partner airlines were dependent on it. Interms of firm-specific factors, the dependence wasalmost entirely one way. Swissair’s partners weresensitive and vulnerable to its actions because theresources it provided were mission critical and wouldhave an immediate and widespread revenue effect ifSwissair ceased to provide them. The more cash-strapped carriers were also sensitive because Swissairprovided the capital they needed to continue operatingand its service contributions affected flight operations.Furthermore, since Swissair’s resources permeated itspartners’ operations, switching and exit costs would berelatively high. The extreme case is Sabena, which wasbeing managed by a Swissair-owned company, inaddition to cooperating on sales, reservations, groundhandling, IT, cargo operations, and code-shares.

Conversely, Swissair was not dependent on a specificpartner’s resources. Swissair’s airline operations wereonly somewhat sensitive to the smaller carriers in termsof revenues from transfer traffic, code-shares or block-space agreements, since European traffic only accountedfor half of its revenues and Qualiflyer’s contributions afraction of that. Its partners’ actions could affect itsother businesses, but again, Qualiflyer carriers were nottheir primary customers. Given the scale and scope ofthe Group’s operations, a single partner’s actions wouldnot have a significant impact on it.

Given the nature of its resource contributions, and itspartners commitments to utilise its services, Swissairclearly had power over its partners and they were clearlydependent on it. In such a case, Swissair did not have totake such large equity stakes in its partners.4 Aside fromLOT Polish, where Swissair outbid BA and Lufthansafor its stake (Bobinski, 1999), it is not evident that theother European partners had many options outside ofQualiflyer. Unlike Swissair, the other global alliances allhad members who were allowed to operate in the EUwithout restrictions.

Instead, despite the fact that Swissair was clearly themost powerful party in the group, and the fact that itspartners depended on its resources, when it constructedinterdependence, it not only bound its partners, but alsoitself. Swissair’s commitments to increase its equityholdings, guarantee its partners’ debts or serve as alender of last resort, increased its exposure to itspartners’ financial performance. Swissair, therefore,weakened its own position by creating a situation ofmutual dependence: even though its partners dependedon Swissair for operational support, this was balancedby their potential impact on Swissair’s profit and lossand cash flow. Moreover, the structure of the alliance

commitments meant that Swissair faced significant exitcosts.

4. The environment, the alliance, and the fall of Swissair

The Swissair Group was assumed to be a profitableoperation by the public, given the airline’s stellarreputation. However, as the data in Table 3 shows, theSwissair Group was barely profitable throughout the1990s. Although its net margins were positive, theynever exceeded 2% between 1989 and 1994, despite thatfact that operating margins were hundreds of basispoints higher. This indicates that the Group incurredsignificant loses in its investments and financial activ-ities. For the period 1995–2000, where comparative datais available from Airline Business’ annual surveys, theGroup’s operating margins underperformed the indus-try average every year, and underperformed on a netmargins basis in all but 2 years. This is in spite of thefact that the volatile passenger transport business onlyaccounted for about half of its operations, and that ithad pursued a diversification strategy aggressively inorder to smooth out its earnings.

However, Swissair’s financial problems cannotall be attributed to financial mismanagement. Asstated in its Annual Reports, a number of externalfactors affected its revenues including the ‘‘Asian flu’’(1998–99), disruptions to transport due to a newEuropean air traffic control system, and militaryoperations in the former Yugoslavia, which resultedin reduced demand and excess capacity. Fuel prices alsoincreased from around $0.40 per gallon in 1999 toalmost $1 per gallon by the end of 2000 (O’Toole, 2001).The decline in the value of the Swiss Franc againstthe US dollar also played a role—despite the fact thatthe Group hedged its foreign exchange exposure.(SAirGroup, 2000b, 2001b). The weakening macro-economic environment had also put downward pressureon the demand for corporate travel. Finally, Swissair’scompetitive environment was changing rapidly, with theestablishment of truly global airline alliances withEuropean, North American and Asian partners, whichprovided a better value proposition to customers thanQualiflyer’s regional focus.

However, although external factors played a role inweakening its financial position, the majority of itsproblems are the direct result of how it implemented itsalliance strategy. As the analysis of the parties’ relativeresource dependence demonstrated, Swissair did notneed equity to hold its partners to it. More significantly,in terms of the inadvisability of these managerialdecisions is the fact that the majority of the large equitystakes were taken in 1999–2000, in the beginning of aglobal economic downturn. The negative impact of thisapproach is clearly evident in the analysis of the Group’s

4While 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.


financial statements from 1997 to 2000 (SAirGroup,1999, 2000b, 2001b).

