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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 diffi-
culty for Swissair to maintain competitive given the high labor cost in Switzerland. Meanwhile, the peo-
ple 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 com-
pany 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” Swis-
sair collapsed.
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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 back-
fired the company. Secondly, management should think out of the box to find alternative plans and frame-
works. 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 im-
portant 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 be-
fore 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
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 recom-
mendations. 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 air-
lines. 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 train-
ing to high-level management to help the company becomes more effective. Beyond those recommenda-
tions, 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.
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Section I. Early Warning System
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 fol-
lowing table shows the assumptions that Swissair made during the process of decision-making, as well as
according evidence.
1 The economic will not go into a The unprecedented extension and intensification of globali-
recession during the payback pe- zation in terms of the international integration of capital and
riod after the aggressive acquisi- product markets led to dramatic economic growth starting in
tion of a number of airline compa- the 1990s. Globalization of world economy was ongoing. ( -
nies in the 1990s. 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 The airline industry itself is a major economic force. The
a high growth rate. Therefore, ac- growth of world air travel has averaged approximately 5%
quisition of airline companies will per year since the 1980s. Historically, annual growth in air
for sure generate profits. travel has been about twice the annual growth in GDP.
(http://web.mit.edu/airlines/analysis/analysis_airline_indus-
try.html)
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3 There will be continuous liberali- The global airline industry experienced great technological
zation and deregulation of the air- innovations in the 1950s, followed by intense regulations
line industry throughout the throughout the world to control profitability and enhance
more intense competition in the 1978, and that in Europe started in 1991.
industry.
4 Swissair will maintain its domi- The Swiss government has long-standing protectionist avia-
nance and have little competition tion policy in the country to limit the growth of foreign com-
in its domestic market, helping petitors and create advantages for domestic business ( -
competitors.
5 The management team of Swissair was known for being conservative and risk-averse
Swissair is good at controlling in the early mid-1990s that helped Swissair generate substan-
risk. The probability of strategic tial cash flows and maintain a healthy operation ( - The Col-
6 Even though losses may occur af- Until the early 1990s, Swissair was financially the strongest
ter the massive equity-based ac- in the industry, being called as “flying bank.” It had been
quisition, Swissair’s business will having excellent financial performance and high credit rat-
financially strong.
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7 Swissair will maintain its leading Swissair had a reputation for high-quality strategy focusing
role in the global airline industry on safety, comfort, reliability, punctuality, and innovation in
and be more risk-resistant com- the industry. Its superior customer services lead to its strong
pared to competitors even when brand name and awareness worldwide ( - Swissair’s Collapse
try.
Unfortunately, assumptions are often incorrectly estimated based on intuition. The benefit of list-
ing the assumptions is that managers who responsible for an initiative can do a more thorough fact-check-
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
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
● 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 ge-
ographic regions, etc. Compared to leading indicators, lagging indicators are the easiest to iden-
tify because them are the outcomes through which Swissair defines success.
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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.
● 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 in-
vested 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
● 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 invest-
ment 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 ac-
quired would increase. However, the value of equity actually decreased by CHF 3,340 million.
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● Return on equity: Swissair’s return on equity between 1995 to 1999 was 4% on average. Expect-
ing “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 Strat-
● 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.
● Profit margin: Swissair used to have a profit margin around 6%. However, after the failure of
● Passengers: Since 1995, the number of passengers of Swissair carried per year increased by ap-
proximately 10% annually. With this growth rate, Swissair should carry at least 19,830,000 pas-
sengers in 2000. The actual number of passengers was 19,220,000, but the difference was not sig-
nificant.
● 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
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Step 6: Calculating the Variance
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 posi-
tive or negative.
The total weighted variance is -482% indicating that the outcome is significantly lower than the
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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
○ Swissair had superior customer services determined by its high-quality strategy focusing
○ The Swiss government’s long-standing protectionist aviation policy could ensure the
● 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,
○ 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 busi-
ness 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
● 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.
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○ 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
sis).
● 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.
○ 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
○ Potential policies that restrict Swissair’s access to other countries will negatively affect
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1. 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).
2. Strategy risk
Swissair has a culture of autocratic leadership and its Board of Directors are composed by mostly politi-
cians, leading to the risk of unqualified management team, poor decision-making, and flawed strategy.
It is possible that Swissair will form an alliance with other airline companies, including Belgium’s Sa-
bena, the French Air Liberte, and the Portuguese TAP to pressure other competitors. However, it is uncer-
4. Competitor risk
Swissair faces increasing competition due the liberalization and deregulation of the global aviation indus-
5. 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 down-
6. Regulatory risk
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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 regu-
7. International risk
Swissair operates all over the world and looks for further expansion globally. Without a thorough under-
standing of the culture and business environment in a foreign country, Swissair will possibly have obsta-
cles 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
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 moti-
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1. 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 gen-
eral population. Thousands closed their accounts with the two banks, and demonstrations of Swissair em-
ployees 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 Switzer-
2. Organizational behavior
Failure to incorporate the other employees of Swissair in decision-making could have been one of the rea-
sons 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 com-
pany. During the crisis, the commitment made huge payments to Sabena and still owned a large amount
of money.
3. 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 al-
ways 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
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1. 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 air-
lines 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.
2. Governance controls
Swissair adopted autocratic leadership style and operated a poor organizational behavior. Most of the fi-
nancial 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 opin-
ions 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.
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 prob-
lem-solving skills. This is exactly what Swiss Air management level need at this moment. The manage-
ment level fully accepted “Hunter Strategy” without any gradual experiments and careful consideration,
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the failed and aggressive decision-making had caused the company to lose billions of dollars and dam-
aged their reputations. Despite the heavy loss that the company has incurred, the Board and executive
Therefore, our team proposes a new policy of linking high-level executives’ performances to their com-
pensation, 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 en-
couraged 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.
4. 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
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
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Work Cited
1. Crafts, Nicholas. “The World Economy in the 1990s: A Long Run Perspective.” London School
of Economics, December 2004. Web. 26 July 2017.
2. “Global Airline Industry Program.” Massachusetts Institute of Technology, Web. 26 July 2017.
3. Knorr, Andreas. “Swissair’s Collapse-An Economic Analysis.” Institu fur Weltwirtschaft und In-
ternationales Management. Universitat Bremen, 28 September 2003. Web. 26 July 2017.
4. “Organizational Behavior in Swissair Failure Featured.” Customer Writing Tips. N.P., 8 July
2013. Web. 26 July 2017.
6. Richter, Patrick. “The Collapse of Swissair.” World Socialist Web Site. N.P., 13 October 2001.
Web. 26 July 2017
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