Case Analysis: Swissairs Alliances

I. Case Background

This case study analysis centers on the Swiss Air Transport Co. Ltd. Swissair, which was then the flagship airline of Switzerland, formed numerous alliances with other international air carriers with the goal of providing customers with a seamless service. Swissair also deliberately formed global and intercontinental alliances in order to create a framework for the broader sharing of activities. This series of global alliances which Swissair formed throughout the 1990s was the companys strategic response to the changing economic situation of the international airline business and the rise of a more radical and highly-competitive business environment. The need to form global alliances was also Swissairs drastic attempt to strengthen the companys position in the global market.

The first global alliance formed by Swissair was with Delta Airlines in 1989 and this was brought about by the opportunity of substantially extending both companies markets of destinations. In the same year, another alliance was immediately formed by Swissair with Singapore International Airlines (SIA). This was followed by the formation of the European Quality Alliance (EQA) with the Scandinavian Air Services (SAS), Austrian Airlines and Finnair. One of the important agreements in these alliances was the cooperation in fleet maintenance and purchases as well as the coordination of routes. Also, through these global alliances formed, Swissair aimed at establishing a close collaboration in operations with other international air carriers and creating marketing alliance of

excellent service. The emphasis of these alliances was like-minded management and attaining the goal of reaching out to the markets that Swissair alone cannot serve economically.

In this case study analysis, a critical discussion on the motivations and factors that led to the management decision of Swissair to form global alliances with other international air carriers will be tackled. A full environmental analysis will be conducted to assess the opportunities and threats in the general and industry environment of Swissair. In addition, the strengths and weaknesses of the internal environment of Swissair will be presented in this case analysis. Assumptions will also be made on the environmental stability, industry growth prospects and financial strength of the company. Finally, alternative course of actions will be presented in this case analysis in order to take advantage of the opportunities and to minimize the threats on the Swissair Company.

II. Environment Analysis A. General Environment (Opportunities & Threats)

The general environment in Switzerland during the 1990s was highly favorable for the Swissair business. The unemployment rate was almost zero percent and the inflation rate was low and stable. There was immense opportunity for the airline services of Swissair to expand and literally stretch its geographic limits by tapping more routes and destinations as well as strengthen its market share on the existing routes. The only threat to

the Swissair business was the fact that it was not owned by the national government; 22% of Swissairs equity was owned by Swiss authorities and the rest was owned by the private investors. This implies that it was possible for Swissair to close down its business in the event that its private investors decide to withdraw their investments in the company.

B. Industry Environment (opportunities & Threats)

The airline industry environment demonstrated consistency in terms of profitability since the year 1983 until the early part of 1990s. In fact, the consistent travel demand growth in the industry for many decades opened up immense opportunities for international air carrier companies such as Swissair to further strengthen their position in the market. Because of the consistent growth in travel demand, the Swissair business continued to grow and expand as manifested in the several global alliances it formed with other international air carriers. However, in the year 1990, the limited global deregulation occurred in the airline industry. The deregulation caused governments in Europe and Asia to loosen their restrictions on operating rights and fare pricing. This eventually caused significant threats on the profitability of Swissair as the pricing and operating rights of carriers became subjected to aviation service agreement (ASA)s new policy which did not allow carriers from one country the right to operate within another countrys domestic borders.

C. Internal Environment Analysis (Strengths and Weakness)

In assessing the internal environment of Swissair, it was found out that the company was relatively strong in its marketing positioning as one of the premier air carriers in the world. In fact, the passengers of Swissair were willing to pay premium fares in exchange for the excellent products and customer service of this carrier. In terms of products and services, Swissair was also undeniably superior as compared to most of its competitors. From the excellent housekeeping, the most premium cuisine and the wellrounded flight attendants of Swissair along with other special airline services features, Swissair was able to fully justify its premium airfare prices and live up to its first-class image as an international air carrier brand.

Another strength of Swissair was its strong line-up of customer service, technical and maintenance staff. Swissairs personnel (i.e., pilots, flight attendants, flight engineers, ground personnel, etc.) were among the best which enabled the airline company to deliver premium services to its customers. Nevertheless, despite Swissairs strong reputation for service, one of its internal weaknesses is the high cost structure of its wages and operations. As compared to other European airlines, Swissairs labor policies were too generous; that is, it would be difficult to be laid off or get fired from the company. In addition, Swissairs management was also too centralized as all decisions were being made in Zurich. As a consequence, it became difficult for Swissair to quickly adapt to new competitive situations. Moreover the complex, nine-layer management structure of Swissair did not allow the company to have the flexibility it needed in order to improve its decision-making capabilities.

III. Assumptions 1. General environment stability

Based on the facts identified in the case study, it would be safe to assume that Swissair was part of a general environment that was relatively stable economically and politically. As part of a country with an unemployment rate that was almost zero percent, a low and stable inflation rate and a profitable business environment, Swissair had all the opportunities to expand its business and go beyond its geographic limits to tap new markets and strengthen its position in its existing customer bases.

2. Industry Growth Prospect

The case study facts emphasized the consistent travel demand growth in the airline industry that has been happening for many decades since Swissair was founded. Thus, it would be safe to assume that the industry growth will continuously transpire for many more years and will open up more opportunities for international air carrier companies such as Swissair to expand their business. The travel demand growth will more likely continue as the population expands which will further strengthen the airline industry business. However, more intense competition will more likely be stirred up among the different international air carrier companies.

