SWISS lays a new foundation for the future

24 June 2003

Swiss International Air Lines took off on March 31, 2002. At that time with a Business Plan for an airline which was intended to maintain the Swiss air transportation system and the most important connections between all airports in Switzerland and abroad. Since that time, the operating environment has continuously changed: passenger volumes went down substantially, the revenues have steadily dropped, costs have increased whilst productivity has remained at the same levels. Like most airlines, it has been impossible for our company to operate profitably under such conditions.

The economic growth forecasts, which were laid down in the first Business Plan have in no way been realised and, since Autumn 2001, have had to be continually lowered. At that time, nobody foresaw the unfavourable economic development, even less so as regards the war in Iraq and the SARS lung infection. World-wide the revenues per passenger kilometre were 18% below the previous year’s figures; in Asia, in April 2003, the receipts were no less than 44% lower. These changes necessitate the elaboration of a new Business Plan.

Repositioning in the market
SWISS will reposition itself in the market: as an international carrier with intercontinental and European connections, an offer in the charter sector and with its own cargo business.The main objectives are: an Ebit margin of 5-7% and a positive operational cash flow. The set time limits permit the preparation of a detailed analysis by mid-August. Following this, these measures should be implemented during the subsequent twelve months and bring the desired results from 2005 onwards. Today, SWISS is presenting the measures, which must be taken for survival and is outlining with which new offers it intends to reposition itself. It is not possible to inform today about the finalised route network, the exact price structure and the current state of the alliance question, as we prefer to discuss this with our partners and suppliers first.

Excellence and efficience
The SWISS objective remains unchanged. It is a leading airline with an international network, where the needs of the clients are the focal point. Swiss strives to provide the highest quality, based on true Swiss values. It is also striving to achieve profitability on a par with the best in the branch. In the offer, a differentiation must be made.

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Excellence in intercontinental traffic. It is there that premium quality continues to be demanded and is met by SWISS. A new premium product will be provided from continent to continent by the Airbus 340.
Efficiency in European traffic: as an answer to the changing customer preferences, the product will be adapted to market requirements which are based on price related to punctuality, timetable, connections, the ability to change reservations and comfort.
New business concept for Europe
SWISS plans to launch an innovative European concept this autumn, when it will become the first scheduled service airline to offer both a Premium Business Class and an extremely competitively priced Economy Class on European routes. This in order to meet customer demands for competitive cost levels. By doing so, SWISS aims to allow its customers to select which level of price-performance suits their individual requirements. The customer makes his or her choice, and pays only for what he or she actually wants. In the future, those who book Economy Class will have to pay for food and beverages. In Business Class, however, passengers can look forward to the usual impeccably high standard of SWISS service. This new European concept will supersede both the previous pricing structure and temporary promotions (e.g. Swiss Europe Savers) within Europe. All seats on European flights will be offered at transparent prices with clearly defined services. Outward and inward flights may be mixed as desired (e.g. Economy Class outward, Business Class back) depending on departure times, time of booking, availability and the customer’s personal preferences. In contrast to low-cost carriers, however, passengers benefit by a large network with higher frequencies and can still collect Miles.

Benchmark figures of the new Business Plan reveale
The benchmark figures of the new Business Plan point the way ahead: the product is to be tailored to customer needs, both the network and the fleet are to be reduced, costs cut and the workforce downsized in line with these changes. The Board of Directors and management of SWISS are confident that the agreed cornerstones of the new Business Plan, which is entitled “Foundation for Winning”, are necessary to ensure SWISS’s survival.

The benchmark figures drafted so far provide for a CHF 1.6 billion reduction in annual costs. CHF 600 million will be generated by actual cost savings, and around CHF 1 billion will derive from the volume effect. Various areas will contribute to this: cockpit, cabin, in-flight service, ground services, maintenance, sales & distribution, overheads, key suppliers, network, fleet optimisation and the European Business Concept.

