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Executive Summary:

Established on March 26, 1931, Swissair operated as one for the world’s most elite airlines, and emphasized a high-quality strategy stressing “safety, passenger comfort, reliability and punctuality” from its very beginning. In early 1990s, deregulation on airline operations brought more competitors to the market, which could provide lower prices and wider supply. Those low-cost carriers increased the difficulty for Swissair to maintain competitive given the high labor cost in Switzerland. Meanwhile, the people in Switzerland rejected to join the European Economic Area, which made Swissair get into mess due to the restriction of operating in other European countries and having freedom to expand alone in Europe. The problem of Swissair at that time is it wasn’t big enough to be a global player, but either small enough to fit into a niche. Aiming to expand market and gain more profits, therefore, in late 1997, Swissair adopted “Hunter Strategy” advised by McKinsey, which was a very aggressive approach to acquire other smaller airlines, even for small airlines running a loss. However, the biggest problem was not this strategy but the process of executive. The management of Swissair, to some extent, most were politician instead of business experts, and top management had a critical role to make decision. Thus, the majority of the company has no visibility of the decision making process of the leadership. Lacking transparency, permanent monitoring in business activities, and accountability as well, Swissair did not take proper action when things go wrong. Meanwhile, mounting debt and continuous losses resulting in liquidity crunch, but since Swissair was applying the “default” acquisition framework, the fact that this company was on the wrong track was not acknowledged, and the necessary decision were not taken. In addition, even some insiders already realized the failure of this strategy, but the board still supported it. As a consequence, “Hunter Strategy” was failed. By 1999 Swissair spent approximately € 2.65 billion on acquisition. Later on, the events of September 11th forced the airline industry to accept that in some respects, aviation is a declining industry. In 2000, Swissair estimated a lose between € 2.99 billion and € 4.10 billion over the next three years (3 – Swissair’s Collapse-An Economic Analysis). In 2001, the once renowned “flying bank” Swissair collapsed.

Through the review of the root causes of the failure, we have identified several key learnings which would have prevented similar incidents. We highly recommend the management team to follow learn these lessons to mitigate the risks in the future. First of all, management should pay more attention to avoid action bias. A lot of the actions late have been proved as short-sighted, which in the end backfired the company. Secondly, management should think out of the box to find alternative plans and frameworks. The management was sticking at the current process and plans the whole time to find solutions. Management should constantly bring new thoughts and sparks to the board. Thirdly, management should not fall into the trap of over-reaction. In most of the situations, deep diving into root causes is more important than taking immediate actions. Furthermore, major initiatives should be handled closely by the management. Management should enforce testing phase to have an initial understanding of the impact before fully launching any plans. Last but not least, as an established business, Swissair should set an early-warning system to alert the stakeholders with any forecasted decline. Thus, the business could really turn the current preventive plans to actively seeking opportunities for improvements.

There are significant opportunities for Swissair in implementing specific measures in place to identify and mitigate threats on an ongoing basis. Our goal is to enhance effective governance measures to avoid threats in the future. After taking possible options into account, we come up with several recommendations. We recommend the board to consider increasing its competitiveness by improving service quality and lowering its costs, at the same time, building partnerships with both government and other airlines. We also recommend the board to consider employing democratic leadership style to improve the governance controls. we also suggest Swissair designing an economic incentive and offering more training to high-level management to help the company becomes more effective. Beyond those recommendations, we advise the board implementing the EWS and root cause analysis, as well as an exit strategy to avoid more losses. We believe these actions would empower the company to achieve better operational excellence.

Section I. Early Warning System

Step 1: The Assumptions

The assumptions are one of the most critical parts of EWS. The execution of “Hunter Strategy” in Swissair must be based on certain underlying facts and evidence that drove the decision to pursue this particular initiative. These assumptions are often implicit, not detailed, and assumed to be true. The following table shows the assumptions that Swissair made during the process of decision-making, as well as according evidence.

