Business Failure Analysis

Derrick Canty

LDR 531

April 13, 2010

Tim Buchanan

For several decades, Switzerland’s former national airline, Swissair, has had a reputation as being an almost perfect embodiment of traditional Swiss virtues like technical innovativeness combined with reliability and solidity at the same time. They were so financially stable that they were known as the “Flying Bank.” Established in 1931, Swissair epitomized international transportation until the late 1990s, when the management decided to follow the aggressive borrowing and acquisition policy known as the Hunter strategy. This strategy was a major expansion program initiated by Swissair aimed to grow its market share through acquisition of small airlines rather than entering into alliances agreements. The buying spree created a major cash flow crisis for parent company SAirGroup (Swissair Group), and was exacerbated by environment caused by the September 11 attacks. Those attacks put a void in the company’s plans and Swissair found itself hamstrung with debt. Unable to make payments to creditors on its large debt, and the refusal of UBS AG (Union Bank of Switzerland) to extend its line of credit a month later forced the entire Swissair fleet to be grounded in October 2001.

Management was the blame for how this company failed because of failure to conduct a market research and not taking competition seriously. Swissair figured that they could just “muscle” the little guy and the consumer would keep using their product. A couple other mistakes were: wasteful use of capital (cash), poor planning, insufficient knowledge about that type of business in legal, financial, accounting, and/or purchasing matters. Swissair spent too much money in the early years and then after the attacks, they didn’t make payments regularly and still didn’t join an alliance to increase their chance to survive like many other airlines did. Tight market regulation is abandoned, fuel cost prices erode under heavy competition and an airline is ruined. More than five years later after the collapse of Swissair, a trial of former board members and top managers of its parent company begun in Zurich. These people were tried on mismanagement, false statements, forgery of documents, and other charges over what has become known as the biggest corporate failure in Swiss history. Swissair left behind debts to the tune of $13.7 billion and resulting in 5,000 job losses. The board also was charged for investing over $200 million into a struggling Belgian carrier at the expense of SAirGroup. The court cleared the defendants of all criminal charges over the airline’s bankruptcy.

Many bankrupt businesses have been found to have poor records and, as a result, ended up making poor decisions. A lack of business records can result into inability to conduct poor cost analysis. Another reason is that government rules, tax laws, and regulations can literally bring a business to a halt if management fails to see their implications in time. Most problems caused by regulations are easily avoidable, so management should get good advice about regulations that impact or may impact a business or cash flow. Business management mistakes are easy to make, but difficult and sometimes expensive to correct as it showed with Swissair. Also bad judgment and lack of management skills and experience are fatal. In 2002, Switzerland was embarrassed to lose its national icon for good.

Union Bank of Switzerland sold the remaining assets of Swissair to Crossair, the regional counterpart to the transatlantic Swissair. Crossair changed the name to Swiss, and the new national airline started its operations officially in March 2002. Management quickly decided to stay as an independent carrier and joined an airline alliance. Since British Airways was the major competitor in Europe, it was difficult for Swiss to earn respect and trust since they had collapsed in recent years. No one wanted to take a chance on this airline, but one did, Lufthansa Group, a German based corporation. After the takeover, Swiss joined the Star Alliance and operations were gradually integrated with Lufthansa. Since management has made wise decisions, it’s clear that Swiss airlines have rebounded from the disaster from years ago and management has vital part in how businesses are operated. The new management core has learned from previous management teams to decide on what is correct for the corporation and its customers and not is right for their pockets. Everyone can learn from mistakes of our past to make a difference in our society in the future.

References:

www.all-about-switzerland.info/swissair-history

www.swissairinfo.ch

www.businesspundit.com