SWISS: Progress despite adverse conditions

17. August 2004

Swiss International Air Lines (Group) has reported a loss from operating activities (EBIT) of CHF 19 million for the first six months of 2004. The result compares to a CHF 346 million operating loss sustained for the same period last year. As already communicated, the settlement of a prolonged legal dispute during the second-quarter period produced a CHF 68 million non-recurring income amount. Cash and cash equivalents totalled CHF 353 million at June 30, 2004, which is above planned projections. The ongoing corporate restructuring proceeded according to plan in many areas in the first half of the year. But SWISS’s turnaround is being negatively influenced by insufficient reductions in aircraft maintenance costs and by the unexpectedly high price of aviation fuel, which added some CHF 29 million to its operating expenses for the first-half period.

Seeking a more efficient management structure, the SWISS Board of Directors has decided to make various organisational adjustments that involve changes in management personnel.

With total consolidated income from operating activities amounting to CHF 1 768 million (compared to CHF 2 098 million for the prior-year period), SWISS posted a loss from operating activities (EBIT) of CHF 19 million for the first six months of 2004. The result is a sizeable improvement on the CHF 346 million operating loss sustained for the same period last year. Indeed, the second quarter of 2004 produced a profit from operating activities of CHF 50 million, following the release of CHF 68 million in provisions no longer required after the settlement of a protracted legal case. Net of this non-recurring income, the second quarter would have produced a loss from operating activities of CHF 18 million – a CHF 129 million improvement on the CHF 147 million operating loss posted for the second quarter of 2003.

With its corporate restructuring well under way, SWISS’s CHF 1 855 million in total operating expenses for the first half of 2004 were a 24.1-per-cent improvement on the CHF 2 444 million of the prior-year period. Total income from operating activities also declined as a result of the substantially smaller route network, but did so by a more modest 15.7 per cent. As already communicated in the media release of June 21, the unexpectedly high price of aviation fuel is having an adverse impact on costs and business results, however, and added some CHF 29 million to operating expenses in the first half of 2004 alone.

The consolidated net loss for the first half of 2004 after the financial result, income taxes and Group items amounted to CHF 33 million, which compares to a consolidated net loss of CHF 333 million for the prior-year period.

Cash and cash equivalents of CHF 353 million

The consolidated balance sheet showed cash and cash equivalents of CHF 353 million plus fixed-term deposits of CHF 5 million on June 30, 2004.

Cash and cash equivalents thus declined by CHF 61 million from their level at the end of the first quarter of 2004, and by CHF 150 million from their level at the end of 2003. It should be mentioned here that the non-recurring income of some CHF 68 million deriving from the settlement of the legal case mentioned above is not included in the cash and cash equivalents on June 30, 2004. These funds will appear as cash in the cash flow statement for the third quarter of the year.

Net cash used in operating activities in the first half of 2004 amounted to CHF 7 million, a CHF 230 million improvement on its prior-year equivalent.

Net cash used in investing activities totalled CHF 37 million in the first half-year. Some CHF 58 million was invested during the period in interiors, rotable spares and consumables for the new Airbus A340 aircraft fleet. This amount was offset by a reduction in cash deposits following the return of other aircraft to their owners.

Net cash used in financing activities in the first half of 2004 amounted to CHF 108 million. The net amount includes cash outflows of CHF 78 million in amortisation payments for aircraft finance leasing liabilities, CHF 52 million to repay loans and CHF 28 million spent on ordinary interest payments on finance leasing and other liabilities. The total cash outflow was offset by an increase in cash and cash equivalents resulting from the use in full of a CHF 50 million credit facility secured with Barclays Bank on March 16, 2004.

Cash and cash equivalents have developed more favourably than orignally expected. Additional liquidity should both cushion the company from the adverse effects of any unforeseen events and enable it to exploit new business opportunities. Therefore, SWISS continues to negotiate with the major Swiss banks and further international financial institutions with the aim of securing additional cash.

Shareholders’ equity

Following incorporation of the loss carried forward from the previous year, Group shareholders’ equity amounted to CHF 982 million on June 30, 2004, producing a balance sheet equity ratio of 27.5 per cent.

The voters attending the Ordinary General Meeting of May 6, 2004 approved a reduction in the nominal value of SWISS shares from CHF 32 to CHF 18 per share. The share capital of Swiss International Air Lines Ltd. was correspondingly reduced by CHF 737 million, from CHF 1 685 million to CHF 948 million. The loss brought forward from the previous year was reduced on the balance sheet by the same amount. This capital reduction is an action envisaged under the Swiss Code of Obligations to help restructure a corporate balance sheet. It has no effect on the company’s intrinsic value, and the total amount of shareholders’ equity remains unchanged.

SWISS and the three dozen of its shareholders who have committed themselves to a “lock-up” agreement until August 31, 2004 are currently discussing a possible extension thereof.

SWISS a year on from announcing its corporate restructuring

Having negotiated an extremely turbulent 2003 and initiated a radical corporate restructuring programme, SWISS is now in substantially better shape. But the company still faces sizeable challenges on its road to profitability. The air transport sector remains a tough business environment. And any company operating in it must respond swiftly and flexibly to change and commit to a process of constant and consistent improvement.

The company has appointed a new internal project team named CIS (Continuous Improvement SWISS) to locate further improvement opportunities and exploit such potential as quickly as possible. The team has been tasked with identifying further possibilities of raising revenues and lowering costs, and reports directly to the Management Board.