	Assumptions	What Evidence is it Based on?
1	The economic will not go into a recession during the payback period after the aggressive acquisition of a number of airline companies in the 1990s.	The unprecedented extension and intensification of globalization in terms of the international integration of capital and product markets led to dramatic economic growth starting in the 1990s. Globalization of world economy was ongoing. ( - The World Economy in the 1990s: a Long Run Perspective) http://eprints.lse.ac.uk/22334/1/WP87.pdf
2	The airline industry will maintain a high growth rate. Therefore, acquisition of airline companies will for sure generate profits.	The airline industry itself is a major economic force. The growth of world air travel has averaged approximately 5% per year since the 1980s. Historically, annual growth in air travel has been about twice the annual growth in GDP. (http://web.mit.edu/airlines/analysis/analysis_airline_industry.html)
3	There will be continuous liberalization and deregulation of the airline industry throughout the world. However, the liberalization will not lead to overcapacity or more intense competition in the industry.	The global airline industry experienced great technological innovations in the 1950s, followed by intense regulations throughout the world to control profitability and enhance competition. (http://web.mit.edu/airlines/analysis/analysis_airline_industry.html) Deregulation in the U.S. started in 1978, and that in Europe started in 1991.
4	Swissair will maintain its dominance and have little competition in its domestic market, helping the company generate stable profits and limiting the growth of competitors.	The Swiss government has long-standing protectionist aviation policy in the country to limit the growth of foreign competitors and create advantages for domestic business ( - Swissair’s Collapse - an Economic Analysis).
5	The management team of Swissair is good at controlling risk. The probability of strategic failure is low and the probability of company failure is low.	Swissair was known for being conservative and risk-averse in the early mid-1990s that helped Swissair generate substantial cash flows and maintain a healthy operation ( - The Collapse of Swissair).
6	Even though losses may occur after the massive equity-based acquisition, Swissair’s business will not be affected because it is too financially strong.	Until the early 1990s, Swissair was financially the strongest in the industry, being called as “flying bank.” It had been having excellent financial performance and high credit rating. ( - The Collapse of Swissair).
7	Swissair will maintain its leading role in the global airline industry and be more risk-resistant compared to competitors even when there is a downturn in the industry.	Swissair had a reputation for high-quality strategy focusing on safety, comfort, reliability, punctuality, and innovation in the industry. Its superior customer services lead to its strong brand name and awareness worldwide ( - Swissair’s Collapse - an Economic Analysis).

Unfortunately, assumptions are often incorrectly estimated based on intuition. The benefit of listing the assumptions is that managers who responsible for an initiative can do a more thorough fact-checking job before executing it.

Step 2: Identifying All the Available Data

In order to conduct a thorough research before executing a strategy, it is necessary to identify all the available data and then categorize them as leading, lagging, or coincident indicators, and then also as short term or long term.

Step 3: Best Practices When Selecting and Categorizing Leading and Lagging Indicators

Short time frames: Using monthly or quarterly data will increase the effectiveness of EWS and help track performance. The management team can notice any unusual changes in performance on time and then mitigate risks.

Special leading indicators: Some leading indicators are either difficult or expensive to capture on an ongoing basis, such as capability of the managers, corporate culture, awareness in different geographic regions, etc. Compared to leading indicators, lagging indicators are the easiest to identify because them are the outcomes through which Swissair defines success.

Step 4: Adding the “Connector” Assumptions

Connectors are those values, often expressed as percentages, that translate leading indicators into lagging indicators. These connector variables can encompass a wide range of variables but are usually metrics. For Swissair’s case, metrics can be return on net invested capital.

Step 5: Entering Leading, Lagging, and Connectors into a Spreadsheet

Leading indicator (occur at the time of executing “Hunter Strategy”)

Net invested capital: Invested capital is the total amount of money raised by Swissair by issuing securities to shareholders and bondholders. Swissair used to have a net invested capital around CHF 5,500 from 1995 to 1998. However, the company adopted “Hunter Strategy” in 1999 and was optimistic about it, thus raised 52% more capital than the normal time.

