Financial results 2002

25 March 2003

SWISS generated total revenue of CHF 4278 million in 2002 and sustained a loss of CHF 980 million. Overall, this result is better than initially planned, but has been negatively burdened by non-recurring exceptional expenditure of CHF 322 million. With these non-recurring expenses excluded, the loss for the year amounted to CHF 658 million.

SWISS is clearly focused on its core flight operations business: no less than 98.8 per cent of its total operating revenue of CHF 4278 million was earned from scheduled passenger, charter and cargo operations. And the majority of this – CHF 3630 million – stemmed from scheduled passenger services. After a modest first quarter, load factors rose substantially from April onwards following the launch of SWISS and reached highly encouraging levels, especially in the summer months. Traffic volumes remained healthy through in October; but, despite reductions in capacity, load factors for November and December were less than satisfactory, especially on European routes. Declining yields – average revenue per revenue seat-kilometre – were a further cause for concern, though their impact was partially offset by higher load factors.

Additional operating income of CHF 117 million
Alongside the total operating revenue of CHF 4278 million, a further CHF 117 million in additional operating income was also generated. CHF 107 million of this derived from the leasing-out of aircraft, income from call centre activities, commissions on ticket sales for other airlines and further income sources. Book gains of CHF 10 million were also realised on disposals of assets.Cargo business generated operating revenue of CHF 421 million. The cargo division also saw its operations enter a new dimension from the second quarter onwards with the addition of widebody transports to the aircraft fleet. Charter operations in 2002 produced total revenue of CHF 177 million. Other operating revenue, which includes revenue from technical services performed for other air carriers and from duty-free sales, amounted to CHF 50 million.

Fierce pricing competition among airlines
The reasons for the decline in yields are to be found in sizeable market overcapacity, in the fierce pricing competition among airlines and in the increased competition from no-frills carriers. The proportion of Business Class passengers also fell, as companies reduced their business travel volumes, often booking in a lower class of travel. Customer spending was also markedly more restrained in the vacation travel market.The cost of materials, which includes fuel purchases, expenditure on technical maintenance and the cost of inflight catering, amounted to CHF 1309 million. The price of aviation fuel rose steadily throughout 2002. But the impact on the profit and loss account of the increases in this key cost item – fuel accounts for some ten per cent of operating costs – was mitigated by hedging transactions concluded at the beginning of the year. The cost of services totalled CHF 1713 million. Regrettably, the year saw rises in sizeable cost items here such as handling fees, landing charges and air traffic control fees – items over which SWISS has only limited influence or control. Commissions paid to distribution partners also reached very high levels. Personnel expenses amounted to CHF 983 million, while depreciation for the year totalled CHF 323 million. The CHF 940 million in other operating expenditure includes administration, advertising, IT and insurance costs.

Results depressed by realignment costs
The company incurred some CHF 180 million in non-recurring costs associated with its expansion from a European regional carrier to an intercontinental airline and the introduction of the new SWISS brand. These are included under expenditure in the profit and loss account. These costs include management consultancy fees, expenditure on IT systems, legal fees and other expenditure items. They will not burden the profit and loss account in future years.

Non-recurring exceptional expenditure
The difficulties currently being experienced in the air transport sector also resulted in adverse aircraft value trends. The market value of aircraft declined in the course of the year. The book value of the regional aircraft fleet was adjusted to take account of these developments, and special depreciation was effected on Saab 2000 and Avro RJ85/100 aircraft. Impairment was also effected on the Business Class lounge at EuroAirport Basel-Mulhouse-Freiburg. The 2002 profit and loss account included a total of CHF 107 million in exceptional value adjustments. A further exceptional expense was incurred in relation to the administration of the SAirGroup. The provisions already effected for losses on receivables associated with the group’s administration were increased by a further CHF 35 million after the court-appointed administrator contested a payment which Swissair had made to Crossair in autumn 2001.

Sizeable loss in the first year of operations
Results from operating activities showed a loss of CHF 909 million after deductions of exceptional expenditure and non-recurring costs. After a net financial loss of CHF 71 million and income taxes and minority interests, the company posted a loss for the year of CHF 980 million.

Investing in the launch of the airline
SWISS invested substantial funds in acquiring the fleet to launch the new airline its aircraft fleet in the course of the year. Seventeen medium-and long-haul aircraft were acquired on fully-paid-out financial leases at the end of March to permit the expansion of the route network, while a further 37 aircraft were obtained on operating leases to the same end. Work also continued on renewing the regional aircraft fleet, with the entry into service of seven new Embraer 145s. And the renewal of the long-haul fleet was initiated with the placement of an order for twelve Airbus A340 jets. The extension to the Basel head-office building, together with new parking and hangar facilities, is proceeding according to plan.

Successful collaboration with financial partners
SWISS can look back on a successful year in terms of its relations with its financing sources. December saw the conclusion of a sale-and-leaseback agreement for seven Embraer 145s along with a new aircraft pre-delivery facility worth a total of CHF 450 million. Capital increases by various cantons raised the company ’s share capital from CHF 2322 million to CHF 2627 million. All in all, CHF 2561 million of new equity flowed into the company between December 2001 and November 2002 in connection with its new strategic alignment. December 2002 saw core shareholders (who account for over 90 per cent of total share capital) agree to extend the existing lockup agreement until August 2004.The extension ensures that SWISS can continue to count on a stable shareholder base.

A balance sheet total of CHF 4668 million
The balance sheet total stood at CHF 4668 million at the end of 2002, a CHF 429 million increase on the prior-year figure. Fixed assets accounted for 54.9 per cent of total assets. The aircraft fleet is the biggest single tem here, with a current balance-sheet value of CHF 2066 million. Cash, fixed- term deposits and securities amounted to CHF 1256 million at year-end. Shareholders’ equity stood at CHF 1709 million following the loss sustained for the year, giving an equity ratio of 36.6 per cent.

Outlook
In view of the difficult economic situation (especially in Europe) and the current geopolitical uncertainties, which, by their very nature, tend to have a strong effect on people’s travel behaviour, demand for air services is expected to be modest at best in 2003. Revenues are also likely to suffer from lingering global overcapacity – large parts of many airlines’ fleets have been mothballed but could be returned to traffic all too easily – and from fierce pricing competition among air carriers. Higher fuel prices also pose a substantial threat. SWISS will be exercising strict cost management in 2003 – an essential activity in today’s tough air transport marketplace. Programs to this end have already been launched, and the first effects have already been felt.

In view of the economy’s continuing poor health and the fundamental crisis that is currently afflicting the air transport sector all over the world, our objective of achieving a breakeven result for 2003 cannot be maintained. With the revenue situation uncertain in the extreme, it is currently impossible to make any firm prediction of results for the year.