Productivity must be further increased throughout the SWISS organisation to lower unit costs. The company is also conducting further studies of the results and potential of every individual route, particularly in Europe, operated from its Basel and Geneva bases and its Zurich hub. SWISS intends to remain a network carrier, however, offering a substantial number of intercontinental services. And its short-haul network should continue to provide direct connections with Europe’s major cities and generate additional connecting traffic in Zurich for the company’s long-haul flights.

Improved load factors

SWISS performed a total of 70 612 flights and carried some 4.6 million passengers in the first six months of 2004. The modifications effected to the SWISS route network and a general industrywide market recovery both had a positive impact on the load factors recorded for the period. SWISS services posted a systemwide first-half seat load factor of 73.4 per cent, a 4.7-percentage-point improvement on the same period last year. Systemwide capacity, measured in available seat kilometres, was 20.1 per cent lower than for the prior-year period. By comparison, the decline in systemwide traffic volume, measured in revenue passenger kilometres, was stemmed to 14.6 per cent. First-half seat load factor on SWISS’s European services stood at 60.3 per cent, an increase of 5.6 percentage points. Seat load factor on intercontinental services rose 3.8 percentage points to a welcome 79.1 per cent. Yield on European services was 8.3 per cent below its prior-year levels, while the yield on intercontinental routes was a 1.8-per-cent improvement on the same period last year.

The airfreight business of Swiss WorldCargo showed positive trends for the first half of 2004. Cargo load factor for the period amounted to 85.8 per cent, a 1.8-percentage-point improvement on the prior-year period. Despite the reductions in cargo capacity which resulted from the downsizing of the SWISS route network, Swiss WorldCargo remains a sustainably profitable undertaking which offers good prospects of medium-to-long-term growth.

High reliability, punctuality less than satisfactory

SWISS operated 98.97 per cent of its published flights in the first half of 2004. The performance is a further improvement of 0.75 percentage points on the already-high reliability recorded for the same period last year. The punctuality of SWISS’s flight operations at Zurich Airport remains less than satisfactory, however. The underperformance is due mainly to the tighter restrictions imposed by the German authorities on approaches to the airport from the north, and the less-than-ideal utilisation of airport capacity owing to limitations on the number of aircraft movements during key departure and arrival periods.

Focus on bilateral partnerships

In addition to those points served by its own aircraft fleet, SWISS also provides services to a large number of destinations under codeshare agreements with various partner airlines. The existing agreements were supplemented on June 1 by the introduction of joint services with Denim Airways on the Zurich-Venice and Zurich-Florence routes.

After extensive negotiations, SWISS decided at the beginning of June not to integrate its Swiss TravelClub frequent flyer programme as originally envisaged into the Executive Club programme run by British Airways. The decision – which was taken for strategic reasons – meant that the bilateral agreement which had been provisionally concluded with British Airways could not be put into effect. This in turn meant that SWISS would not join the oneworld alliance.

This will not affect SWISS’s bilateral commercial agreements with the other alliance members. SWISS thus continues to offer its customers an extensive network of air services and connections covering all six continents. In the Swiss TravelClub, SWISS also retains an attractive frequent flyer programme for its customers.

An advanced long-haul fleet

The SWISS Group operated 85 aircraft as of June 30, 2004. Eighty of these were in SWISS scheduled service, three were deployed for charter flights and two were operated by its Crossair Europe subsidiary. The fleet had an average age at the end of June 2004 of just 5.7 years.

SWISS concluded the renewal of its long-haul fleet in the course of the first six months, with its ninth Airbus A340-300 entering revenue service on June 26. The last Boeing MD-11 is scheduled for withdrawal with the cutover to the winter timetable period at the end of October, after which SWISS will operate an all-Airbus long-haul fleet offering passengers state-of-the-art air travel comfort.

On the regional fleet front, the decision was taken to postpone the delivery of the first Embraer 170, which had been originally scheduled for December 2004, in view of the corporate turnaround which is currently under way. However, the aircraft type remains a firm element in SWISS’ future fleet and network planning.

Adjustments to upper management and reduced personnel numbers

Striving for a more efficient and more market-oriented management structure, the SWISS Board of Directors has decided, effective September 1, 2004, to make various organisational adjustments that involve changes in management personnel. The Marketing and Services division will be broken up, with some units assigned to Sales (now called Sales and Marketing) and others to Operations. The incumbent head of Marketing and Services, Daniel Weder, will take on new duties within Operations. The new head of the Network division is Harry Hohmeister (40), currently employed with Thomas Cook/Condor. He will succeed Martin Isler at the end of 2004. Martin Isler will take on a new assignment within the company.

The leaner management structure and the direct embedding of Marketing, Sales and Network within the Management Board make it unnecessary to fill the position of Managing Director Commerce (CCO). In future the Management Board will consist of CEO Dr. Christoph Franz, Managing Director Operations Manfred Brennwald, Managing Director Finances Ulrik Svensson, and the heads of Network (Harry Hohmeister) and Sales and Marketing (Oliver Evans). The newly created administrative department Corporate Strategy will be led by Dr. Christoph Beckmann (40), a German industrial engineer.

SWISS had a total of 7 252 employees in full-time-equivalent (FTE) terms on June 30, 2004 – 820 fewer than at the end of December 2003. Of these, 6 571 were with the parent company and 681 with various subsidiaries. The 7 252 FTE positions were divided among 8 449 employees around the world.