Connector assumption

Return on net invested capital: During 1995 to 1999, Swissair had an average return on net invested capital of 9.9%, with the highest return being 12.2% and the lowest return being 6.3%. With “Hunter Strategy,” Swissair possibly expected a return of 15%. However, the actual return on net invested capital was -36%, indicating a big failure financially.

Lagging indicators (occur after the adoption of “Hunter Strategy”)

Gain/loss on net invested capital: Swissair expected to make a profit of CHF 825 million from invested capital based on the estimated ratio of return; but it lost CHF 3,010 million on the investment in reality.

Equity: The core of “Hunter Strategy” was equity-based acquisition. Swissair predicted to have an increasing amount of equity because it believed that the value of the airline companies it acquired would increase. However, the value of equity actually decreased by CHF 3,340 million.

Return on equity: Swissair’s return on equity between 1995 to 1999 was 4% on average. Expecting “Hunter Strategy” to be a successful plan, the company predicted to have a return on equity of 7%. Since the strategy was a big failure, Swissair’s return on equity in 2000 was -71%.

Debt-to-equity ratio: Swissair used to have a debt-to-equity ratio around 1. Due to “Hunter Strategy,” the company was deeply in debt, leading to a debt-to-equity ratio of 5.

Earnings per share: Because of the failure, Swissair’s earnings per share was CHF - 236 for 2000.

Equity per share: Swissair’s equity per share over the past five years was CHF 683 on average. However, it dropped to CHF 92 in 2000.

Profit margin: Swissair used to have a profit margin around 6%. However, after the failure of “Hunter Strategy,” its profit margin became -16% in 2000.

Passengers: Since 1995, the number of passengers of Swissair carried per year increased by approximately 10% annually. With this growth rate, Swissair should carry at least 19,830,000 passengers in 2000. The actual number of passengers was 19,220,000, but the difference was not significant.

Flying hours: Swissair’s annual flying hours increased by 15% every year since 1995. Therefore, the estimated flying hours for 2000 was 667,380. However, the actual number was 598,375, with is 10% lower than the forecasted flying hours.

Step 6: Calculating the Variance

Step 7: Calculating a Weighted Scored

A larger positive weighted variance indicate that Swissair is outperforming. A negative weighted variance indicates that a negative outcome and the company is underperforming. The weight for “Debt-to-equity ratio” is negative because a lower debt-to-equity ratio is better, so a positive variance indicates an unwanted outcome, instead of an appealing outcome. By adjusting the weight to a negative number, the “EWS Weighted Variance” for “Debt-to-equity ratio” will correctly reflect whether the outcome is positive or negative.

The total weighted variance is -482% indicating that the outcome is significantly lower than the expectation. Swissair was definitely underperformed.

Section II. SWOT Analysis

Strengths

Until the early 1990s, Swissair was financially the strongest in the industry, being called as “flying bank.” Excellent financial performance and credit rating were resulted from the previous risk-averse management teams (6 – The Collapse of Swissair).

Swissair had superior customer services determined by its high-quality strategy focusing on safety, comfort, reliability, punctuality, and innovation.

The Swiss government’s long-standing protectionist aviation policy could ensure the dominance of Swissair in its domestic market.

Weaknesses

Majority of the Board of Directors of Swissair were politicians with limited knowledge of business management. Despite the fact, Swissair had a culture of autocratic leadership, which restricted valuable contribution made by talented individual regarding decision making (4 – Organizational Behavior in Swissair Failure Featured).

Swissair had limited growth potential of its home market due to small population (seven million), high labor costs, and the strong currency, which kept the cost of domestic business high.

Swiss rejected to join the Common European Market in 1992. Starting on June 1, 2002, the European Economic Area (EEA) Treaty restricted that equal access for Switzerland-based airlines to the EU market was granted only in combination with a wider bilateral deal between the EU and Switzerland (3 – Swissair’s Collapse-An Economic Analysis).

Opportunities

Swissair has huge growth potentials in the Asian and Latin American markets where tourism is developing rapidly. In addition, local airline companies in Asia and Latin America are not as competitive as Swissair in terms of, for example, great reputation and customer services.

