Who lost Swissair?

In placing blame for the airline’s collapse, Switzerland’s smug establishment needs to take a long and hard look at itself.

In placing blame for the airline’s collapse, Switzerland’s smug establishment needs to take a long and hard look at itself.

By Tom Buerkle with Rick Smith
February 2002
Institutional Investor Magazine

Bénédict Hentsch, scion of one of Geneva’s most venerable private banking families and pillar of the local establishment, has a Christmas card list that reads like a Who’s Who of the Swiss elite. But this year, leading financiers, industrialists and politicians found something unexpected accompanying the usual holiday greeting: a copy of a newspaper interview in which Hentsch, the deputy chairman and longest-serving board member of Swissair Group, the holding company of Swissair, sought to justify decisions that he and fellow board members had taken in the three years leading up to carrier’s collapse in October.

“We were already condemned as the people who ran Swiss-air into the ground,” says Hentsch. “So for certain opinion makers, I would like them at least to have my side of the story.”

Many of Switzerland’s financial and political elite are struggling to justify their actions in the Swissair mess. That won’t be easy. The airline’s collapse was not just a business disaster. It was a national humiliation - and a wake-up call to the coterie of bankers and businessmen that had always run the economy as reliably as a fine Swiss watch.

“It’s a visible watershed,” says Hans-Jörg Rudloff, a senior executive at Barclays Capital who sits on several Swiss corporate boards and serves as vice chairman of pharmaceuticals giant Novartis. “Switzerland had a good reputation for being very well managed, very orderly. That you can’t even go bankrupt in an orderly way shows how much management skills have deteriorated. It seems that the country has outgrown its reserves of human resources to fill top positions.”

Swissair was more, of course, than a mere airline; it was a national icon that for decades exemplified qualities that the Swiss hold dear: precision, punctuality, service and financial probity. Generations of Swiss children received the airline’s shares as gifts. Now, besides losing face in the debacle, the Swiss have lost billions of francs in private and public money. The country’s budget has slipped into deficit because the government provided emergency aid to keep the airline aloft and then help fund its successor, Crossair.

The Swissair collapse “had a big impact on consumer confidence and on confidence in general,” reports Ulrich Kohli, chief economist of the Swiss National Bank. “We’re not used to these kind of events. And there has been damage to the Swiss reputation abroad.”

From Geneva to Zurich, assigning blame has become a national pastime. Who lost Swissair? There’s more than enough guilt to go around, and apportioning it could take years. But the broad outlines of the making of the Swissair debacle are already discernible. In the mid-1990s Swissair’s top executives were desperate to maintain access to the wider European market and arrogantly believed that they could compete with giants like British Airways and Deutsche Lufthansa. So they embarked on a high-risk expansion strategy of taking minority stakes in several obscure and struggling European carriers to build a Europewide network. Losses mounted - the acquisitions cost Swissair a staggering Sf3.7 billion ($2.3 billion) in operating losses and write-offs in 2000 alone - but Swissair’s board, packed with eminences from finance and politics who had scant experience running an airline, temporized.

Not until early last year, after Swissair had burned up most of its capital, did the board act. In March it named a new chief executive from Nestlé, Mario Corti. Unfortunately, Corti was slow in getting a handle on the airline’s debts and in selling assets to raise vital cash. And as Swissair rapidly lost altitude, a last-minute rescue attempt failed because of infighting between the airline, its leading banks - UBS and Credit Suisse Group - and the federal government.

Swissair was placed in receivership and is being sustained through March only by virtue of Sf1.45 billion in aid from the federal government. The collapse also triggered the failure of Swissair’s 49 percent-owned affiliate, Sabena Belgian World Airlines. Swissair will be succeeded by Crossair, the regional airline it acquired in the 1980s; bolstered by a Sf2.7 billion capital injection from the government, banks and industry, Crossair is to take over two thirds of Swissair’s fleet and routes. Meanwhile, Zurich prosecutors and a court-appointed liquidator are investigating the collapse, which could lead to civil damages or even criminal charges. But the process will drag on for months if not years.

The Swissair saga highlights the contradictions between the global aspirations of Switzerland’s leading companies and the parochial instincts and hubris of its homegrown managers. Many Swiss believe that the reasons for Swissair’s collapse lie in the very clannishness of their society - the tightly interwoven corporate and financial relationships and the shared political, social and military connections that define life in one of the world’s most intimate financial centers. In Zurich the elite are called der Filz, or “the felt,” a fabric so tightly pressed together you can hardly distinguish the individual fibers.

