SAir - and now the rescue plan April 2001

SAir has announced one of the most spectacular financial results in European aviation history — a net loss of Sfr2.9bn ($1.7bn) on revenues of Sfr15bn, with Sfr2.4bn of the loss related to write–offs on its airline investments.

SAir, until recently thought of as one of Europe’s financially robust airlines, is now looking very fragile with a debt/equity ratio of 6/1 on its balance sheet. Its share price plummeted another 30% of announcement of the results at the beginning of April, and Moody’s downgraded its credit status from A3 to Baa3, one grade above junk bonds.

SAir, under the new leadership of Mario Corti, formerly head of Nestle, is now faced with putting together a turn–around strategy for the whole Group. He has at least the comfort of knowing that the Swiss governmental bodies, which retain a 13% stake in the company, will probably not let the core airline go bankrupt. State aid, in some form or another, may be necessary, which should be permissible given that Switzerland is outside the EU and the European Economic Airspace Agreement.

Painful exiting

Exiting from the investee airlines looks as if it will be very complicated, not least because many of the aircraft financing deals signed by these carriers impose serious penalties if the SAir link is cut.

Starting with the French situation: AOM, Air Litoral and Air Liberte are still three completed uncoordinated airlines with three different cultures producing a combined operating loss of about Sfr480m in 2000. They continue to suffer from union problems and face powerful competition from the TGV high–speed network.

One alternative is to declare bankruptcy, but such are the extent of SAir’s obligations this would probably be the most expensive option, with the risk of long and tortuous legal proceedings. The strategy could centre on selling some assets, such as the Nice operation, where Air Littoral has a good position, and/or the long–haul routes to the French Caribbean, then restructuring the network, with the aim of providing feed to an alliance partner. An immediate problem is that Air Littoral, to whom Sair has cut off funding, would only command a distress sale price now.

Perhaps the French government will intervene — the first instance of state aid to a non flag–carrier.

Having just pumped €250m into Sabena (see Aviation Strategy, March 2001), SAir has little choice but to stick with this airline. Here the strategy will have to be old–fashioned asset stripping. Cash could be raised from the sale of parked A340s and other assets. The network could be severely trimmed as well, with transatlantic services being an obvious target, but agreements with the unions which themselves are contributing to Sabena’s rescue plan may limit SAir’s scope for action.

LTU has yet to see any benefits from tour operator Rewe’s purchase of 40% of this charter last year (SAir is stuck with 49.9%). The operating loss for 2000 is estimated at Sfr 220m on revenues of Sfr1.6bn. An outside possibility here would be for SAir to tempt Airtours/Fti into a further expansion in the German market by putting its share up for sale at a distressed price.

SAir pulled out of the TAP investment (34% planned) last December and there have been mutterings from the Portuguese government about law suits. This probably will not happen but SAir will not get away completely free — it will have to provide some aircraft financing guarantees for TAP and maybe also for Portugalia whose purchase agreement fell through earlier in 2000.

In Italy SAir’s two investee airlines, Volare and Air Europe Italy, lost over Sfr100m between then at the operating level last year.

Problems include the expenses associated with the introduction of new 777s, low domestic load factors, competition from Alitalia and, most importantly, negative synergies from the attempted merger of the two airlines. The plan seems to be to continue with the merger, centring operations at Milan Linate, and hope that cost saving emerge and that yield can be improved. These two airlines could probably be sold on without too many legal complications, but there are no obvious purchasers on the horizon. LOT’s operating profit in 2000 was marginal — Sfr13m on Sfr1.1bn of revenues — but it was a profit. LOT has a modern fleet, a dominant position at Warsaw and is by far the most successful of the former Soviet Bloc carriers, but it does have problems winning Western customers and is under constant threat from Lufthansa and its Star partners. SAir’s best strategy would appear to be to keep its investment and assist in whatever way possible in building LOT’s hub network. At a later date it may then be possible for SAir to sell its stake to BA/American as part of the upcoming alliance re–alignment process.

SAA has been the most successful of SAir’s investments, producing an estimated operating profit of Sfr380 in 2000 on revenues of Sfr2.2bn. Selling its 20% stake would be a relatively easy way of raising cash, though it wouldn’t recover its original expenditure of Sfr370m. SAir’s best option here might be to hold on to its stake until the planned pivatisation next year which could coincide with SAA joining either oneworld or Star. At that point selling on the stake to Lufthsansa/United or BA/American might be logical.

So from this review it becomes painfully clear that there is no way for SAir to unload its loss–making airline investments in the near future. These investments were intended to generate new market opportunities for SAir’s successful service companies. Now SAir’s service companies will have to be sacrificed to cover the investment losses.

As for Swissair itself, it made a substantial operating loss of Sfr195m in 2000. The charter airline Balair lost a further Sfr25m and even Crossair, the efficient regional subsidiary, went into the red for the first time with an estimated operating loss of Sfr20m.

Swissair, if it is to survive, now at least must have a clear vision of the future: this involves getting eventually getting rid of the SAir and Qualiflyer baggage (including the names) and re–establishing itself as a niche, high–quality carrier linked into the oneworld alliance (becoming a BA franchisee might be a step too far).

The aim of establishing a strong position in the EU through acquisition now seems totally misguided. The protection gained from bilateral, including its open skies antitrust–immunised agreement with the US, is vital to its future.

Assets for sale

Returning to the possible disposals — SAir may have to sell most or all of Gate Gourmet, Nuance, Swissport and Flight lease. It certainly won’t be able to charge premium prices and so there could well be some bargains for the company’s erstwhile competitors.

Gate Gourmet is the is the second largest airline catering company after Lufthansa’s LSG. LSG would certainly be interested in GateGourmet but this would raise monopolistic concerns. It could go to one of the smaller players like Air France’s Servair, which would then have a similar global scale to that of LSG.

Nuance is an important airport retailing and duty–free merchandiser. It could attract the interest of similar operators like Aer Rianta.

Swissport is a leading supplier of third–party ground handling services. Again the biggest competitor is a Lufthansa company, Globeground, and again a merger of the two would attract the interest of the competition authorities. There might be opportunities for the UK–based Menzies Group or the French Servisair.

Flightlease, the operating lease subsidiary, could be swallowed up by one of several leasing companies or financial institutions in line with the consolidation that is taking place in this sector.