Airlines, such as Belgium’s Sabena, the French Air Liberte, the Portuguese TAP, and other smaller airlines requested to form an alliance with Swissair, the so-called “Qualifier Group,” to increase the overall competence (3 – Swissair’s Collapse-An Economic Analysis).

Threats

Swissair faces increasing competition due to the liberalization and deregulation of the aviation industry in the U.S. starting in 1978 (6 – The Collapse of Swissair). Airlines that operate in the U.S. no longer require government subsidies and routes guaranteed by the U.S. government, and can therefore lower the standards for passengers and reduce prices.

Liberalization of the aviation industry in Europe beginning in 1991 led to overcapacity and fierce competition in the industry (1 – All About Switzerland).

Swissair’s business is highly threatened by terrorism, which can cause people’s fear of global travelling. Any aviation accident related to terrorism will even more damage the reputation of the airline company Swissair and harms its profitability.

Potential policies that restrict Swissair’s access to other countries will negatively affect the company’s profitability.

Section III. Risk Identification

Financial risk

In 1998, Swissair planned to acquire significant stakes in multiple airlines, such as Air Europe, Air Liberte, Turkish Airlines, and South African Airways, to increase market share. By 1999 Swissair spent approximately € 2.65 billion on acquisition. However, in 2000, Swissair estimated a lose between € 2.99 billion and € 4.10 billion over the next three years (3 – Swissair’s Collapse-An Economic Analysis).

Strategy risk

Swissair has a culture of autocratic leadership and its Board of Directors are composed by mostly politicians, leading to the risk of unqualified management team, poor decision-making, and flawed strategy.

Strategic relationship risk

It is possible that Swissair will form an alliance with other airline companies, including Belgium’s Sabena, the French Air Liberte, and the Portuguese TAP to pressure other competitors. However, it is uncertain whether the alliance is reliable and well-functioning.

Competitor risk

Swissair faces increasing competition due the liberalization and deregulation of the global aviation industry in late 20th century especially in the U.S. and Europe.

Economic risk

Generally speaking, airline companies offer a premium mean of transportation with a premium price and their popularity significantly depends on the prosperity of tourism. If there is a global economic downturn, airline companies will suffer from low profitability.

Regulatory risk

Switzerland rejected to join the Common European Market, thus Switzerland-based airlines have limited access to other EU member state. Swissair’s profitability is harmed by strict regulations, and future regulations are uncertain and can be stricter.

International risk

Swissair operates all over the world and looks for further expansion globally. Without a thorough understanding of the culture and business environment in a foreign country, Swissair will possibly have obstacles in its operation. For example, its employees need to be able to speak local languages to communicate with customer; the food it serves on the airplane has to match the taste of local people; the company can not violate any types of local regulations when operate overseas.

Human resources risk

Swissair has an autocratic management team, limiting the contribution, development, and promotion of individual employees. People who work at lower levels of the company may feel stressed and less motivated, and therefore, have lower performance and productivity.

Section IV. Root Cause Analysis

Political influence

Swiss politicians and the Swissair management immediately launched a campaign against the banks, painting UBS boss Marcel Ospel as the nation’s bogeyman. There were also angry reactions in the general population. Thousands closed their accounts with the two banks, and demonstrations of Swissair employees were supported with sympathy and enthusiasm (6 – The Collapse of Swissair). Some savings speeded up the collapse of Swissair. The Swiss trade union decided to take shares in the new airlines. This decision to let Swissair collapse is a declaration of war not only company’s staff, but also on Switzerland’s previously relatively high level of social provisions.

Organizational behavior

Failure to incorporate the other employees of Swissair in decision-making could have been one of the reasons why the national icon collapsed (4 – Organizational Behavior in Swissair Failure Featured). Most of the financial commitments decisions only benefit the directors but no other beneficiaries of the company. During the crisis, the commitment made huge payments to Sabena and still owned a large amount of money.