“When things are going well, people say that it’s important that everybody knows everybody, and when things go badly, then people have a different view, but in any case, it is not an efficient way to run a country or a business,” says Kurt Schiltknecht, chief economist of the Swiss National Bank for ten years and now an executive at corporate raider Martin Eb-ner’s BZ Group Holding in Zurich.

The Swissair board was all Filz, and for good reason. Board members were not particularly well paid. In 2000 they received 50 shares (average value for the year: Sf288 each) and a fee of Sf800 per meeting. The fringe benefits were better: They received the envied “Freipass,” entitling them, their spouses and their young children to unlimited first-class travel on Swissair.

But among the status-conscious Swiss, serving on the Swiss-air board was not a matter of money. Being invited to preside over the nation’s flag carrier was the ultimate accolade, a certification that one had arrived in the corridors of power. “It was a monument that you were asked to join as a kind of honor,” says Hentsch.

One year ago the honored members included, among others: Hentsch; Lukas Mühlemann, chairman and CEO of Credit Suisse, Swissair’s house bank; Thomas Schmidheiny, chairman of Swiss cement conglomerate Holcim and one of the country’s richest men, with a personal wealth estimated by Forbes magazine at $2.6 billion; Eric Honegger, a power in Zurich politics and former finance minister for the canton; Andres Leuenberger, vice chairman of Roche Holding; Corti, then chief financial officer of Nestlé; and Vreni Spoerry-Toneatti, a member of the Swiss Council of States. Spoerry-Toneatti also sat on the boards of Credit Suisse, as did Schmidheiny, and Nestlé; Honegger was on the board of UBS, Swissair’s No. 2 bank, having taken over what amounted to a Swissair seat at UBS from the carrier’s former finance director, Georges Schorderet.

It’s hard to believe that such an array of talent could ultimately have been responsible for the worst failure in Swiss corporate history, Rudloff says. “This took place with a board that should have been capable of handling such things,” he states. “These people totally failed in their task.”

On Swiss boards, “everybody is looking left and right and not asking questions,” says Michael Werder, a lawyer representing a group of Swissair bondholders who has himself sat on Swiss boards. “If a Mühlemann is not objecting to the figures, then they must be all right.”

“The same old boys are everywhere,” adds Hans Kaufmann, a member of Parliament from the right-wing Swiss People’s Party and a stock analyst and chief economist for Bank Julius Baer. “In the Swissair mess, there were no contrary voices early on.”

It’s telling that one early victim of the Swissair affair was an outsider: Briton Luqman Arnold, former president of the group executive board at UBS. He was forced out in December because of differences with UBS chairman Marcel Ospel over the bank’s participating in the airline’s rescue (see story below).

With investigations continuing and potential liabilities accumulating, few board members are willing to speak publicly. Credit Suisse’s Mühlemann declined repeated requests for interviews, as did most other board members. But a spokesman for Credit Suisse defended Mühlemann’s role at Swissair, saying he had “fully complied with his duties” as a board member. Ospel, too, declined to discuss his bank’s role in the affair.

But Hentsch, 53, who has remained at Swissair to try to assemble a benefits package for the airline’s laid-off workers, has mounted a stout defense. His role in the disaster forced him to step down as managing partner of Darier Hentsch & Cie., the bank founded by his forefathers in 1796, to protect his partners from potential liability for claims stemming from Swiss-air’s collapse. He says that the airline’s expansion strategy was what ultimately brought it down. But he insists that the airline needed to grow its European presence to survive in the 1990s and that the board properly supervised that strategy.

“Clearly, we had a very close relationship among board members,” Hentsch says. “But I don’t see why, because you are on the board of somebody else, you can’t act as a free-thinking person. That has not been my experience. We were part of the decision-making process. We asked hard questions. You cannot change strategy every six months.”

Swissair CEO Corti also seeks to defend his reputation. In an interview with Institutional Investor, he takes credit for bringing the full extent of Swissair’s liabilities into the open, stanching the company’s foreign losses and readying nonflight-related assets for sale. The strategy might have succeeded, Corti insists, if the September 11 attacks hadn’t occurred and if bankers had given him time to work out a recapitalization agreement. “I’m the first to admit I inherited a gigantic set of problems,” Corti says. “It could have been worked out in an orderly way. The drama is we weren’t given the time.”

