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Swiss-Lufthansa deal leaves questions open

What kind of hub would Zurich be after a takeover? Keystone Archive

Shareholders in the national airline, Swiss, are keeping tight-lipped about their discussions on a takeover offer from Germany’s Lufthansa.

This content was published on March 14, 2005 - 10:55

Major shareholders met on Monday evening to discuss the deal, which would give Lufthansa the airline at a knockdown price in exchange for guarantees on the Swiss brand and the Zurich airport hub.

However, there has been no public comment on the outcome of the meeting – or on the nature of the Lufthansa offer, which involves a market price-based payment to small shareholders but leaves larger shareholders virtually empty-handed.

The only reaction to date came from Nestlé CEO Peter Brabeck, whose company is a major shareholder along with the federal government and big banks UBS and Credit Suisse.

Brabeck said only that he did not regret the initial investment in Swiss three years ago, which was motivated largely by "social responsibility" – to avoid massive job losses.

Analysts were initially positive about the German offer, saying it was Swiss’s only hope of survival – and pointing out that an initial Lufthansa requirement to inject a further SFr300 million of capital appeared to have been quietly dropped.

Other options?

However, questions are now increasingly being asked about whether Lufthansa’s "guarantees" amount to much – and whether the national carrier might still be better off going it alone.

Some observers say Swiss management may not have fully explored all the strategic alternatives, in particular the possibility of raising private equity capital.

Analyst Sepp Moser told swissinfo that Swiss had virtually no options left but to join Lufthansa, as the airline was "effectively broke, even if it is not technically bankrupt".

But others take the view that, after several rounds of cost cutting, management has plenty of experience of slimming down and could continue doing so for a while yet.

One expert also pointed out that the federal authorities might be persuaded to intervene again to prop up Swiss.

The government has already ruled out public money for the airline, "but that’s what they said the last time," commented the expert, who declined to be named.

Scepticism

If the deal does go through, the main worry is the future of the Swiss hub at Zurich, which is considered to have crucial strategic importance for the national economy as a whole.

Lufthansa has conspicuously avoided saying how long the guarantee would last.

However, some analysts are sceptical that it would last longer than a few years, given the nature of the aviation industry.

It also remains to be specified precisely what kind of "hub" Zurich would be.

Thomas Bieger, professor of marketing and management at St Gallen University, points out that there are two main types – "regional" and "core" hubs.

"The question is whether Lufthansa sees Zurich as a regional hub for Swiss, in which case it would serve the southern part of Europe, or whether Swiss would be granted the status [of Lufthansa’s] third core hub, alongside Frankfurt and Munich."

Multi-hub?

Bieger told swissinfo that since Lufthansa "relies on a multi-hub strategy", Swiss could be in Zurich for the long haul.

However, some observers say Lufthansa has only developed Munich as a second hub because it has been unable to expand operations at Frankfurt as much as it would like.

They argue that the German company is very unlikely to consider developing a third hub at Zurich in the longer term.

The Swiss government has made clear it is keen to unload Swiss, and it would probably be relieved if the deal comes off.

But it is thought to be equally determined to preserve direct links between Zurich – the business capital – and key international destinations.

If the guarantees seem inadequate, Bern might still baulk at a deal.

As the biggest shareholder in Swiss, with a 20 per cent stake, the federal government stands to receive next to nothing for its holding – except Lufthansa’s guarantees.

swissinfo

Key facts

Lufthansa has offered to buy out small shareholders but a deal would leave the larger ones virtually empty handed.
The offer "guarantees" Zurich as a hub, but does not say for how long or how extensive the connections would be.
Lufthansa's initial demand - the injection of a further SFr300 million of capital into Swiss - seems to have been dropped.

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