The airline business is among the worst performing of any industry. In the last 10 years in the U.S., for example, the airline industry has cumulatively lost over $50 billion and numerous carriers have disappeared, either by bankruptcy or merger. Internationally, the picture is similarly gloomy, especially in mature markets like Europe. However, many countries around the globe continue to protect and support failing flag carriers that are often absorbing substantial amounts of public funds. Switzerland is a notable exception, with lessons to teach the rest of the world.
Following the post-9/11 economic turndown, Swissair’s assets lost value dramatically. The Swiss national carrier was grounded in October 2001 and bankruptcy proceedings followed shortly thereafter. Most Swiss citizens and creditors were certain that the Swiss government would bail out the national airline—because that’s what proud governments do, right?
However, the Swiss government kept Swissair alive only until March 2002, when liquidation was initiated. After that, the government funded the creation of the successor airline Swiss International Air Lines (“Swiss”), which saw a former regional airline take over most of the former Swissair’s routes, airplanes, and staff. Three years later, the new Swiss carrier was sold to Lufthansa, where it became the most profitable airline within the group.
The Swiss government chose to let go of its national carrier because of the huge losses it generated as a result of its complex and bulky business structure. Swissair owned multiple loss-making carriers, employed a complicated legal structure, and had taken on massive debt to support its operations. Restructuring such an entity was considered far too complex, risky, and expensive. The fresh start that liquidation afforded the government was more attractive even when compared with the financial loss (not to mention the emotional sting) from the sale of Swiss to Lufthansa.
Most state-owned or legacy carriers that face financial troubles should not be considered for restructuring and/or privatization. They often have a complex history with many legal and moral obligations toward staff, clients, the host country, or passengers. Liquidation is usually a better solution. It averts the problems that can come from existing generous benefits and pension schemes for senior staff, the discounts and free tickets gifted to those close to the carrier or its owners, and especially the notion that the airline serves the country and therefore must fly to distant destinations, generating losses.
But although liquidation makes the most sense economically, there continue to be numerous examples of failed privatizations or prolonged funding of money-losing, state-owned carriers that absorb millions of dollars of public funds—money which could be put to good use in other sectors. The Swiss government, faced with a failing carrier, gave it wings to fly away, charting a course others should follow.