Swissair failure

Almoazer Abdelrahman
206030203141001
 EVERY COMPANY HAS A CORPORATE GOVERNANCE

The corporate governance (CG) of large, stock market-listed corporations dominates the
academic and public debate. This has actually created the (wrong) impression that CG is
predominantly an issue for these types of companies. Every organization – not only corporations
– has a governance system: governance concerns the distribution of power and responsibilities
and, consequently, accountability for the organization’s performance.
We distinguish, however, between the governance of different types of organizations such as
membership vs. capital-based organizations, and public vs. private companies.

CG concerns companies that, in modern economies, are characterized by specific features:

• The license-to-operate is fundamentally an economic one: to competitively provide goods and
services to customers who are willing to pay. This does not mean that companies should ignore
the social and environmental impact that is the side-effect – ‘externalities’ – of their task.
• The central benchmark of success and survival is a profit – the monetary value added
comprised of the difference between the costs incurred and attained revenues.
• Corporations are hierarchical organizations that may differ in their degree of hierarchy
• The ultimate ‘say’ in a company is based on property rights, not on (democratic) principles
Corporate governance establishes clear structures regarding accountability,
responsibility, and transparency at the head of the company, and defines the role
of boards and management.
This definition differentiates CG from other management themes in several ways:
• First, it deals only with the company’s top management (but sometimes also with specificCG
implications further down the corporate ladder, such as subsidiary governance or compliance
insurance).
• It does not deal with the content of a specific strategy and the organization as such, but
specifically with how accountability and responsibility are allocated – especially between the top
management and the board – and how this is made transparent to the stakeholders.
In short: who is responsible for what.

• Transparency is not only concerned with the accountability dimension, because it would
be difficult to hold someone accountable without being able to benchmark performance.
CG does not, however, justify this benchmark, it simply describes the process; how a
specific corporation has identified this benchmark.
The diffusion of corporate governance regulation is found in many issues, but a global
convergence towards one corporate governance model – whatever it may be – is unlikely, due
to the number of cultural, regulatory, and structural barriers. Convergence is therefore unlikely
to occur within the near future.
 (neo-classical) ‘principal–agent’ theory.

states that the principal (for example, the owners of a company) cannot trust the agent (for
example, the management) to act in the principal’s best interest, but to follow her/his own. The
principal’s problem is that the agent knows the situation much better than she/he does, due to
the information asymmetry, and that, furthermore, supervising the agent means that the
principal incurs costs, which are called agency costs. The principal is therefore focused on how to
specify the right incentives for the agent in a contract so that she/he acts in the principal’s best
interests, who can then minimize her/his agency costs.
The main arguments are:
• The assumptions about human behavior are too simplistic; for example, the agents are
regarded as only being ruled by opportunistic self-interest. Furthermore, the theory does not
explain how the players’ perceptions of their interests are formed in situations of uncertainty.
• By assuming that the firm is a ‘bundle of contracts’, power relations are overlooked (which
explains, for example, the practice of ‘repricing’ stock options once they are ‘under water’).
• It applies only to specific types of ownership. For example, the thousands of shareholders
in a widely held stock-listed company can hardly be regarded as ‘principals’, given individual
shareholders’ limited rights; they have more incentive to exit and sell their shares than to take
the trouble to voice their concerns.
 BASIC CORPORATE GOVERNANCE INSTITUTIONS
As the principal–agent theory implies, you need at least two players or institutions: the principal
(in the case of companies, the owners) and the agent (the management).
This description might suffice for smaller, closely held companies in which the ownership and
management are obviously separated. For most global, larger companies this description is not
adequate, as you need four basic entities for a comprehensive analysis:
The general assembly/annual meeting, where all owners meet (or to which they are invited) and
take decisions as described in the corporate articles of foundation, or receive reports for which
they have asked.
The board: The board is the apex that carries the company, ‘it’s where the buck stops’, whether
this is legally described or not.
A board has several characteristics:
(1)regular meetings (more than once a year);
(2) defined tasks and rights, but no operational or functional tasks, it therefore does not ‘run’
the company;
(3) itis elected or appointed by the owners and there is no higher authority other than the
owners.
• Management (either a CEO or a board of management) is defined as
having to report to the board (even if the chairman of the board and the
CEO are one person) and is held accountable by the board for its actions
and results.
• Outside stakeholders include a wide variety of interest groups:
regulators, employees , financial analysts, local communities, and society
at large.
There is no generally accepted answer to the question regarding the
extent to which stakeholders should or could influence the decisions
taken in the CG system. Even in the US states, corporate law allows the
board to consider or represent other interests than that of shareholders.
In the spirit of the contingency theory, this question can be left open and
specific situations can be analyzed.
 THE SHAPING FACTORS OF CORPORATE GOVERNANCE

