Swiss “premium” strategy – third time lucky?

Swiss is still particularly fond of its business passengers Keystone

Swiss International Airlines is now German in all but name – but what difference will this make to how it sells itself to customers?

Lufthansa boss Wolfgang Mayrhuber, speaking after the takeover was finalised on Tuesday, gave a clear indication that the future focus will be largely on providing “premium quality” service to the lucrative business market.

But he also made it clear that the current cost-cutting campaign will continue until the airline manages to turn a profit – and possibly well beyond.

“Lufthansa and Swiss, two world renowned airlines with a strong sense of quality, are joining forces. The most important aspect of this is that it will produce clear benefits for our customers,” said Mayrhuber.

“More destinations, better connections, comprehensive frequent-flyer programmes and mutual lounge access enhance the attractiveness of both companies.”

Analysts point out that, if implemented, it will be the third time that the Swiss national airline has attempted to conquer the market by a strategy of offering superior quality at relatively high prices – even if it is no longer “made in Switzerland”.

Jérôme Schupp, of Geneva-based private bank Syz & Co, told swissinfo: “[Mayrhuber’s comments notwithstanding], it is difficult to say at the moment what they will really do.

“They probably still have to discuss with Lufthansa in some detail exactly what the new strategy will be – and it may well be quite different on shorter and longer-haul flights [respectively].”

Which way now?

Schupp pointed out that, after failed predecessor Swissair’s original “premium quality” approach gradually became mired in a web of strategic contradictions that led ultimately to its downfall, Swiss also tried for a while to position itself in a similar way.

“The strategy was very unclear. First, they switched to selling tickets at very low prices to try to beat the competition [at its own game], then they seemed to switch back.”

He predicts that Swiss and Lufthansa management will try to play the “quality card” for passengers using the Zurich hub to travel outside Europe, and says this would be a “clever move”.

However, he adds that the “big question” now is whether management takes a similar approach when it comes to shorter-haul (European) flights – and whether Lufthansa decides to reduce the number of Swiss flights on these routes, or even replace them entirely.

“I don’t see any big long-term plans to move everything to Munich or Frankfurt, because there is still a market in Switzerland,” said Schupp. “But there will be changes.”

Relative success

A quick look at the operating statistics for Swiss in recent years confirms this picture.

While the airline as a whole continues to lose money head over heels, the intercontinental flights are at least doing much better when it comes to putting “bums on seats”.

Out of some 9.2 million total passengers in 2004, Swiss recorded a seat load factor – a measure of how many seats are filled by paying customers – of 81.3 per cent on these flights, compared with just 60.8 per cent on European routes.

Analysts point out that, while higher capacity does not necessarily translate into profitability – both average price and costs per seat also play key roles – the main difference in Europe was the fierce competition from low-cost competitors.

While the Swiss-Lufthansa deal will end direct competition between the two airlines and increase joint market share on flights in and out of Zurich, the low-cost competition is certainly not going to go away.

More to come?

Swiss President and CEO Christoph Franz also gave a clear signal after the takeover deal was signed that the future strategy – whatever it is – will have to produce results fast.

He said the airline would continue with the restructuring programme announced in January, involving the loss of up to 1,000 jobs and a further reduction in the regional fleet by the end of next year.

Lufthansa’s Mayrhuber said on Wednesday he expected Swiss to make a profit by 2007.

And he gave a clear indication of what is still to come, telling journalists: “Restructuring is not something that can be outsourced, it is something that has to be done in one’s own house.”

swissinfo, Chris Lewis in Zurich

Key facts

Lufthansa formally announced the takeover of Swiss on Tuesday.
The deal, which could bring shareholders anywhere from SFr70 million to SFr480 million depending on future performance, ends three years of independence for the loss-making Swiss airline.
It follows Air France’s takeover of KLM last year, to form the world’s largest airline group.

In brief

Lufthansa Chairman and CEO Wolfgang Mayrhuber has indicated that he wants Swiss to set itself apart from the competition by superior standards.

However, analysts say the “premium quality” approach is more likely to be implemented on longer-haul routes.

Mayrhuber also stressed that he expects Swiss to continue with its radical cost-cutting programmes.