Can Super Mario Save Swissair?

The new CEO will have a tough time righting the flag carrier

It was once one of the smoothest-running airlines in Europe. So it has been a shock to investors to witness the mounting disarray at Swissair, Switzerland's flag carrier. In January, Swissair's parent company, SAirGroup, jettisoned CEO Philippe Bruggisser, who had charted the expansion strategy that plunged the company into the red. Then Moritz Suter, airline division chief, bailed out on Mar. 7. The following week, the company said that 9 of its 10 supervisory board members would quit, including Chairman and interim CEO Eric Honegger--a tacit acknowledgment that they had endorsed a bad strategy. "We've never seen anything like this in Switzerland," says Hans-Jacob Heitz, leader of a group of dissident shareholders.

Enter Super Mario. That's how the new CEO, Mario Corti, is known in Switzerland. Corti, the chief financial officer of Swiss food giant Nestle, is the only board member left at the airline. Since he joined in April, 2000, Corti wasn't tainted by the ill-fated alliance strategy which drove the company to buy sizable minority stakes in half a dozen troubled airlines. And he has impressive credentials: Corti vastly improved Nestle's relations with its investors, served once as deputy head of banking at the Swiss central bank, and even holds a pilot's license. "He's a very creative financial guy, and he has strong personal connections," says Joel Markus, chairman of consulting firm Korn Ferry's central European operations. "You need a fast solution here."

Indeed. Swiss newspapers speculate that SAirGroup, which has revenues of around $8 billion, will show a loss of as much as $1.5 billion on Apr. 2, when it reveals its 2000 results. It's not that SAirGroup's expansion strategy was totally flawed. Lufthansa has thrived by building a vast network of airline alliances, while selectively taking equity stakes. SAirGroup went wrong when it invested heavily in second-tier partners, many of which are in trouble. One partner, Belgium's Sabena, is estimated to have lost $180 million last year: SAirGroup pledged last month to inject $136 million into the carrier after unions agreed to cost cuts. TAP of Portugal lost $92 million, and SAirGroup's French affiliates--AOM, Air Littoral, and Air Liberte--are believed to have lost more than $360 million. To help keep its partners afloat and shore up its own finances, Zurich-based SAir may have to sell some of its profitable catering, hotel, or leasing operations to protect its financial health. SAirGroup won't comment.

Investors hope Corti will sell off the stakes in the French and Belgian partners, and sign up with a bigger ally-- transatlantic partner American Airlines, perhaps, or KLM Royal Dutch Airlines. Two of the outgoing supervisory board members, Credit Suisse CEO Lukas Muhlemann and prominent Geneva banker Benedict Hentsch, say the group needs to join one of the larger alliances.

The trouble is, SAirGroup may have difficulty attracting other airlines. No shareholder can vote more than 3% of the shares, which means no suitor can take over the entire company. Sabena and the French airlines are so weak that no one may want them. And SAirGroup has an awkward dual-hub system, which means some passengers must fly from Swissair's hub in Zurich to nearby Basel, the hub of SAirGroup's regional carrier Crossair.

OVERBILLING? The biggest obstacle for larger carriers, however, is SAirGroup's tangled alliances and liabilities. Activist Heitz has lined up 100 small shareholders who want an independent audit of the 1999 results, which he thinks may have understated the provisions SAirGroup needed to take to reflect problems with its alliances.

The trouble spills beyond the Swiss borders. In France, a pilots' union representative at AOM, which is 49.9% owned by SAirGroup, may be considering a lawsuit that says SAirGroup's Flightlease subsidiary overbilled AOM on some Airbus planes it leased to the French carrier. SAirGroup declines to comment. With potential liabilities from lawsuits and restated accounts, outsiders aren't likely to invest in SAirGroup soon. "It's like catching a falling knife. Nobody wants to do it," says analyst Corne Zandbergen at Fortis Bank in Amsterdam.

Corti is not expected to unveil a new strategy until a special shareholders' meeting in September. He's appealing to investors to give him time. "I'm not responsible for the past; I'm responsible for the future," he said on TV soon after his appointment as CEO on Mar. 15. Right now, that future looks pretty turbulent.

By Christine Tierney in Frankfurt and Carol Matlack in Paris

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