swiss Tal Drori Martin Gerhardt Taro Honda Jung

swiss Tal Drori Martin Gerhardt Taro Honda Jung Su Arindam Thakur Manuel Villabona QUO VADIS?

Swissair - the good years Strong and consistent balance sheet – “flying bank” Strong brand name and reputation 4 th biggest airline in Europe Best quality and service (best service award, 19982001 successively) Swiss national pride and flag carrier

Crash of Swissair Stranded! The Sun (03/10/2001) Swissair future on knife-edge BBC News (15/10/2001) National pride driving Swissair deal CNN (23/10/2001) A nation in shock: Swissair crisis BBC News (28/10/2001) Collapse shatters Swiss image BBC News (18/10/2001)

Reasons for Swissair’s failure Main causes Swiss veto against joining the European Economic Area Main effects Complex bilateral agreements with all EU-countries Small country as home base Saturated home-market Numerous small alliances 1) No alliance focus Time Aggressive acquisition of second tier carriers in Europe Mix of low-cost and high quality carriers Management hubris Discounts for journalists Accumulation of losses Cannibalization, dilution of brand name Weak strategy implementation, defection of alliance partners Uncritical media coverage, shocking end 1) Air Littoral, AOM France, Crossair, LOT, Portugalia, TAP, Volare, Austrian Airlines, Balair, Cargolux, LTU, South African Airways, Ukraine International Airlines

SWISS International Air Lines today Economic performance 1) 2003 2001 1000 Number of destinations 210 70 273 2000 0 2001 1999 -909 Number of aircrafts 81 13. 9 10. 6 Staff in 1000’ 16 10. 7 Revenue in bn. CHF 5. 3 -2000 -3000 Passengers in mil. 4 1) SWISS Company information, financial reports 2003 -498 -1000 138 2002 -2. 885 Strategy • Divestiture of non-aviation assets • Joined Oneworld alliance Sep. 2003 • Recapturing reputation on service (best service award 2004)

Developing a new strategy for Swiss Long-term STRATEGY VALUE COST SPEED HUMAN RESOURCES Short-term/ turnaround

STRATEGY VALUE COST HUMAN RESOURCES SPEED

Strategic options for airlines Singapore Airlines High SWISS BA Lufthansa Air France KLM Service Level Full service strategy Quantas/Jet Star Airline-in-anairline strategy Easy. Jet Ryanair Low Low-price strategy Price Level High

Option 1: Low Cost Airline Strategy Implementation Distribution Crew Costs § Offer low fares Lower compensation Direct Sales over internet Reduced complement No commission on ticket sales Performance incentive No 3 rd party fees § Focus on short-haul routes that generate maximum revenue § Maximize air-time § No comfort services § No alliances Overhead Seats 15% more seats / aircraft One plane – one class Low-Cost Strategy Airport Costs Switch to Secondary airports Reduce number of planes to have only 1 type Lower general administrative costs Lower maintenance costs Passenger Services No catering No in-flight amenities

Option 1: Low Cost Airline Opportunities § Reduction of complexity § Cost reduction (maintenance and administrative cost) § Higher degree of automation (e. g. Internet) § Attract more customers § Lower competition in Continental Europe

Option 2: Full-service airline Strategy § Quality-driven instead of cost- driven § Target long-haul operation § Keep hub-and-spoke network § Orient towards business travellers § Continuous invest into infrastructure, facilities and HR § Aggressively build brand Implementation Short-term § Leverage One. World alliance partners’ resources § Invest mainly in HR training rather than physical facilities to save cost § Implement new short-haul concept “SWISS in Europe” § Build brand mainly by word of mouth Long-term § Launch more long-haul operations § Invest more in physical assets § Build brand through marketing initiatives

Option 2: Full-service airline Opportunities § Reduction of complexity § Cost reduction (maintenance and administrative cost) § Higher degree of automation (e. g. Internet) § Attract more customers § Lower competition in Continental Europe

Option 3: Airline-in-an-airline Strategy § “Airline in an airline” : Maintaining the full service and creating a low cost channel § Combining the advantages of parallel but differentiated operations. § Targeting two market segments in the same time. Implementation § Investing money in acquiring an existing low cost airline. § “The Greenfield approach” -Establish a separate subsidiary with its own name and logo (which can be related to Swiss) and possibly with a separate management.

