Swiss seen lucky to swap independence for survival

Analysts say state-invested airlines across Europe have proved a tough sell, despite hopes sparked by Air France's takeover of Dutch KLM last year to form the world's biggest airline company by revenues.

The Swiss deal -- worth up to 310 million euros ($409 million -- is the largest transaction since, as analysts say most carriers have done too little to lower costs to attract investors.

"The Swiss had to move if they were going to get in on the action," said analyst Nick van den Brul at Exane BNP Paribas.

Van den Brul said Lufthansa would boost its network by about 20 percent with Swiss, allowing it to move closer to the scale of Air France-KLM in lucrative long-haul flights.

For Swiss, it has joined forces with one of Europe's big three -- Air France-KLM, British Airways and Lufthansa.

"Going it alone would have meant that Swiss slowly bleeds to death," Swiss Finance Minister Hans-Rudolf Merz told a news conference in the Swiss capital.

Smaller traditional carriers more heavily reliant on short flights are being hammered by low-fare carriers such as Ireland's Ryanair .

High fuel prices have squeezed financially weak airlines further.


EU RULES

Another key driver behind airline privatisation is a widening European Union which means fewer carriers can fall back on state bailouts, prompting governments to redouble efforts to unload their airlines.

Hungary is on its fourth attempt to privatise Malev [MALV.UL] while Greece has called its efforts to sell Olympic Airlines [OLY.UL] the company's last chance at survival.

Losses and state control hobbled efforts by Italy's Alitalia to join Air France-KLM.

And Czech carrier CSA said this week it would take another year of cost cutting before privatisation through an initial public offering could begin.

"It's the graveyard," said one London airlines analyst, referring to the risk facing airlines which cannot cut costs, a reality underscored by the collapse of Belgium's Sabena and Swiss predecessor Swissair.


SWISS PROGRESS

Analysts say Swiss won Lufthansa's attention with the progress it made in cutting losses to 140 million Swiss francs last year from 687 million in 2003.

"The key issue is whether Lufthansa can turn it around to create value and how much investment in restructuring is still required," Merrill Lynch analyst Anthony Bor wrote in a recent research note.

Swiss did not always get it right, stumbling in its 2002 re-launch by targeting premier service at a time when much of the industry was scrapping first-class seating in favour of more economy seats where passengers paid for sandwiches.

After an about-face, Swiss started to bring down costs, with management hoping to lower operating costs by another 300 million swiss francs ($255 million) a year through 800 to 1,000 job cuts.

Swiss has already cast off operations such as catering and heavy maintenance, but analysts say it is vital that the latest reforms are carried out.

"Unless Lufthansa can radically change Swiss, there is risk," said Goldman Sachs analyst Hugo Scott-Gall in a recent research note.

Citigroup analyst Andrew Light said with restructuring, Swiss was expected to break even at the operating and net income levels in 2005.


NO HELP FROM UPSTARTS

Despite the woes of traditional carriers, the airlines industry continues to draw new entrants, drawn by growth seen doubling traffic in Europe by 2020.

But upstarts have shied away from taking over existing airlines, reluctant to shoulder the heavy costs of old fleets, pension backlogs and vertically integrated structures where all maintenance and catering, for example, is done in-house.

Analysts say it is easier to start from scratch, keeping costs low through use of Internet booking, outsourced support and leased fleets drawn from a glut of modern planes in storage since the industry's slowdown began in 2001.

Source: Reuters