4.1. Profit and loss

Despite net losses in 1995 and 1996, it appeared thatthe Swissair Group had turned the corner by 1997,although its net margin of 3% was still below theindustry average. Indeed, the Bloomberg databaseshows that its performance was rewarded by the market.The Swissair Group’s share price on the Zurichexchange (SRN.VX) rose from CHF 226.4 on 3 January1997 to CHF 509 by 17 July 1998; this was followed by agradual decline, although the price remained above theJanuary 1997 level until February 2001.

The Group’s margins remained positive until it facedcatastrophic losses in 2000. What is more telling are thedifferences between the operating margins from theunderlying business (before profits/losses from opera-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 and minority interests. (Table 4) Although itsinvestments brought almost CHF 200M in additionalincome in 1997 and 1998, these gains were completelyovershadowed by a CHF 31M loss in 1999 and moresignificantly, a CHF 3195M loss in 2000. While the lossin 1999 does not appear significant, exceptional incomehid a CHF 401M loss from the airline investments.After exceptional income and costs are taken intoaccount, the investments in other airlines reduced EBITby CHF 80M in 1999 and CHF 3256M in 2000.5

Breaking down EBIT according to the Group’s businessunits shows the impact of the investment strategy moreclearly. (Table 5) At the same time, it appeared that thediversification strategy was working, as the analysis ofthe return on invested capital (ROIC) by business unitshows that the SAirLines was by far the poorestperforming, with returns of 3.3% in 1999 and 0.9% in2000, compared to up to 32.6% for SAirLogistics.

In addition, over the same period, the Group lostCHF 601M from financial investments and financial

activities, which includes items such as interest, incomefrom securities, exchange rate differences, and the costof hedging transactions. Thus, while the Group’soperations were profitable, financial management andinvestment strategies were conducted at a loss.

4.2. Balance sheet and cash flow

The alliance strategy’s impact was also evident in theGroup’s balance sheet and cash flow statements. From1997 to 2000, the Group’s debt-to-equity increaseddramatically: debt-equity ratios rose from 81:19 to 97:3.Although the net loss of CHF 2885M in 2000 waslargely responsible for eroding shareholder’s equity bysome 72% from the previous year, the Group’s liabilitieshad also doubled during this period. The mostsignificant increases came from current liabilities,primarily bank loans, and provisions to cover expectedliabilities from its airline investments.6 As a result,interest payments during this period also doubled.Although airlines are generally highly leveraged, given

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

Table 4

Swissair Group Returns 1997–2001-1H

1997

(%)

1998

(%)

1999

(%)

2000

(%)

2001-1H

(%)

Operating margin of

underlying business

5.3 5.34 5.18 3.72 2.52

EBIT 6.23 6.2 4.95 �15.97 �0.53

Net margin 3.1 3.2 2.1 �17.78 �2.88

Table 5

Breakdown of EBIT by Business Unit

EBIT By Division 1997 1998 1999 2000 2001-1H

SAirLines 264 354 188 35 138

SAirServices 127 145 165 162 �6

SAirLogistics 43 33 6 99 17

SAirRelations 181 153 269 300 56

SAirGroup 43 15 95 68 �111

SAirLines investments �80 �3256 �137

EBIT 658 700 643 �2592 �43

5Exceptional costs included writing down CHF 506M in loans to

Air Littoral, AOM, Volare, and the Belgian government, for Sabena.

6Provisions for airline investments were CHF 2423M; these do not

cover any future operating losses.


the need for large capital investments, Swissair wasconsistently more highly leveraged than a sample ofother carriers. According to one measure of leveragefound in the Bloomberg database, total debt/totalcapital, Swissair ranged from 63.18% to 88.20%.Singapore Airlines lay at the other extreme, with totaldebt/total capital ranging from 4.65% to 6.53% duringthe same period.

The diversification and alliance strategy’s effects werealso evident in the Group’s cash flow statements. Overthe period 1997–2000, free cash flow (FCF) was negativeCHF 1347M. Net cash inflow from operating activitieswas CHF 6129M. As Table 6 illustrates, positive cashflow would not have been maintained absent significantfinancing activities, which increased the Group’s lever-age and interest paid to support its investments. Whilesome of these outlays were made to diversify andstrengthen its portfolio, Swissair was also propping upits French partners by an estimated CHF 80M7 permonth in 2000, while Sabena had to be restructured andrecapitalised.

4.3. Exit

By the end of 2000, the Swissair Group’s managementrecognised that its strategy was a disaster, and that itsairline investments were responsible for the verysubstantial losses. The President and CEO responsiblefor 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 existingeconomic environment, and the carriers’ drain onits resources, it did not have the ability to finance itsstrategy, particularly as it was meeting resistance in itsattempts to force some of its associated companies torestructure. Therefore, its only choice was to restructurethe Group itself: stem cash outflow by exiting loss-making investments and focus on its core business—theairline. Its new Chairman stated that, ‘‘any futurepartnerships must clearly be based on mutual interestand little or no capital links’’. (SAirGroup, 2001a) Thus,

while Swissair had succeeded in preventing itspartners from defecting from the alliance, it now hadto defect.

