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Swiss stays mum on Lufthansa link-up rumours

Partnership talks? Lufthansa and Swiss planes pass each other at Zurich airport Keystone

The national airline Swiss is saying nothing in the face of growing speculation that it is close to joining an alliance with Germany’s Lufthansa.

This content was published on March 11, 2005 - 16:50

At the company’s annual results conference on Friday, CEO Christoph Franz said: "I have been asked this question at every press conference I have given [since I took over last year], and my answer is the same as always: no comment."

Franz said the issue of a possible alliance was "bound to come up in future", but only once Swiss had become profitable and had proved that it was "in a position to decide its own future".

He said he was confident that the airline would make an operating profit by 2006, if not this year. But he did not say whether that would also translate into a net profit after financial charges (interest and taxation).

Asked to define the airline’s current strategy, Franz told swissinfo it was based on four elements: its "quality orientation", its "relatively young" airline fleet, its unrivalled offer to passengers travelling to and from Switzerland, and its central geographical location.

He said that, given these "advantages", he saw no reason why Swiss should not be successful in its chosen markets – provided it successfully continued to cut costs.

Franz also stressed that Swiss was committed to Zurich airport as a central "hub" for its operations, which fall into three main categories: regional, European and international flights.

Whose strategy?

One analyst, who asked not to be named, said the CEO’s description of Swiss’s strategy sounded suspiciously like that of failed predecessor Swissair – and did not seem to take account of radically changed market conditions.

He said Franz and his management team had done a "very good job" of scaling down operations, getting costs under control and regaining the confidence of the financial community.

But he added that cost-cutting and a "hub approach" would not set Swiss apart from the competition since almost every major airline in the world is already doing the same thing.

Also, Swiss’s reluctance to say whether it intends to attain its goals through internal growth or together with a partner is seen as the missing "link" in its strategy.

Recent media reports say Lufthansa and Swiss have broadly agreed on the terms for a takeover, but unnamed officials were quoted on Friday as saying that Lufthansa is not likely to make any "quick decision".

Secret talks?

Swiss pulled out of talks with Lufthansa two years ago, but negotiations to enter the rival Oneworld alliance – dominated by British Airways – collapsed last year.

Over the past month, speculation that serious talks with the Germans are once again under way has continued to grow, but officials are quoted as saying that Lufthansa is insisting on secrecy.

Lufthansa is also said to be demanding an injection of extra capital into Swiss (at least SFr300 million), further productivity improvements (at least ten per cent), and resolution of current problems involving aircraft rental contracts.

The first element could prove to be political dynamite, if the federal government in Bern decides to pump any more money into Swiss following its initial injection of SFr2 billion several years ago.

However, chief financial officer Ulrik Svensson said on Friday that there were "no plans" for any capital increase this year.

Challenging conditions

The underlying logic of joining an airline alliance remains compelling – most analysts agree that the domestic market is simply not large enough for Swiss to survive alone in the long run – even if does claw its way back into the black.

Franz himself admitted that the airline was having a tough time in the face of rising fuel prices, "aggressive" competition and the ongoing political dispute over flight approaches to Zurich airport.

Globally, he said the airline sector was once again a growth industry following the post-2001 "stagnation" – but continuing over-capacity and fierce competition meant airlines were still suffering "fare erosion".

However, Franz pointed out that the carrier had substantially narrowed its operational losses from SFr703 million (including restructuring costs) in 2003 to SFr122 million (before interest and tax) last year.

He stressed that Swiss was now "generating cash on the operating level, not burning it" – operational cash flow rose by more than half a billion francs to reach SFr189 million in 2004.

As for strategic advantages, perhaps the final word should go to a UK banking analyst, who commented: "For my money, Swiss still has the best blueberry muffins in Europe – even if economy class passengers now have to pay for them."

swissinfo, Chris Lewis in Basel

Key facts

2004 total income: SFr3.64 billion (2003: 4.13 billion)
Operating loss: SFr122 million (703 million)
Net loss: SFr 140 billion (677 million)
Operating cash flow: SFr 189 million (– 340 million)
Seat load factor – Europe: 60.8% (59.6%)
SLF – InterContinental: 81.3% (78%)
Yield (revenue per passenger-km) – Europe: down 3.2%
Yield – IC: up 3.1%

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In brief

Swiss is refusing to confirm or deny reports of further partnership talks with Lufthansa.

CEO Franz insists that the airline must return to the black before it goes any further with possible plans for a strategic alliance.

But many analysts say such a partnership is likely – if only because it would fill the company’s "strategic gap".

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