Option 3: Airline-in-an-airline Opportunities § Enables competition with low budget airlines § Positive impact of Swiss brand name § Switch to Swiss for long hauls § The no frills sector is still dominated by operations involving UK point § Increase range of customers

Strategy decision Main impacts Option 1 Option 2 Option 3 Financial investment required 5 2 4 Massive restructuring of fleet and operations 5 1 3 Impact on corporate culture 5 1 3 Impact on brand current customer base 5 2 3 Risk of canibalization 1 1 5 Impact on current alliance membership status 5 1 4 1 – lowest impact/risk 5 – highest impact/risk

Managing the turnaround of SWISS Long-term STRATEGY VALUE COST SPEED “If the Wright brothers were alive today, Wilbur have to fire Orville to reduce costs“ Herb Kelleher, Southwest Airlines HUMAN RESOURCES Short-term/ turnaround

Agenda STRATEGY VALUE COST SPEED HUMAN RESOURCES

Motivating and aligning the workforce SWISS today Heterogeneous organization and culture as legacy from Swissair and Crossair Measures New vision and new corporate culture (honesty, trust, dignity, mutual respect) Above average personnel cost Introduce performance incentives Lack of trust in management Management changes at all layers People are tensed due to insecure future and layoffs Enhance teamwork and identification G. Bethune CEO “Many companies in crisis mode will just change the CEO. The approach is like changing only the lead husky on a sled-dog team. Four dogs back, the look and smell stays the same“

Agenda STRATEGY VALUE COST HUMAN RESOURCES SPEED

Service performance 100 % on time arrivals 2003 92 84, 1 80 Difficulties in providing service 79, 8 78, 7 78, 3 BA Air France SWISS 60 40 • Little tangible product dimensions • No time on short flights to demonstrate a wide service range • Consistency is more important than absolute value • Negative feedback spreads faster than positive 20 0 Ryanair 30 Lufthansa Missing baggage per 1000 passengers 2003 25 20 18, 7 18, 8 BA Air France 15, 1 15 12, 1 10 5 0, 5 0 Ryanair SWISS Lufthansa

Transform service into a competitive advantage Reasons for choosing an airline other than price Safety Punctuality Availability of direct flights Airport proximity to city center Baggage handling Involuntary denied boardings Friendliness of staff Cleanliness Airmiles C. C. Kong ex. CEO Create a virtuous cycle Eliminate nonvalue-adding work Higher productivity Continuous improvement Higher profits Satisfied customers Satisfied employees More investment projects Expand the workforce “Our passengers are our raison d’être. If Singapore Airlines is successful, it is largely because we have never allowed ourselves to forget that important fact“

Agenda STRATEGY VALUE COST HUMAN RESOURCES SPEED

Cost performance Average cost composition per available-seat-kilometer 1) Average cost per available-seatkilometer in €ct 2003 1) 20 Aircraft ownership General & Administrative Airport 10% charges, traffic 13% control 9% 16% Sales, marketing & distribution 7% Passenger services Ground 18% handling 12% 5% 10% 17 15 12 7, 8 Maintenance 7, 1 4, 5 5 Crew cost 0 Fuel 10 10 Luft- SWISS Air BA hansa France 1) Association of European Airlines, Civil Aviation Authority, Mc. Kinsey Quarterly Easy Ryanair Jet

Restructuring fleet & operations to reduce complexity Airline model Divest non-core assets Withdraw from unprofitable routes, redefined hub strategy Reduce number of airplane types, decrease average Increase role of Internet-sales Offer repair, maintenance, and catering services “We started Internet booking 2 years ago. . . resulting in a cut of 56% in sales cost!“ Sales agents Callcenter Internet W. Walsh CEO

Agenda STRATEGY VALUE COST HUMAN RESOURCES SPEED

Flexibility as key competency Synchronize the entire business process through effective IT systems Cater to customer needs quickly Be flexible – improve service quality continuously and fast Jim Parker CEO Manage finance effectively and reduce cash-to-cash cycle React quickly to the volatile business demands Seize opportunities for improving service quality "The key word is flexibility. As a result of our employees' commitment to low costs, low fares and high quality customer services, the future for Southwest is bright "

Recommendations FULL SERVICE STRATEGY • Target long-haul and business travelers • Build brand on service excellence • Continuous investment in infrastructure, IT, and HR • Provide more destinations by using hub-andspoke network VALUE COST SPEED • Work closely with alliance partners and leverage their resources • Remove management hubris and change organizational culture to better respond changing consumer needs HUMAN RESOURCES

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