The airline industry is a cutthroat business even in the best of times. Heavy government regulation, excess capacity, the huge capital requirements to buy and maintain fleets and intense price competition all combine to make profits hard to come by. It’s axiomatic that the industry has never earned its cost of capital through a full business cycle - indeed, a sizable portion of the industry stayed aloft in the early to mid-1990s only because of the protection of Chapter 11 in the U.S. and government bailouts in Europe. And U.S. airlines are benefiting from $15 billion in emergency aid and loan guarantees arising from the September 11 attacks. Indeed, that package, assembled in just over a week, makes the Swissair rescue effort look like dithering.

Swissair was a swallow among hawks. At the start of 2001 it operated just 75 planes - making it less than one quarter the size of British Airways - and it ranked fifth in Europe in revenue passenger kilometers, behind BA, Lufthansa, Air France and KLM Royal Dutch Airlines.

The event that would put Swissair on the flight path to ruin took place nearly a decade ago. In December 1992 Swiss voters rejected the country’s bid to join the European Economic Area, which today gives Norway, Iceland and Liechtenstein open access to the European Union. Swissair had lobbied hard for a “yes” vote, hoping to gain the same access to the EU aviation market as its larger competitors. As an outsider, Swissair had to watch as European carriers added flights to their schedules and entered alliances while its own attempts to grow were stymied by EU countries’ reluctance to renegotiate individual aviation treaties with Switzerland.

Swissair’s response was to seek to forge an alliance in 1993 with three other small but well-regarded airlines: KLM, SAS and Austrian Airlines. This so-called Alcazar alliance might have enabled the partners to overcome the limits of their small national markets and create a viable pan-European rival to the big three: BA, Air France and Lufthansa. But after ten months of negotiations, the project fell apart over the choice of a U.S. partner. Swissair already had an alliance with Delta Air Lines, and KLM owned 25 percent of Northwest Airlines. Swiss and Dutch national pride also put a damper on the entire effort, as it would have required surrendering flag carriers to a multinational.

The failure of Alcazar led an increasingly anxious Swissair to embark on a more direct method of expanding: It would gain an EU foothold by buying part of a well-known European carrier. In 1995 the company paid Sf267 million for a 49.5 percent stake in Sabena, the perennially troubled Belgian airline that had earned a profit in only one of its 71 years of existence. It also extended a Sf165 million loan to the Belgian government, which owned the remainder of Sabena.

The deal gave Swissair an EU hub in Brussels and an option to take majority control of Sabena after 2000. But it also exposed Swissair to risks that rapidly became all too apparent. Sabena’s unions staged strikes over proposed cost cuts, eventually forcing chief executive Pierre Godfroid to resign in February 1996. He was replaced by a Swissair executive, Paul Reutlinger, who bought labor peace, but at the expense of Swissair’s cost-cutting goals: Instead of the intended one-third reduction in the airline’s payroll, Swissair’s head count jumped about 70 percent. One year later Swissair wrote off its equity stake in Sabena, a major reason for its Sf497 million loss in 1996.

Sabena highlighted the pitfalls of the expansion strategy. Because European Union law denied the Swiss company majority control of the Belgian airline, Swissair could not exercise real management control to integrate the two airlines’ fleets and routes to reduce costs. Just the same, Swissair was liable for Sabena’s losses. It was just such a corporate catch-22 that prompted KLM to eschew minority acquisitions and consider alliances or outright mergers. Pieter Bouw, who headed KLM at the time and is now trying to pick up the pieces as chairman of Crossair, declares flatly that the Swiss expansion strategy “was doomed to fail.”

In spite of the brightly flashing warning signs, Swissair and its newly appointed CEO, Philippe Bruggisser, broadened the expansion strategy by buying stakes in a number of marginal carriers. Bruggisser had run the group’s fast-growing catering, hotel and retail operations and was named at the start of 1997 to replace longtime CEO Otto Loepfe, who was in failing health and was also associated with the failure of Alcazar.

Senior Swissair executives were supremely confident of their ability to whip new airline partners into shape - after all, they were managing one of the world’s most highly regarded carriers. “Swissair thought it was so good it could turn around five other airlines at the same time,” says attorney Werder.

And for a brief time, it appeared that the Swiss airline might be right. A booming global economy and rock-bottom oil prices helped Swissair post a record profit of Sf361 million in 1998, a figure that included only the second profit ever at Sabena. (Although Swissair had written off its investment, it was still entitled to its share of Sabena’s profits, as well as losses.)

