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SWISS Takes Off into a New Future with Lufthansa

“Green light” for Lufthansa and Swiss: the supervisory board of Deutsche Lufthansa AG and the board of directors of Swiss International Air Lines AG today approved the business model jointly developed by both companies for the takeover and integration of SWISS into the Lufthansa Group. The Swiss Confederation, the Canton Zurich, and other large shareholders support the transaction. So far, a corresponding approval has been obtained from more than 80% of the SWISS share capital. Lufthansa’s Chairman and CEO Wolfgang Mayrhuber and SWISS President and CEO Christoph Franz will sign the Integration Agreement at 8:00 p.m. in Zurich today.Lufthansa’s Chairman and CEO Wolfgang Mayrhuber emphasized the benefits of the integration for both airlines: “Lufthansa and SWISS, two world renowned airlines with a strong sense of quality and service are joining forces. The most important aspect of the integration is that it will produce clear benefits for our customers. More destinations, better connections, comprehensive frequent-flyer programs and mutual lounge access enhance the attractiveness of both companies. The merger is not only good for Switzerland and Germany; it is also beneficial for our Star Alliance partners and strengthens the European aviation sector.”

Christoph Franz, President and CEO of SWISS commented on the successful conclusion of negotiations with Lufthansa: “As a member of the Lufthansa Group, SWISS will be able to permanently fulfill its task even better of connecting Switzerland with the world. SWISS will become even more attractive for its customers with expanded services through integration into this leading network, coordinated flight plans, and access to the lounges of Lufthansa and its partners. The creation of a competitive cost structure will, however, continue to provide the basis for a positive development of SWISS.” SWISS will therefore continue to pursue the restructuring program announced in January 2005. The company still intends to conclude the negotiations on new general labor agreements rapidly, on the lines of the pay accord reached at the weekend with three ground worker unions. Christoph Franz: “The Integration Agreement ensures fair development of the Zurich hub, the size of our long-haul fleet, the quality brand SWISS, and the continued existence of SWISS as an operating airline based in Switzerland.” In order to preserve the Swiss air traffic infrastructure for the long term, an independent foundation will be established under Swiss law for a period of ten years, which will be able to propose a member to the Lufthansa supervisory board and two members to the SWISS board of directors.

Lufthansa will further expand its position as an internationally leading network carrier by integrating SWISS. Through its access to an attractive market with great economic strength and by harmonizing traffic between the neighboring countries, Lufthansa will strengthen its competitive position permanently. Already from the 2005/06 winter flight schedule onwards, the customers of both companies will be offered an expanded global service.

The takeover creates significant synergies both on the revenue and on the cost side, which will gradually increase and amount to about EUR 160 million (approximately CHF 250 million) per year from 2007 onwards.

According to the jointly developed business model, SWISS is to remain a mostly independent airline with its management and seat in Switzerland, its own fleet and crew, managed within the Lufthansa system as a profit center. SWISS will keep its own brand appearance, continue to develop its strengths, und expand its locational advantage on the Swiss market. This includes a demand-driven international network of routes as well as an intercontinental hub at its base in Zurich, which is to be developed on an equitable basis with the Lufthansa hubs in Frankfurt and Munich. Lufthansa will expand the long-haul fleet of SWISS with two additional intercontinental jets, provided competitive cost structures are in place. Long-term prospects are opening up for SWISS and its employees.


Transaction Structure

The ultimate goal is the complete takeover of SWISS. Due to the requirements of antitrust law and in order to secure the traffic rights, the acquisition is broken down into several steps. The shares of SWISS will be held by a newly-established Swiss company (AirTrust). During a first step, Lufthansa will acquire 11% in AirTrust. After receiving antitrust clearance, the share will be increased to 49%. At the same time, negotiations will be conducted in order to secure the air traffic rights. When the relevant agreements are obtained, Lufthansa will take over 100% of SWISS.

Via AirTrust, Lufthansa will submit a takeover offer to the free-float shareholders of SWISS probably in May. The amount will be calculated on the base of the average price of the SWISS share during the last 30 trading days prior to the day of filing with the Takeover Commission in Switzerland (probably March 23, 2005). Lufthansa will pay about EUR 45 million (about CHF 70 million) for about 15% of the SWISS equity.

The large SWISS shareholders will receive an out-performance option (earn-out) in exchange for their shares, the payout of which in 2008 will depend on the performance of Lufthansa’s share price compared with competitors’ shares. If the price of the Lufthansa share outperforms by 50%, the maximum payout will amount to about EUR 250 million (about CHF 390 million).

Overall, the purchase price for the complete acquisition of SWISS ranges between approximately EUR 45 million and EUR 300 million (between CHF 70 million and 460 million).