From the outside, Swissair’s corporate governance structure appeared irre- proachable. All members of theVerwaltungsrat, the body which under Swiss law has the ultimate responsibility for leading the company (Gesamtleitungs- funktion), included outside directors who had outstanding track records as bankers and industrialists (only one was a former senior manager). It was a
‘legion of honour’ (and previously based not just on prestige of the members but also on seniority; members were advised to keep quiet for the first two years).
Over the years, the government influence had waned, although some of the Swiss cantons held an important minority share (led by the Canton of Zurich, which also owns Zurich Airport). Only two of the ten board members came from the civil service – roughly in line with the shareholding. The Swiss desire for elite consensus remained strong. The board had a detailed list of duties, enshrined in the company’s Articles of Association and
three committees – (1) finance, which basically also functioned as an audit committee in today’s language; (2) organization, including group personnel policy; and (3) remuneration. The meetings were held on a monthly basis and the long-time non-executive chairman, a retired CEO, was responsible for the board agenda and information flow.
The management was responsible for running the company. Philippe Brug- gisser, who had been the COO since 1995 and CEO since 1997, had a track record for first turning around Swissair’s service division and then staging the airline’s return to profitability (after losses in 1995 and 1996). Together with Lukas M¨uhlemann (the former head of McKinsey Switzerland, who became CEO of SwissRe in 1994 and of Cr´edit Suisse in 1997), Bruggisser tried to tackle two strategic dilemmas for Swissair. First, there was a threat that the airline would be locked out of the emerging European aviation market, due to deregulation within the EU. Second, it was too small to be a global player in the consolidating industry and too big (and too proud) to become a second-tier feeder2 airline in one of the big aviation alliances. An attempt to merge with other mid-sized airlines in 1993 failed due to political resistance in Switzerland. To resolve these dilemmas, an aggressive acquisi- tion strategy (labelled the ‘Hunter Strategy’ by McKinsey) was undertaken.
The goal was to acquire 10 to 25% stakes in a number of airlines, including Finnair, Austrian Airlines and Irish Aer Lingus, to form a European pole for an alliance with a big US carrier (at that time Delta). In addition, the services (maintenance, catering, IT) were to be expanded and sold to the group members.
However, as one board member later admitted, the Hunter Strategy was
‘proving more difficult to implement than expected’. Most of the originally
targeted airlines declined to join the Qualiflyer Alliance under Swissair leadership. So after taking a 49.5% stake in Sabena in 1995, Bruggisser acquired 49% of French Air Littoral and 49% of German charter carrier LTU in 1998. In 1999, Swissair acquired a 49% share in each of the following: French AOM and Air Libert´e, Italian Volare Group and Air Europe. An attempt to secretly increase the stake in Austrian Airlines failed, resulting in Austrian Airlines pulling out of Qualiflyer and switching to Lufthansa’s Star Alliance. A 20% stake of South African Airlines was acquired. In 2000, Polish LOT (37%) and Portuguese TAP (20%) completed the shopping spree (but TAP was never executed). However, Delta left the Qualiflyer Alliance.
2000 was already a difficult year as losses in the allied airlines exceeded CHF 700 million (after CHF 400 million in 1999). High fuel costs and restructuring costs added additional financial stress. The Hunter Strategy came under increasing criticism, but Bruggisser convinced the board to continue. He was backed by solid support from the Swiss public, who overwhelmingly wanted a strong national carrier. Rumours started to spread.
There were allegations that Cr´edit Suisse, whose CEO and chairman Lukas M¨uhlemann played a leading role on the Swissair board, fired a financial analyst who had written a critical report about Swissair’s financial health.
The report objected to the propping up of results from gains in the pension fund (due to the booming stock market) and keeping aircraft leases off the balance sheet (declared as operational, not financial leases). In November 2000, the board continued to affirm the strategy and its confidence in the CEO. However, in January 2001, Swissair had to report a loss of CHF 2.9 billion. Bruggisser left and the Hunter Strategy was abandoned. After a transition during which the chairman of the board also took the job of CEO,
the chief financial officer of Nestl´e, Mario Corti, who was one of the few newer board members, took over. At the annual general meeting, seven of the ten board members resigned and the shareholders voted against legally discharging the board.
M¨uhlemann, one of the remaining board members, replied to the question of whether or not the board had acted with due diligence:
The board of directors has to rely on management, which is responsible for the operational business. The board has to have a careful look at management’s ideas and proposals. It has to ask critical questions and if necessary demand alternative scenarios.
Our trust in management was justifiable with the record results of 1997 and 1998. Directors cannot know as much about the market, competition, customer requirements and organization of the company as a management.
The new leadership tried to break up the alliance, which proved costly (in order to reject its option to increase its stake in Sabena to 85%, Swissair had to pay CHF 430 million). The long-term auditor, who had signed off with identical statements for the previous four years and never expressed doubts or concerns, resigned in June 2001. The new auditors revised the figures for 2000, but no legal violation could be detected. Asset sales, such as the sale of Swiss Hotel & Resorts for CHF 520 million, could not really stop the bleeding. When September 11 threw the global airline industry further into decline, Swissair ran out of liquidity and grounded its fleet on 1 October, leaving 40 000 passengers stranded and sending a shockwave through a nation that prides itself on its reliability, efficiency and a ‘sure
eye’ (symbolized in the Wilhelm Tell story). On 5 October, M¨uhlemann also resigned from the Swissair board.