However, Swissair found that it had raised its ownexit costs. Some of its commitments could not beabrogated without financial compensation. Although itbacked out of a commitment to purchase 34% of TAPPortugal, it had to guarantee a CHF 61M loan instead.To exit from its French carriers, Swissair had to injectmore capital to keep them from becoming bankrupt. Itultimately sold its French interests, but at a price:Swissair paid some CHF 340M to help support AOM/Libert!e’s operations and leased four aircraft on favour-able terms.

Sabena proved to be the stickiest investment toexit from, since it teetered on the brink of bankruptcythroughout 2001, requiring further funds from itsowners, Swissair and the Belgian government. More-over, its unions protested attempts to restructurewith sporadic strikes, and Belgium’s promises of aidwere subject to EU investigations. Belgium alsothreatened to sue the Group for reneging on its promiseto increase its stake to 85%. To forestall this, it agreedto finance 60% of the Government’s CHF 620M bail-out package, in addition to CHF 235M contributedearlier in the year.8

Extricating itself from its alliance commitments wasjust one element of the restructuring plan; the Groupbegan disposing of assets, such as its stakes in Galileoand Equant, in order to generate cash and reduce itsdebt burden. However, given the economic downturn,these airline-related assets were unlikely to be asvaluable as during a boom. It also had to restate itsbalance sheet to include off-balance sheet items andfound that the Group’s debt had risen to some CHF16565M9, against only CHF 3519M in cash andinvestments. Its total financial exposure worsenedduring the first half of 2001, with debts of CHF17112M against CHF 2130M, forcing it to put corebusiness up for sale, including its Nuance retail stores,and a majority stake in its Swissport ground handlingoperations.

Whether these measures could stave off bankruptcybecame moot after the terrorist attacks in the USfundamentally altered the industry’s operating environ-ment. The Group, the Swiss government and severalmajor banks tried to work out a rescue plan, but whenthe funds did not materialise, Swissair was forced to haltoperations, as its aircraft were being seized for unpaidbills.

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

7The 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.

8Swissair’s failure to meet a CHF200M 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.9This was 3 times the amount in 2000.


5. Conclusions

This paper argues that although the events ofSeptember 11th precipitated the Swissair Group’s fail-ure, management decisions over a period of several yearsalready brought the Group to the brink of bankruptcy.Although it encountered a number of external factors,from economic crises to military conflicts, whichdepressed its revenues and increased its costs, the factis that these types of shocks are part of the very natureof the airline industry. Swissair recognised this, which iswhy, at the corporate level, its strategy was to diversifyits operations in order to give investors a ‘‘safer andsteadier earnings flow’’. (SAirGroup, 2000a) Whilemany of these businesses were still strongly airline-related, the financial analyses illustrated that these weremore profitable than the airline operations.

This paper contends that the Swissair Group’s bank-ruptcy is the result of failures in implementing itsalliance strategy. As the power and interdependencemodel illustrated, large equity investments were notcritical to its goal of preventing its partners fromdefecting. This resource-based analysis showed that therelationships 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, constrainingdefection. The use of large equity stakes, along withpromises to increase its stakes, guarantee loans, or act asa lender of last resort made the Group sensitive, andultimately, vulnerable to its partners’ financial perfor-mance because this had a direct impact on its cash flow.Making equity investments in other carriers underminedits diversification strategy by increasing its exposure tothe volatile airline business, during an economic down-turn. Additionally, its partner choice was also question-able: not only were these carriers weak, they were fromthe same geographic region as Swissair, and would beexposed to the same macro-economic environment.Thus, these partners would increase rather thandiversify its risk.

While the Swissair Group recognised the volatilityinherent in the airline industry and devised a strategy toreduce its exposure to macro-economic and politicaleffects, the implementation of this strategy was funda-mentally flawed. In building a cage to prevent itspartners from exiting, Swissair locked itself in as well.As a result, the Group was weakened, rather thanstrengthened, by the new strategy. Although it was stillweak in August 2001, when it presented its half-yearresults, some equity analysts believed that its restructur-ing plan had potential. But given its precarious financialposition, it ultimately could not respond to the crisiscreated by September 11th.

Acknowledgements

This work is being supported by the SSHRC (SocialSciences and Humanities Research Council of Canada).The views expressed are those of the author and arenot necessarily shared by the Fletcher School, TuftsUniversity or SSHRC.

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Alliance strategy and the fall of Swissair