ERA 2006: Regional line at last a solid contributor to Swiss profits

 - September 13, 2006, 5:00 AM

Larger aircraft and lower costs have produced a winning formula for Swiss International Airlines’ regional operations–despite high fuel prices not entirely offset by surtaxes on tickets. Swiss announced an overall profit of SFr76 million ($61 million) for the first half of the year and stresses that regional, European and intercontinental flights have all contributed to the positive result. The airline foundered in red ink quarter after quarter since its inception in 2002, as regional operations often ate away profits made on long-haul flights.

The airline reported earnings before interest and taxes of SFr98 million ($79 million) for this year’s first half, versus a loss of SFr9 million ($7 million) for the same period last year. Sales rose 11.7 percent, from SFr1.769 billion ($1.435 billion) to SFr1.976 billion ($1.594 billion).

The figures reflect a successful change in management philosophy adopted with the arrival of ex-Lufthansa manager Christoph Franz in 2004, and confirmed after the takeover of Swiss by Lufthansa completed in March of last year. By last October Swiss had phased out all its Saab 2000s, and the last of its erstwhile 25 Embraer ERJ 145s had left the fleet by the end of July. The company kept its four Avro RJ85s and since last November a new subsidiary called Swiss European Air Lines has been operating the regional fleet, which now includes 20 RJ100s with five-abreast seat configurations for up to 97 passengers.

Under the new regime, Swiss European wet leases its aircraft to the parent company and engages in no marketing or sales activities. It employs a staff of 268, and managing director Peter Koch reports to Swiss COO Manfred Brennwald. Its pilots and flight attendants work under contracts separate from the parent company’s personnel. Swiss European aircraft account for about 40 percent of Swiss’s European capacity.

Some of Swiss’s Avros are well over 10 years old, but plans to replace them with 15 Embraer E170s and another 15 Embraer E190/195s remain shelved since 2003. To preserve a feeder network with smaller regional aircraft, Swiss has negotiated a series of wet-lease and code-sharing agreements with independents such as Darwin Airline, based in Lugano. Darwin flies four ex-Swiss Saab 2000s, still maintained by their former operator in Basel. Swiss wet leases a Darwin Saab for four daily Zurich-Lugano links and flies under a code-share agreement for the Bern-London City leg. The airline also maintains code-share deals with regionals such as Cirrus Airlines, Adria and Blue 1.

The drive to outsource regional operations to subsidiaries and third-party airlines capable of operating at lower cost reflects the policy of Lufthansa. The German flag carrier outsources its own regional operations to five subsidiaries, all of which provide aircraft under wet-lease agreements to Lufthansa Regional.

Swiss’s turnaround couldn’t have happened so convincingly without the successful renegotiation of employment contracts with its regional and European pilots, as well as with all cabin and ground personnel unions.  The company’s staff shrunk from an average of 6,497 employees during the first half of last year to 5,717 during the first half of this year.

While expressing satisfaction with recent developments, Franz cautioned that the company would need to achieve a higher EBIT margin during favorable economic conditions than its current 5 percent to ensure survival in the next industry downturn.