Emboldened by those results, the company multiplied its European bets. A 1998 McKinsey & Co. report had recommended that Swissair adopt a “hunter” strategy and buy up equity stakes in other airlines as a way to fashion a broad alliance capable of taking on the big European carriers. The strategy was considered by Swissair executives to have the imprimatur of Mühlemann, who had headed McKinsey’s Zurich office in the early 1990s.

Over the next two years, Swissair acquired 49 percent stakes in LTU International Airways, Germany’s No. 3 charter carrier, and the French regional airlines Air Littoral, AOM French Airlines and Air Liberté, as well as smaller stakes in Italy’s Volare Airlines and Air Europe, LOT Polish Airlines and South African Airways.

The French and German acquisitions were pivotal, both to Swissair’s strategy and to its subsequent woes. LTU was not predicting an end to losses until 2003, and both it and the French carriers were squeezed by the resurgence of Air France and Lufthansa. “If it were only a matter of Sabena, you wouldn’t have seen what happened happen,” says Damien Horth, an airline analyst with ABN Amro in London. “LTU was a mistake, and the really big mistake was the French lines.”

Rising fuel prices and a strong dollar put Swissair under pressure in 2000, and speculation about losses on foreign acquisitions and the group’s health mounted. Christopher Chandiramani, an equity analyst with Credit Suisse Private Banking, cited the whispered concerns in his stock market commentary in early July, saying Swissair would need to take write-downs to restructure some of its acquisitions. A few days later he was fired - Credit Suisse said he violated bank rules by talking to the press. “I was a pawn who had to be sacrificed,” contends Chandiramani, who sued the bank and won Sf200,000 in an out-of-court settlement.

Swissair executives, meanwhile, were continuing to steer analysts toward a profit forecast of about Sf200 million for the year. The figure was pure blue sky. Swissair wound up losing almost 15 times that amount as the expansion strategy caved in. By the start of 2001, the airline had begun to spiral downward. Bruggisser was dismissed as CEO on January 23 and replaced temporarily by board member and company chairman Honegger, the former financial boss of Zurich. Here was a man with all the right political credentials but no business experience. Christoph Blocher, chief of the Swiss People’s Party, wrote at the time: “He’s never had to sell so much as a pencil in his entire life.”

Honegger made upbeat statements about the airline’s finances, but the board’s actions spoke louder than his words. On March 9 he and eight of the nine other board members announced that they would resign on a staggered schedule stretching over 13 months, acknowledging that the strategy they had endorsed for years had failed disastrously. Only Nestlé's Corti would remain, and he was quickly appointed to succeed Honegger as CEO and chairman on March 16.

Mario Corti is a flying enthusiast who delights in showing pictures from his 1992 round-the-world flight in a Cessna 340. But he had no airline experience before joining the Swissair board in 2000 and had doubts about the move. “I was very happy at Nestlé,” he says. “It’s a great company, triple-A, the bankers kiss your feet. But I said, ‘Somehow, we have to save this thing.’”

It soon became clear just how Sisyphean his mission would be. On April 2 Swissair stunned the market, and indeed the country, by reporting a net loss of Sf2.89 billion for 2000. Swissair’s share of the losses from its minority stakes in partner airlines totaled Sf796 million. It also wrote down loans to the airlines by Sf506 million and took a charge of Sf2.42 billion to cover restructuring, asset write-downs and contractual liabilities at those airlines. Shareholders’ equity plunged 60 percent, to Sf1.16 billion.

Corti and Swissair were now utterly dependent on their bankers. Credit Suisse had served for years as Swissair’s primary bank, and Credit Suisse First Boston had led or co-managed seven of the airline’s eight most recent bond issues. The relationship was especially close because of Mühlemann, who had served as CEO of the bank since 1997 and as a Swissair board member since 1995.

Nevertheless, it was UBS, a comparative outsider, that pushed for change when Corti took over. On March 31, two days before the disastrous 2000 results were released, UBS’s Ospel and Jürg Haller, head of risk management in Switzerland for the bank, met with Corti to warn him that the company was overvaluing many of its assets, and pressed him for quick action to slash its more than Sf15 billion of costly debt and rebuild equity.

“In our perception the company was in an extremely critical state,” says Haller, a participant in all of the bank’s negotiations with Swissair. “We had come to the conclusion that the asset values that they were stating were lower in terms of marketability than what the company had estimated. We said, ‘Look, if you have information that would allow us to come to different conclusions, we would like to receive that information,’ and we continued to press for it. But the company chose not to continue that dialogue.”

