Swiss flies into black - but for how long?

Analysts still want Swiss to fill in the details of its future strategy Keystone Archive

The national airline, Swiss, has recorded its first quarterly profit, but most analysts agree that further financial turbulence lies ahead.

This content was published on November 16, 2004

Swiss posted a third quarter pre-tax operating profit of SFr20 million ($17 million), but pledged to keep cutting costs in the face of high fuel costs and fierce competition from low-cost European carriers.

Dieter Schneiderbauer, an aviation specialist with Mercer Management Consulting, told swissinfo that the positive quarterly results showed that Swiss had “done a lot of homework” on the cost-cutting front.

But he pointed out that the third quarter is always the strongest for European airlines, adding that the overall profit masked the fact that both load factor – the number of seats filled per flight – and yield were continuing to drop on European routes.

Patrik Schwendimann, an analyst at the Zurich Cantonal Bank, said the company’s free cash-flow result – up from SFr353 million in June to SFr361 million in September – was also disappointing.

He pointed out the company had received a one-off payment of SFr68 million for funds previously tied up in a dispute over money allegedly owed by its predecessor, Swissair.

No taboos

Matthias Egger, an analyst at Bank Pictet & Cie, said Swiss was still not in a position to break even at the operating level for the full year and further progress would be needed both on the cost front and in terms of increasing revenues.

President and CEO Christoph Franz said the results justified the company’s strategy of operating as a network carrier with intercontinental services focused on its Zurich airport hub.

However, he added that Swiss still had to continue cutting costs and seeking new revenue, and pledged that there would be “no taboos”.

Many aviation analysts say Swiss is still too big for its small home market, despite slashing its fleet from 132 to 85 aircraft and eliminating some 3,000 jobs since the end of 2002.

British competitor BA also beat forecasts for the third quarter, but warned that high fuel costs and lower ticket prices would affect full-year performance.

In Germany, Lufthansa recorded a third-quarter profit, but signalled further cost cuts and cited the same main competitive drivers.

Tough outlook

Schneiderbauer told swissinfo that cost-cutting was not the only challenge ahead for Swiss.

“Swiss will not win the battle on the cost front only. They need to go more aggressively to the market and make sure they do not lose too much market share in Switzerland. That will not be easy.”

He added that competition within Europe, particularly from low-cost carriers, could force further cuts on Swiss routes.

“In Europe there is cutthroat competition, particularly from the low-cost airlines, and Swiss has already lost Geneva to the low-cost airlines [EasyJet].

“Swiss may claim that they were right to keep a strong intercontinental [network], but on the European business their strategy is still questionable.

“It is not yet clear whether they will be able to compete in future with the low-cost carriers on point-to-point routes. If they cannot justify their prices, they may have to make further cuts in that part of the network.”

Looking ahead, Schneiderbauer said anything more than a “moderate loss” for the final quarter of 2004 would still be a “surprise”, given the combination of high fuel prices, increasing competition from European low-cost carriers and lower winter season demand.

The outlook for the first quarter of 2005 – traditionally the worst period for European airlines – was also “tough”, and further job cuts could be expected.

“It is still too early to say whether Swiss will be able to compete successfully in the long run,” said Schneiderbauer. “A year from now, we may be in a better position to predict whether Swiss will last or whether it will disappear as an independent carrier.”

swissinfo, Chris Lewis

In brief

Swiss has made its first quarterly operating profit, but analysts say it is still too early to say whether the airline has really begun a turnaround.

One expert says it will probably be this time next year before any judgement can be made about long-term prospects.

The third quarter is traditionally the most successful for European airlines.

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Key facts

Swiss recorded an operational profit of SFr20 million and net (post-tax) profit of SFr16 million for the third quarter.
It had posted a technical second-quarter profit of SFr45 million, but that masked a real operational loss of SFr18 million.
The third quarter of 2003 saw an operational loss of SFr62 million and a net loss of SFr276 million.

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