Measures involving the network and the fleet
The first step in the direction of profitability is to make the necessary adjustments to the network. Focusing on high revenue routes and destinations with a promising future will provide the basis for all further action. The network must, therefore, be trimmed by up to 35%. In line with this, there will also be a substantial reduction in the number of destinations served directly from all SWISS locations in Switzerland. On the precise number and choice of destinations to be eliminated SWISS is informing first its partners. The key markets will be maintained in the network.The seat-kilometres on offer in the intercontinental sector will be reduced by 31%. The number of aircraft will be trimmed from 25 to 18. SWISS will concentrate on high-volume routes and abandon non-profitable destinations. The long-haul fleet will be harmonised, the A330 and A340 family concept will generate multiple synergies.
On European routes, the seat-kilometres will be reduced by 38%. The number of medium-haul aircraft (A320 family) will be reduced from 24 to 21, and from 59 to 35 in the regional sector (Saab, Embraer, Avro). There are also plans to further standardise the regional fleet (ERJ 145 or Saab 2000). Loss-generating domestic connections will be abandoned. It is expected that the SWISS European network can be rendered profitable by concentrating on high-volume European destinations.

Personnel measures
The sacrifices which SWISS now has to make are substantial. The reductions in our network and fleet will mean around 3000 redundancies. This is a painful measure, and SWISS is consulting with the unions to find the most partnerly solutions. Around 700 cockpit jobs, 830 cabin jobs, 850 overheads (incl. outstations), around 350 maintenance jobs, about 140 ground service jobs and 130 cargo jobs are affected. These reductions come in addition to the job losses announced in November 2002 (300) and February 2003 (700).

Uncompromising commitment from all partners is essential
SWISS intends to work in close consultation with the trade unions to manage both these job losses and the upcoming round of cost-cutting. With regard to saving, SWISS is highly reliant on its partners and suppliers: the cornerstones of the new Business Plan, and hence the long-term survival of SWISS, can only successfully take effect if everyone – staff, suppliers, lenders, trade unions and the authorities – pulls together in the same direction. The turnaround requires a clear commitment to the future of SWISS. Over the next few weeks we will therefore be calling on all those involved to find viable solutions which will then flow into the detailed and definitive Business Plan. No specific statements about the final route network will be made until then.
Key financials
A credible, appropriately structured Business Plan will provide the basis for a successful business policy. The aim is to have an Ebit margin of 5 to 7% from 2004 onwards, and to ensure that the operative cash flow is also positive from 2004 onwards. Our target is to reach sales of CHF 3.2 billion in 2004 and CHF 3.3 billion in 2005. Total restructuring costs in 2003 and 2004 amount to CHF 150 to 200 million.

Additional financing of CHF 500 million will be required to attain the necessary financial stability for the restructuring. Liquidity will stabilise as the restructuring measures are implemented provided there are no further unforeseen events with a big negative impact.

Consequences of the ruling by the court of arbitration

The court of arbitration has stipulated that a proportional zipper system should apply to job losses amongst the two SWISS pilot corps. This will mean unaffordable costs and expenditure as well as unacceptable operational restrictions for SWISS until the contract with SWISS PILOTS expires in 2005.

This is a situation which jeopardises the implementation of the new Business Plan, and hence the company’s survival.

The SWISS Board of Directors has therefore decided to enter into immediate negotiations about the collective working agreements with all trade unions. Compromises will be required on all sides if the ambitious goal of the new Business Plan is to be achieved.Bearing in mind the difficult situation the company expects the full willingness of the parties concerned to have discussions concluded until July 15 in order to have clarity on further options that will have to be taken.
Outlook
The priorities to ensure the future of SWISS are as follows:
1. Commitment of all partners: We are all sitting in the same boat. It is in no one’s interest to see SWISS fail.

2. Implementation of restructuring: SWISS must implement the planned measures without delay to minimise further losses.

3. Safeguard credit lines: Including operating loans and working capital facilities. SWISS is currently involved in negotiations with the banks to find an agreement as soon as possible.

4. Solution to the alliance issue: SWISS has to create partnership for long term survival. Restructuring must, however, go ahead, to create a sustainable competitive position under any scenario.