Disqualiflyer February 2001

SAir’s policy of investing in smaller airlines has come to a grinding halt with the departure of CEO Philippe Brugisser. It had been apparent for some time that the logic behind the SAir strategy was pretty dubious — see, for example "How many turn–arounds can SAir cope with?", (Aviation Strategy, Oct. 2000) or even "Sabena: Europe’s first flag–carrier failure?” (Dec. 1998). What is surprising is that it took so long for SAir’s board to take action.

The signals from the stock–market have been stark. As at the end of January, SAir’s stock–market capitalisation was just over $1.9bn, compared to $3bn in 1998. Yet over the past few years SAir has spent an estimated $1.7bn on shares in airlines and service companies. And until recently a further $0.4m of investments were planned.

There are two extreme ways to reconcile these numbers. If the prices SAir paid for these companies correctly reflect their value to the purchaser, one would have to conclude that Swissair itself, Crossair, Gate Gourmet etc. are themselves worth very little indeed. The alternative, and more plausible, explanation is that the monetary investments have added very little to SAir in terms of airline feed, ground handling contracts, catering outlets, etc.. In other words SAir should have been able to win this business without having to pay its customers.

There will be widespread repercussions from SAir’s reversal. First, there will now be more pressure for a break–up of the SAir conglomerate into service companies and the airlines. This is the only way that the stock–market is going to be able to re–assess the value of SAir. Second, Swissair itself will have to re–focus on being a premium airline brand, something that has diminished in recent years. A sale of the airline is becoming more likely.

Third, TAP and Sabena have just lost their major source of funding. Either national governments will attempt to re–finance, which would be illegal under the terms of previous state aid decisions, or they will have to finally undertake a radical restructuring or they will go bankrupt. The new French airline, built from AOM, Air Liberté and Air Littoral, might just benefit from a re–focussing of management effort. And there are new opportunities for SAA — see over.