Leadership structure

Swissair adopted autocratic leadership style which don’t pay attention to the ideas that come up from lower ranks but rather heed opinions from high office. Research has shown that most political leaders always use autocratic leadership styles hence rarely ask for opinions from other members. In such a case the leader is always responsible for executing the ideas and objectives which are raised by stakeholders while in the case of Swissair the leaders ignored the opinions raised by other members and they carried out the director’s wishes

Section V. Final Recommendations

Triggers for responding to the threats

For the threats that we mentioned in our SWOT analysis, Swissair faced four threats at that time. Firstly, Swissair faced increasing competition due to the liberalization and deregulation of the aviation industry in the U.S. and Europe, it can through its excellent services and lower its cost to lower its prices to increase its competitiveness and to prevent the threat from the airlines in the U.S. Secondly, Swissair’s business is highly threatened by terrorism. We will recommend Swissair to advertise it’s one of the most safety airlines and good world situation to mitigate people’s scare. The last threat is potential policies that restrict Swissair’s access to other countries. We think Swissair’s top managers should build a good relationship with local government and through it to relieve restriction from other countries. Swissair also can join an alliance to cooperate with other airlines arrive “win-win” situation to decrease the negative effects from political restriction.

Governance controls

Swissair adopted autocratic leadership style and operated a poor organizational behavior. Most of the financial commitments decisions only benefit to the directors and no other beneficiaries of the company. So, we will suggest Swissair employ democratic leadership style, the top managers need to ask for opinions from other lower ranks. Then the company’s decisions will not only benefit with leaders but all the members in Swissair. Using democratic leadership style also would contribute to Swissair avoid use the Hunter Strategy which is one of the most important root causes to its failure.

New executive level controls

Executive control refers to the ability to control and coordinate all departments across the company. The new executive control aims at enhancing this ability to facilitate with a better decision-making and problem-solving skills. This is exactly what Swiss Air management level need at this moment. The management level fully accepted “Hunter Strategy” without any gradual experiments and careful consideration, the failed and aggressive decision-making had caused the company to lose billions of dollars and damaged their reputations. Despite the heavy loss that the company has incurred, the Board and executive level still received high salaries and attractive compensations.

Therefore, our team proposes a new policy of linking high-level executives’ performances to their compensation, thus the company needs to design an economic incentive for senior-level management. The performance should not specifically indicate financial performance but also their responsibility to the work and the trustworthy relationship with customers and investors. Also, high level management will receive other lower-level employees anonymous feedback and ratings periodically. Employees are encouraged to point out management flaws and can provide some meaningful advice to help improve or solve the problem. Lastly, make sure to let high-level management to receive adequate training, either to learn up-to-date technologies or the more advanced management methods to help the company become more effective.

Process controls

As for process control, our team advise the company to implement the EWS and root cause analysis, it is important for a company to have an effective dashboard which provided by EWS to help the company identify and solve the problems promptly without further damages incur. Adequate researches before any product or service launch is essential, as well as encouraging employees to participate in decision-making is also necessary for the sake of the stake of company. Last but not least, no matter how confident the company with the new product or collaboration, it is significant for a company to have an exit strategy to help set a limit for losses and avoid digging the hole. Examples of exit strategy for Swissair can be stop furthermore investment in targets that generate dramatic losses and sell existing assets to have more liquid capitals to cover losses.

Work Cited

Crafts, Nicholas. “The World Economy in the 1990s: A Long Run Perspective.” London School of Economics, December 2004. Web. 26 July 2017.

“Global Airline Industry Program.” Massachusetts Institute of Technology, Web. 26 July 2017.

Knorr, Andreas. “Swissair’s Collapse-An Economic Analysis.” Institu fur Weltwirtschaft und Internationales Management. Universitat Bremen, 28 September 2003. Web. 26 July 2017.

“Organizational Behavior in Swissair Failure Featured.” Customer Writing Tips. N.P., 8 July 2013. Web. 26 July 2017.

Rahesch. "Swissair – Meltdown of a National Icon." Technology and Operations Management. N.p., 9 December 2015. Web. 12 July 2017.

Richter, Patrick. “The Collapse of Swissair.” World Socialist Web Site. N.P., 13 October 2001. Web. 26 July 2017

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