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Tuesday, 2 October, 2001, 12:14 GMT 13:14 UK
Q&A: Swissair in crisis

Swissair suspended all flights on Tuesday morning, one day after it said it had agreed a rescue package with two banks. BBC News Online explains the background to the crisis affecting one of Europe's most prestigious airlines.

What is happening to Swissair now?

Swissair was forced to suspend all flights on Tuesday morning after several of its planes were impounded at European airports and fuel suppliers refused to refuel planes at the airline's Zurich hub.

A BP spokesman said all oil companies were asking Swissair to pre-pay for any fuel supplies.

Planes already en route continued to their destinations.

The actions came one day after Swissair said it had agreed a rescue package with two Swiss banks that would see the flight operations folded into Swissair subsidiary Crossair while other units, including catering and ground services, were filing for bankruptcy.

Under the plans, UBS and Credit Suisse, the two banks, will own 70% of Crossair.

Despite the "rescue package", businesses remained wary over whether Swissair would be able to pay its bills.

Are Swissair's problems related to the 11 September attacks on the US?

Not directly. Swissair was already in very deep trouble because of a disastrous expansion strategy involving investments in a large number of financially weak airlines.

These included French regional airlines Air Littoral, Air Liberte and AOM as well as Belgian national flag carrier Sabena, in which Swissair has a 49.5% stake.

Swissair also has minority stakes in South African Airlines, Polish airline LOT and Italian regional carrier Volare, among others.

In recent months, Swissair has backed away from commitments to increase investments in a number of these airlines.

Swissair has itself recently announced the heaviest losses in its history as well as a boardroom clearout.

What's happened to those other airlines?

Funding was cut off from Air Littoral while short-term measures were agreed to keep AOM and Air Liberte in the air, although substantial job losses were announced.

The futures of AOM and Air Liberte remain uncertain.

The Belgian government has been reported to be considering legal action against Swissair if it does not provide funds promised to Sabena.

Sabena's board was due to hold a crisis meeting in Brussels on Tuesday evening to discuss the way forward.

One analyst said the airline was likely to file for bankruptcy in the next few weeks.

How bad is the financial outlook for European airlines in general?

Although US airlines have been hit harder by the 11 September attacks, European airlines also face falling passenger numbers, added security costs, falls in their share prices and increased insurance premiums.

Airlines that suffered financial losses before the attacks, such as British Airways and Swissair, are particularly vulnerable.

BA, Virgin Atlantic, Alitalia and Scandinavian airline SAS are among those that have announced thousands of job cuts in recent weeks.

IATA, the International Air Transport Association, estimates that airlines worldwide will suffer total losses of 10bn in 2001.

How badly were the airlines suffering before the attacks?

Global economic slowdown left airlines suffering from excess capacity as passenger numbers, especially lucrative business travellers, dropped.

In particular, the US downturn affected airlines that generated a lot of their business from the transatlantic route.

IATA also said airlines were forced to negotiate expensive contracts with pilots just as the economic slowdown took a grip.

Meanwhile, recent highs in the oil price have dented sentiment in the sector as airlines spend more than 10% of their operating costs on fuel.

In addition, airlines are facing increased tariffs charged by airports and air traffic control.

Will European airlines receive aid, like their US counterparts?

The US airlines have won a $15bn aid package from Congress.

The aid comprises $5bn in cash and $10bn in loans.

In Europe, any package would take account of the fact that the airlines are not as cash-strapped as their US counterparts and nor are their problems as closely connected to the 11 September attacks.

What long-term impact will the attacks on the US have?

The industry is expecting regulators on both sides of the Atlantic to relax restrictive rules on future mergers as a result of the crisis.

Most analysts believe that the industry is too fragmented and needs to consolidate so that players can share costs and build greater economies of scale.

At the moment regulations provide a disincentive because merger partners are often forced to give up existing traffic rights.

In Europe, this is likely to mean several national flag carriers go out of existence.

Swissair and Sabena have placed themselves at the top of that list.

See also:

02 Oct 01 | Business
Swissair grounds all flights
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