3. Financial strength of the company

During the latter part of 1980s, Swissair had revenues amounting to more than $2 billion dollars. The company also had strong cash flows to self-finance its aircraft expenditures and capital equipment. The strong customer service reputation of Swissair and the willingness of its passengers to pay premium fares in exchange for its excellent carrier services were among the main reasons for the companys financial strength. One solid proof of the strong financial capabilities of Swissair was its initiative in forming several global and intercontinental alliances with other international air carrier companies. Given these facts, it would be logical to assume that Swissairs act of establishing global alliances was driven not by the need to become financially strong but to maintain and further establish its financial strength and strong competitive position in the airline industry in the long run.

Current ratio Quick ratio

CR = Total current assets/Total current liabilities QR = (Total current assets inventories)/Total current liabilities

Return on assets:

ROA = Profit after tax/Total assets ROA (net) = Net income/average total assets

Return on equity: Return on investment Debt ratio

ROE = Profit after tax/shareholders equity ROI = Profit after tax/total investments DR = Total debts/Total assets

IV. Problem Statement

Swissair faced several challenges and obstacles in confronting the new competitive environment that emerged in the early 1990s. The first important issue that Swissair encountered was the global deregulation which drove governments in Asian and European nations to loosen their restrictions on operating rights and fare pricing. The new policy implemented by ASA (aviation service agreement) imposed restrictions on international air carriers such as Swissair in operating within another countrys domestic borders. Through ASAs new policy, Swissair was no longer allowed to fly and operate domestic flights within the United States (e.g., flights from New York to Boston) although it maintained international flights from Zurich to any point in the United States and vice-versa. Thus, Swissairs operations became limited and its profitability was adversely affected.

Another significant issue that was faced by Swissair was the rise of a new and more radical political environment in Europe. The European Communitys Single European Act of 1985 brought about political and regulatory consequences on the Swissair operations. Among the important repercussions of this new regulation was the deregulation of the fare pricing structure on all international flights which placed emphasis on deep-discount fares. This huge change in the pricing structure led to profitability issues for the Swissair business. In forming global alliances with other international air carrier companies, Swissair found itself in a precarious position of not knowing whether or not the global

alliances it formed will help the company weather the upcoming changes in the competitive airline business environment.

V. Alternative Course of Action A. Description of Alternative 1

The Swiss Air Transport Co. Ltd should launch its own airline carrier brand apart from Swissair that offers cheap or discounted international flights to cater to the business travellers who are part of the lower end of the market. Since Swissair has a strong financial position, it has the capacity to finance a new airline brand that would take travellers to and from Europe at more affordable airfare rates. However, Swissair must be cautious of maintaining its premium brand image and its excellent customer service so as to differentiate itself from the new airline brand that its mother company will establish.

A.1. Advantages

Creating and launching a new airline brand that offers cheaper international flights to and from Europe to other continents will enable Swissair to tap more profitable markets of business travellers who are searching for a more affordable means of travelling around the world.

The Swiss Air Transport Co. Ltd will not be able to violate the European Communitys Single European Act of 1985 which includes provisions for deep-

discount fares as it will be launching a new carrier with cheaper international fares.

A.2. Disadvantages

It would be require a huge amount of investment for the Swiss Air Transport Co. Ltd. to create and launch a new airline brand that offers cheaper international flights.

It may take longer time for the Swiss Air Transport Co. Ltd. to respond to the European Communitys Single European Act of 1985 as it would take years to create and launch a new airline brand.

Profitability issues may arise from creating and launching a new airline brand that offers cheap airfare rates.

B. Description of Alternative 2

Swissair should focus on maintaining its brand reputation of delivering premium quality and excellent customer service that will justify its high airfare price rates. Swissair must do niche marketing to specifically target business and luxury travellers who are not price sensitive and are willing to pay a huge amount of money for a uniquely superior and one of a kind travel experience.

B.1. Advantages

By further improving its brand position, Swissair will be able to build a loyal following of customers willing to pay airfare prices at premium.

Swissair will eventually own the niche market of business and luxury travellers who prefer a superior and excellent travel experience.

Swissair will be able to further improve its current quality and excellent customer service which will make the travel experience of its customers more exciting, fun and memorable.

B.2. Disadvantages Swissair will encounter cost-structure issues with the European Communitys (EC) Single European Act of 1985 and will be required to renegotiate terms with the European ASAs and the representatives of the EC. Swissairs customer base will be very limited. Sustaining good profit may become an issue in the long run.

C. Description of Alternative 3

Swissair must find a way to overhaul its existing cost structure and cut down unnecessary expenses on wages and operations. The Swissair management must assess all the variables affecting the companys airfare rates and identify which cost areas it must cut down.

C.1. Advantages

By cutting down unnecessary costs, the Swissair management may be able to lower down its expensive airfare rates.

Lower airfare rates will enable Swissair to tap additional markets of travellers.

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Profitability issues may potentially be solved through cost-cutting measures.

C.2. Disadvantages

The premium image of Swissair may be negatively affected by the cost-cutting measures.

The quality of Swissairs products and customer service may decline as the management will be focused on cutting down all unnecessary costs.

VI. Recommended Alternative and Action Plans

Function area

Objective To implement a new global campaign that will further strengthen Swissairs market positioning To negotiate costs of production of every new aircraft purchased by Swissair

Marketing

Production

Operation & Marketing

To minimize operation and marketing costs

Strategies Communicate to the customers that Swissair has the most excellent product and customer service among all carriers. Ensure that Swissair personnel are able to successfully negotiate production costs for the Swissair aircrafts. The Swissair management must inform all its operations and marketing personnel of the areas where the

Timeline Three to six month global campaign

Budget

$2.3 million dollars

Within one year

Target savings of over $200,000 million dollars

Within one year

Target savings of over $100,000 million dollars

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Finance

To align all finance-related efforts in the Swissair company with the goal of cutting down unnecessary costs

cost-cutting measures will be applied. The Swissair management must identify the finance-related areas where the cost-cutting measures will be applied.

Within one year

Target savings of over $150,000 million dollars

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