The demise of Swiss national carrier Swissair has pushed one of Europe’s largest regional airlines to a critical juncture in its development. Crossair–now fully independent of the bankrupt flag carrier–must chart a new course over unfamiliar territory, leaving investors optimistic over the potential for growth but wary of untold pitfalls.

Just before Swissair declared bankruptcy on October 1, Swiss banks Crédit Suisse and UBS bought the group’s 70-percent stake in Crossair to keep the regional airline out of the liquidation process. Some three weeks later, on October 22, the Swiss government announced plans to buy 20 percent of Crossair’s share capital, which increased by $1.66 billion to $1.85 billion. Local governments in Zurich, Geneva and Basel have pledged to contribute another 18 percent, while corporate, institutional and private investors now plan to take the remaining 62 percent.

As a result of the restructuring plan, dubbed Project Phoenix, Crossair assumed responsibility for many of Swissair’s European routes, giving the Basel-based airline 70 destinations as of October 27. For legal and logistical reasons, Crossair will not take over Swissair’s international operations before next March. Consequently, the Swiss government contributed another $600 million to allow the flag carrier to continue international operations until then.

The Swiss flag carrier, weakened by many years of overexpansion under the management of former CEO Philippe Bruggisser, ultimately fell victim to the decline in air travel following the September 11 terrorist attacks in the U.S. To prevent disruption of air travel to and from Switzerland, the government established a task force with the participation of banks and industry leaders, including Swissair and Crossair management.

The task force is led by Peter Siegenthaler, director of the Swiss federal finance administration. A plan hammered out during the weekend of October 13 specifies that Crossair would take over 26 short/medium airliners from Swissair to serve 36 additional destinations starting October 29. At a later date, probably not before March, Crossair plans to accept 26 long-range airliners from Swissair.

Before its bankruptcy, Swissair operated a fleet of 77 aircraft, including a pair of Boeing 767-300ERs flown by its now defunct charter subsidiary, Balair. Those Boeings have since gone to tour operator Hotelplan for use with a new charter airline called Belair.

Plans of lesser scope, which would put an end to overseas liaisons, had also been discussed. However, Crossair CEO Andre Dosé fully endorsed the plan to take over long-range airliners from Swissair to maintain the intercontinental role of Zurich Airport. According to Dosé, Crossair will return to profitability in 2004.

Swissair house banks Crédit Suisse and UBS have indicated they would invest $920 million in the new venture. Private and institutional investors, as well as local governments in Zurich, Geneva and Basel, will contribute at least another $900 million. To date UBS, Crédit Suisse and Crossair have signed a credit contract worth some $300 million. Before the government’s endorsement, the Crossair administrative board had approved $60 million, and another $60 million became immediately available when the board and banks accepted the business plan.

Legal Uncertainties
Although Crossair appears on its way to securing the needed funding, its emergence as Swissair’s successor airline remains subject to legal challenge. Swissair group leaves behind a hefty debt estimated to exceed $12 billion, including aircraft leasing contracts. Even the sale of the airline’s moneymaking subsidiaries would not pay off all creditors.

Swissair Group’s main subsidiaries are SR Technics (maintenance and refurbishing), Flight Lease (aircraft leasing), Gate Gourmet (airline catering), Swissport (ground handling in 25 countries), Nuance (duty-free shops) and Atraxis (ticket reservations and data processing).

The 70-percent stake Swissair held in Crossair fell to Crédit Suisse and UBS just before the bankruptcy declaration at the share price of the previous day’s stock exchange quote. Some creditors may challenge the sale, particularly now that the share price has sharply risen.

In addition, Crossair has an option to purchase the name of Swissair, a privilege granted shortly before the bankruptcy declaration and which may lead to other claims. Some fear that the use of the Swissair brand by Crossair may result in legal action against any company identified as Swissair’s official successor. This may happen with Sabena, to whom Swissair had agreed to pay close to $400 million before declaring bankruptcy.

However, the government feels strong public pressure to make Crossair’s plans a success. If Crossair remained a regional airline and Swissair went under without a successor, up to 27,000 jobs would have evaporated, in addition to an unspecified number of directly dependent jobs, at Zurich Airport, for example. If the plan succeeds, job losses should be limited to 5,000.

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