Analyst warns that success of new airline far from secure

Analysts say developments in the airline industry are generally depressed Keystone Archive

The financial success of Switzerland's rescued airline is far from secure, according to a London-based airline analyst.

Monday’s decision by the Swiss government and the business community to pump more than SFr4 billion into the venture ($2.4 billion) has left most financial analysts waiting for more information before making any recommendations to investors.

The new airline would be built from the remains of Swissair, and based on the regional airline Crossair.

However, Anthony Bor from investment bank Merrill Lynch told swissinfo that in general, developments in the airline industry were depressed, particularly following the September 11 terror attacks in the United States.

“Looking at it purely from the perspective of the financial markets, it’s somewhat disappointing to see that certain governments, not just the Swiss, have chosen to support their national flag carriers during this time,” he said.

“Too many airlines”

“What we have been looking for, for some time in the airline industry is consolidation. There are too many airlines whose networks are too large, which is upsetting the supply/demand balance in the industry,” he added.

Although Bor thought there was good reason to believe that a flag carrier or network-based airline in Switzerland was a “justifiable project”, he said there were general and specific challenges facing it.

The general concerns include the current economic background and the duration of the downturn in the industry, with all airlines suffering from a “cash crunch”.

“More specifically, you have here a business with a higher-than-average cost base, some very stiff challenges in terms of rapid integration of two separate airlines, including personnel costs, pilot wage levels and so on,” he told swissinfo.

“The correct size of the long-haul fleet also has to be put in place to make this a profitable operation, so I certainly don’t think anyone should assume it’s going to be an easy project,” he added.

Three main carriers

Bor believes that over the next five years, there will be a consolidation in the industry towards three main carriers on each side of the Atlantic.

“In Europe, I expect those to be Air France, Lufthansa and British Airways. I expect to see other carriers like Crossair or the new Swissair gravitate into one of those groupings. That’s not necessarily to say that the brand will crease to exist but I would expect to see it become part of a bigger organisation,” he commented.

Like other analysts contacted by swissinfo, there was some reticence to be drawn yet on whether the new airline would be a good investment.

“Until we have a clearer vision of what precisely the business plan would look like, precisely how large the fleet will be and precisely what destinations it will serve, it would be very difficult to make accurate forecasts as to the likely profitability and cash flow that this business will generate,” he said.

“Without wishing to sit on the fence too much, it is simply too early to say whether this would be an interesting investment or not. But what is clear is that there are going to be some very big challenges and difficult questions to be answered before one could conclude that it is a good investment,” he added.

by Robert Brookes