Personalities. A CEO with an outstanding performance or a towering, resilient chairman with

long experience, wisdom, and diplomatic skills will shape boardroom discussions – and the
resultant decisions – whatever the formalities may be.
Business model and industry context.
Ownership.
Legal and political environment.
TYPES OF CORPORATE GOVERNANCE SYSTEM
THE TYPES OF BOARD
The ‘watchdog’ board is the type now required by Sarbanes–Oxley and institutional investors. It loads its Audit Committee with
heavy control tasks and predominantly examines the financial figures of past performance.

The ‘scout’ board is often found, for example, in privately held companies, where the owners themselves look after their money
and use boards to alert them to new trends, bring new ideas, and challenge the management to avoid complacency.

For the ‘VIP’ board, the performance on both axes is low. We call it the VIP board as such a board is often stuffed with VIPs, who
have little intention of looking at the nitty-gritty of the business. One recent example was the board of Hollinger International,
where Henry Kissinger – former US Secretary of State and an eminent historian – served next to other, mostly retired, but still to
all intents senior government officials.

The ‘challenger’ board combines high performance with the ‘scout’ and the ‘watchdog’ dimension of board work. But honestly,
we haven’t seen many practical examples of such boards performing very highly on every axis, as the integration of the two
tasks represents a dilemma.
But whatever type of board is a good fit for a company, in the end it matters how the directors and corporate officers all work
together and are able to contribute. This personal
dimension is especially important when, in tough situations, the players have to stand and
act together.
 ‘learning nuggets’
• Beyond the legal requirements – a value-adding institutional set-up, which needs to be
negotiated between the key players in a company (including investors) and answers the
question: value-added for whom?
• CG system also depends on contingency factors such as size, business situation, personalities,
and ownership, and therefore evolves over time.
• There is a need for synchronization with corporate evolution.
The board has to be specific in the value-added of its work, establishing transparency and
accountability as two outcomes of its work, which need to be ensured under all circumstances.
• Selecting the right people for top management, setting the values and incentives according to
the fundamental strategic direction, and ensuring the integrity of the core process designs are
other areas where a board can add significant, but hard-to-quantify, value-added.
 Introduction
• Formed from a merger between Balair and Ad Astra Aero in 1931
• Headquartered at Zurich airport, Kloten
• Former national airline of Switzerland
• In 1932, Swissair bought 2 Lockheed Orion airplanes and was the first
European airline to use American planes
• In 1992, Swissair flew to 109 destinations in 66 countries
• It was known as the “Flying Bank” due to it’s financial stability -
Regarded as a Swiss national symbol and icon
• In 2000, Swissair reported losses for the first time in its 70 year history
worth $1.8bn
 
• Ceased operations in 2002
• Current national airline of Switzerland- Swiss International Air Lines
(SWISS)
• In its later time (By early 2001) it had 72,000 employees worldwide with
21,000 local employees
• In 2001, Swissair had 75 aircraft that served 210 destinations in 75
countries
 The Collapse
• On October 2, 2001 Swissair suspended all its flights due to liquidity problems. Around 40,000 passengers were left stranded worldwide.
• On October 3,2001 bank officials and Swissair executives blamed each other for grounding.
• Between 1978 to 1993 there was a consolidation in the global airline industry and Airlines joined European or global alliances instead.
• Swissair was a part of Swissair Group. In 1992, Swissair flew to 109 destinations in 66 countries and Swiss voted against integrating the
airline with European Economicc Area.

Challenge for Board and Management - Remain globally competitive or become an insignificant regional airline?

• Management decides on an aggressive acquisition strategy.

