SWISS Reports First-half Loss

Swiss International Air Lines generated total income from operating activities of CHF 2 098 million in the first six months of 2003 and reports a net loss of CHF 333 million for the period. The CHF 133 million net loss posted for the second quarter of the year was an improvement on the CHF 200 million net loss sustained in the first three months. The better performance helped produce a first-half result which was also an improvement on the CHF 447 million net loss sustained for the first six months of 2002.

The cost economies already initiated - some of them as early as winter 2002/03 - are now beginning to bite. The liquidity of the SWISS Group (including three-to-twelve-month fixed-term deposits) stood at CHF 811 million at the end of June 2003 (com-pared to CHF 913 million at the end of March).

SWISS carried 5.5 million passengers on its scheduled air services in the first half of 2003, generating operating revenue of CHF 1 715 million. The seat load factor amounted to 68.7%, and the gross yield per revenue seat-kilometre totalled CHF 0.14. Pressure on yields thus remained strong throughout the period. The reasons for the tough business climate which continued to be experienced in the first six months can be found partly in the highly cyclical nature of the air transport industry, which is currently suffering from sizeable overcapacities, and partly in the shock impact on demand of exogenous factors, primarily the SARS out-break and the hostilities in Iraq. SWISS has also had to contend with increasing pricing pressure from the no-frills carriers.

The company’s cargo business produced encouraging first-half operating revenue of CHF 260 million, a result which was largely in line with previous quarters’ performance. ÊThe CHF 57 million in revenue from charter operations was 13.6% down on the same period last year, a decline largely attributable to the reduction in capacity following fleet downsizing ac-tivities. A further CHF 22 million in revenue was generated from other operations, including aircraft maintenance performed on other airlines’ behalf. Ê
SWISS generated total income from operating activities of CHF 2 098 million in the first half of 2003. The result includes other operating income of CHF 44 million earned through the leasing-out of aircraft, flight simulators and office facilities and through commissions on ticket sales for other airlines.
The airline market: current health and trends
IATA, the International Air Transport Association, was still reporting dramatically low traffic volumes for its member airlines as recently as its June monthly report. ÊAfter May traffic had been 21% below its prior-year level (and as much as 55% below on Far East routes), a modest recovery was seen in June, though results for the month were still a tangible 11.8% down overall and 35.8% down for the Far East on their 2002 equivalents. SWISS’s results should also be viewed and assessed against this overall industry background. And, in an extremely turbulent second three months, the airline did post a significantly-improved quar-terly result.
In its own latest report, which was published at the end of July, the Association of European Airlines (AEA) even speaks of the first signs of a slow recovery. Total traffic volume in the European airlines’ prime markets (within Europe, across the North Atlantic and to and from the Far East) was 1.7% higher for the last week of July than for the same period last year, a result which appears to confirm the trend reversal seen over the past few weeks. The growth was strongest over the North Atlantic at 6.7% - partly, of course, because these routes had suffered the greatest declines in 2002. Traffic in Europe rose by 2.0%. And the markets seem to be recovering in the Far East, too, where volumes are now approaching their prior-year levels. The severity of the decline in the Far East, which hit SWISS hard, is illustrated by the fact that, despite a continuous recovery over the past eleven weeks, market volumes are still some 6.6% below their 2002 equivalents.

SWISS’s earnings from operating activities show a loss of CHF 346 million for the first six months of the year. With financial expenses of CHF 25 million and financial income of CHF 40 million (the latter deriving from currency-exchange gains and interest on liquid funds), the financial result contributed a profit of CHF 15 million to this first-half performance. ÊIncome taxes - paid on profits achieved by subsidiary companies - amounted to CHF 2 million. ÊAs a result, the first six months of 2003 produced a net loss for the period of CHF 333 million.

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The exceptional costs which are being incurred as a result of the restructuring activities cur-rently under way are not included in the present half-yearly results. These non-recurring costs have been budgeted at around CHF 200 million. This amount includes the leaving set-tlements associated with the out-of-court agreement recently concluded with a section of the pilot corps, the costs arising from “Sozialplan” severance benefits packages and early re-tirements, and the additional costs incurred through the early withdrawal of equipment from the aircraft fleet. ÊThese provisions will be shown at the end of the second half of 2003, when they will be included in the consolidated financial statements for the year as a whole.

SWISS’s first-quarter results were adversely affected by the lingering global economic re-cession, the sizeable uncertainties in the period leading up to the hostilities in Iraq and the lower travel volumes during the conflict itself. Revenues in the second quarter were severely depressed by the outbreak of SARS, and are substantially below budgeted projections.

The consolidated balance sheet shows cash and cash equivalents, short-term fixed-term deposits and marketable securities amounting to CHF 811 million at the end of June, CHF 445 million less than these positions had totalled at the end of 2002 and CHF 102 million below their aggregate total at the end of March 2003. ÊThese figures clearly show that the cash drain slowed down in the second three months of the year. The trend can be partly attributed to seasonal business fluctuations and to steps taken to reduce non-cash net working capital; but the actions implemented under the Target Turnaround cost reduction programme launched last November are also now being fully felt, and made a particularly strong contribution to the sizeable savings effected in areas such as IT, sales and marketing and commissions paid.

The value of the aircraft fleet on June 30, 2003 amounted to CHF 2 050 million, a CHF 16 million decline on its equivalent at the end of 2002. ÊThat the capitalised value of the aircraft fleet fell despite the arrival of the first Airbus A340 is due primarily to the fact that the reduction in the number of Embraer aircraft ordered resulted in the partial repayment of a prepayment already made (and capitalised) for the aircraft concerned.

The value of the property, plant and equipment position amounted to CHF 302 million, CHF 36 million more than at the beginning of the year. ÊThe increase can be largely ascribed to the completion of the Basel head-office extension and to the capitalisation of properties in Zurich and IT facilities. Non-current assets accounted for 60.0% of the company’s total as-sets at the end of June 2003.

Shareholders’ equity stood at CHF 1 360 million after incorporation of the loss sustained in the first-half period, giving a balance sheet equity ratio of 31.0%. The capital reduction by reducing the share’s nominal value from CHF 50 to CHF 32 which was approved by the 2003 Ordinary General Meeting was effected on May 9, lowering share capital by a total of CHF 946 million. ÊThe share premium position was also reduced by CHF 338 million, and the loss carried forward was reduced by the same overall amount.

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