THE BOTTOM LINE: Swiss Air Lines' Troubled Skies

By GORAN MIJUK

Of DOW JONES NEWSWIRES
ZURICH -- Swiss International Air Lines (Z.SWI) needs a radical overhaul if it's to escape the fate of Swissair , its defunct predecessor.

The carrier has a muddled strategy that combines no-frills and premium services, has too big a fleet and lacks a strong partner. Last year it lost CHF1 billion. While it has CHF1.2 billion in cash, it's burning as much as CHF3 million a day.

"I'd rather go to the casino than invest in Swiss," said Beat Stuber, a partner at Swiss asset management company Johnson & Stuber.

There's much to be done just a year after it emerged from the ruins of Swissair and regional carrier Crossair. The company says it plans to cut CHF600 million of costs by 2004 and will release a new business plan in early May.

"This airline needs a strong partner and to join an alliance," says Stephane Garelli, a specialist in global competitiveness and professor at the International Institute for Management Development in Lausanne. "It also needs to rebuild the brand and determine its most suitable size."

With problems mounting on the recent downturn in air travel, most private and institutional investors have shied away from the stock. Early Wednesday it was down 5.3%, at CHF3.40, a fraction of its February 2002 flotation price of CHF56.

Another turnoff is its small 15% free float. The Swiss government and some leading businesses control the company.

If management continues to tinker rather than take bold action to reshape itself, the chances of a revival at Swiss look slim.

Political Considerations
One reason why management may be hesitant is the fresh memory of political upheaval that preceded the creation of Swiss.

The collapse of Swissair shortly after the Sept. 11, 2001 attacks in the U.S. was the largest corporate shock the country has ever suffered. It led to unprecedented public protests. To halt this meltdown in public confidence, the federal and cantonal governments hurriedly cobbled together a rescue plan with Switzerland's business elite to pump more than CHF4 billion into the airline industry. The Swiss government holds 20.4% of the airline and cantons and communities 12.2%.

While Switzerland's taxpayers backed the plan, they did so grudgingly and only because a total collapse could have led to the loss of more than 50,000 jobs and disappearance of a national Swiss airline.

A deep cut in the size of the airline's fleet may be one of management's few options, but it might be hard to sell because that could lead to the loss of as many as 3,000 jobs.

Swiss has reduced its fleet by 15% since February and now has a fleet of 110, including 25 long-haul jets. Orders for new aircraft have been postponed and staff cut by 10% to 9000. But analysts say those moves won't generate enough savings.

"What they really need are massive measures," said Mathias Egger, analyst at Bank Pictet.

Airline analysts say Switzerland's population of just 7 million people is too small to sustain 25 long-haul aircraft. It needs only around seven, they say, but reducing the fleet will cause reciprocal cuts in the rest of its operations. Most of these planes bring passengers to Switzerland from the rest of Europe to feed connecting intercontinental flights.

No Thrills About No Frills
IMD's Garelli is also wary of Swiss's latest attempt to build a no-frills service of four Airbus A-340 jets. He said the service undermines the company's efforts to position itself as a premium carrier.

The "Swiss Sun" venture is aimed at shifting more customers to its Zurich hub to fill up long-distance flights, which are now running at 50% occupancy. But Garelli says Swiss will be cannibalizing its own business on several European routes, further threatening its bid for a return to profitability

Swiss's search for an alliance is also on hold. Though the airline has close ties with OneWorld alliance members AMR Corp.'s (AMR) American Airlines, Finnair OYJ (Y.FAI) and Spanish Iberia Lineas Aereas De Espana SA (E.ILA), Swiss doesn't expect to join the alliance before next year.

Alliances are key to large airlines. They enable carriers to cost-effectively expand branding and marketing and enhance their image around the world.

Swiss has cut some routes due to the SARS epidemic and war in Iraq, but analysts say management may become complacent in the hope that its cash will be enough to get through the current crisis.

However, the cash reserves will dwindle, with analysts expecting the airline to post a CHF500 million loss in 2003. That would leave Swiss short of money in early 2004 if the market doesn't improve drastically.

Swiss said its first-quarter net loss reached triple figures but was below the CHF300 million some analysts feared.

Aware of the high cash-burn rate, Swiss two weeks ago suspended flights to seven long-haul destinations and reduced the frequency of flights on 20 European routes.

While more cuts are in the pipeline, Chief Executive Andre Dose Tuesday asked its main lenders, UBS AG (UBS) and Credit Suisse Group (CSR) - each holds 10% of the airline's shares - to reinstate a CHF500 million credit line, which he said the banks recently withdrew. Both banks deny that, saying Swiss itself canceled the credit last year.

"We are working on a new business plan and will publish the cornerstones in early May," said Swiss spokesman Dominik Werner.

While he declined to give details, Werner said there would be no "taboos," suggesting that any cuts may be deeper than previous moves.

Dieter Winet, portfolio manager at Swissca asset management, which doesn't hold any of the airline's shares, fears a repeat of Swissair's fate if management doesn't map out the right plan.

"The current carrier is an economic failure with only politics, that is taxpayers, able to save it," he said.

Company Web Site:http://www.swiss.com