The first target Belgian state airline –Sabena
• In 1995,Despite the chronic financial problems and bad
reputation for service, 49.5% stake was acquired in Sabena to
gain foothold in Europe
• “Hunter Strategy”: In 1997, McKinsey Switzerland advised
the group to behave like a hunter and acquire 10% to 25%
stakes in European partners of Delta.
• The chairmen had no prior experience in aviation industry
 The Board
• Swissair Group’s board members were elected for 3 years with a possibility of re-election
• In 1989, the board had 32 members and decisions were made by the executive committee of the BoD
• Complete board met about five times a year for half to one day and executive committee met monthly
• The financial, organisation and remuneration committee met twice a year for half a day!
• In 1999, board was reduced to 10 members who met every month and executive committee was abolished
• In a study done in the 1980s, Switzerland was run by elite of 300 people from industry, banks, and trade associations.
• Members are selected mostly by their friends who were already in. Interconnectedness of Swiss companies was criticised
• In addition, Swiss law required the majority of board members to be Swiss nationals or residents
• Swissair's Board-The Who’s Who of Switzerland
• For example Swissair chairman Honegger was director of UBS and UBS’s chairman Robert Studer was a Swissair Board member
• A lot of Governmental and political influence on the day-to-day management ,government’s regulatory role overlapped with the board’s
oversight role.
• In a bid to comply with the political and social norms, economic and ethical norms were ignored

Other factors
• In 2000, high fuel prices and a strong dollar exchange rate added to the misery
• European airlines are not able to quickly cut labour costs in response to a downturn, Swissair executives had little experience dealing
with European unions
• June 2001, PWC resigned as auditors – for four years identical statements, not a minor deficiency reported regarding different
holdings
 The CEO
The Good
• In October 1995,the board appointed Philippe Bruggisser as the COO and in 1996, he became the
CEO of the group.
• Philippe worked for 22 years with Swissair
• After net losses in 1995/1996 accredited to Sabena acquisition, Philippe was able to turnaround the
airline by 1997
• In February 2001, the management cancelled several follow-up investments including 34% stake in
TAP Air Portugal, and 51% in Turkish airlines.

The Bad
• In 1998, Philippe Bruggisser implemented hunter strategy and achieved 20% market share in Europe
by acquiring financially sick airlines
• The troubled acquisitions required aid of SFr 3 billion in two years
• Group didn’t have enough liquidity to solve problems with Sabena
• Strategy of having an own aviation alliance led to bankruptcy Philippe Bruggisser
*At present, Philippe Bruggisser is a Special
Advisor to Otus & Company and an
• The new CEO Mario Corti appointed in March 2001. Received a lot of public support and trust. independent advisor and consultant on and
• Cost cutting measures- Sold their hotel chain Swissotel to Raffles Hotel Group for SFr 520 million. to the aviation industry. He established his
own consultancy firm.
• Initiated the internal corporate magazine ‘Voice’ that encouraged cost saving measures by employees.
Swissair pilots accepted a 5% pay cut for 2 years.
• On 1 April 2002 successor airline Swiss International Air
Lines (Swiss) was founded on the base of former CrossAir,
taking over most of the routes, planes and staff of the former
Swissair
• Swiss took over 26 long-haul and 26 medium haul Aircraft
from the Swissair fleet and refurbished the liveries to turn it
into new fleet, together with the former Crossair Fleet. The
remainder of the Swissair aircraft that were grounded and
were not taken by Swiss were returned to their lessors
• Criminal trial began 16 January 2007. The entire Swissair
management board stood facing criminal charges of
mismanagement, false statements, and forgery of
documents. On 7 June 2007 the court cleared the
defendants of all criminal charges over the airline's 2001
bankruptcy
• In 2005 German airlines Lufthansa created a new
company Air Trust with plans to take over Swiss.
Lufthansa started with a minority stake of 11%, and by July
1st, 2007 took over Swiss completely
• In 2005, Swiss set-up a regional airline - Swiss European Air
Lines, to operate European routes for its parent company because
of problems with the former Crossair pilot unions
• Two independently operating divisions were also setup within
Swiss, known as - Swiss Aviation Training and Swiss
WorldCargo, to use the belly capacity of passenger planes
• After the takeover, the regional fleet was changed from
Crossair's Embraer ERJs and Saabs to Avro RJs, which are flown
by a wholly owned subsidiary, Swiss Global Air Lines. The rest of
the fleet, apart from the regional jets, was also rationalised and is
now mainly Airbus aircraft apart from the Boeing 777, which is
operated by Swiss Global Air Lines
• Swiss became a part of the coveted Star Alliance (world’s largest
airline alliance with 27 airlines) in 2006
• In 2008, Swiss took over - Edelweiss Air and Sevair
• Swiss is currently the national airlines of Switzerland with fleet
size of 78 and ~11,000 employees
Thank You!