Corti didn’t heed the advice, but he insists that he moved as quickly as possible to try to pull Swissair out of its nosedive. He brought in KPMG in place of Swissair’s regular auditor, PricewaterhouseCoopers, to review the company’s books. He also arranged a Sf1 billion standby credit facility with Credit Suisse First Boston, Deutsche Bank and Citibank. (UBS declined to participate.)

Corti announced the facility to shareholders at a marathon annual meeting in late April, and the news calmed concerns about liquidity. But what Corti didn’t reveal to shareholders was that the facility had such tight conditions - it couldn’t be used to repay debts, for example - that it was unlikely that it would ever be used.

Corti rejects allegations that he misrepresented the credit facility, saying it was only intended as a potential bridge loan in a future sale of peripheral assets, such as Swissair’s airport retail outlets. “It was designed to be a security measure,” he says now. But government officials are demanding that Zurich prosecutors investigate whether Swissair misrepresented its financial position. “It’s absolutely clear that I want an answer on this question,” says Peter Siegenthaler, the Swiss Treasury director who is handling the government’s intervention into Swissair. It was “quite astonishing,” he tells Institutional Investor, that the conditions weren’t disclosed.

Meanwhile, Corti began repaying bank debt - nearly Sf1 billion worth by the time of Swissair’s collapse, with UBS being particularly aggressive in cutting its exposure. Coming at a time when Swiss-air needed to hang on to every franc, the debt repayments baffled analysts. They could represent “an unequal treatment of creditors,” speculates Karl Wüthrich, Swissair’s court-appointed liquidator.

But Corti dismisses any hint of favoritism. “The order of the day was to reduce the balance sheet and reduce the debt,” he says. “It was just extremely difficult to persuade some banks to roll over debt” to allow the airline to keep going without repayments.

Corti also moved to extricate Swissair from its foreign ventures. He reached agreements to pull out of the three French airlines and struck an accord with Brussels to limit Swissair’s Sabena exposure to an injection of E258 million ($219 million).

During the summer, he also unveiled plans to raise Sf3 billion through the sale or refinancing of assets, including Swissport, an operator of ground-handling facilities, and Nuance, the airport retail outlets. Unfortunately, it was already too late for this cash-raising exercise.

On August 30 Corti’s new auditors came back with bad news: Swissair Group had incorrectly accounted for items ranging from airplane leases to pension assets, according to KPMG. (Pricewaterhouse- Coopers says, “We are convinced that our statement [of 2000] results was correct.”) The reaudit reduced shareholders’ equity by Sf444 million, to just Sf716 million. Swissair reported a first-half 2001 net loss of Sf234 million after a provision of Sf251 million for losses at LTU.

The company now had just Sf555 million of equity but Sf17.1 billion of debt. Swissair’s tank was nearly empty when the events of September 11 hit airlines worldwide. Corti turned to Bern. He went to Finance Minister Kaspar Villiger on September 17 and appealed for Sf2 billion to Sf3 billion in government loan guarantees to tide the company over until it could restructure its debt. The answer was no. The government said it had no legal basis for extending guarantees unless a company was in receivership.

With speculation about bankruptcy mounting, Swissair called a crisis meeting with its bankers on the evening of Saturday, September 29. Corti made one last plea for saving Swissair through a drastic restructuring, but UBS effectively vetoed the plan. Instead, Ospel and his team proposed a Sf1.35 billion joint rescue under which UBS and Credit Suisse would buy and strip out Swissair’s 70-percent-owned subsidiary, Crossair, give the regional carrier some of Swiss-air’s planes and routes and put the parent airline group into receivership.

“We were not planning to save Swiss-air in terms of wanting to get involved in the airline business,” says UBS’s Haller. That would have been “an irresponsible act vis-à-vis our shareholders.”

Ospel wanted UBS to assume 51 percent of the rescue, but Mühlemann balked at ceding control of so old a client as Swissair and the talks broke up. On Sunday officials of the airline, Credit Suisse and the federal government met in Bern. Ospel boycotted the session, claiming that there was no need for the government to become involved. It looked as if Credit Suisse might handle the rescue alone, but after pleading by Crossair founder and chairman Moritz Suter, a close associate of Ospel’s in Basel, UBS returned to the negotiations that night.

At a nationally televised news conference on Monday evening, October 1, Swissair and its banks announced an agreement on a rescue plan, dubbed Project Phoenix. The banks would buy the Crossair stake for Sf259 million, with UBS taking 51 percent; Credit Suisse was relegated to a minority role.

In the meantime, negotiations continued among the banks and the government on a Sf250 million bridge loan to enable Swissair to maintain flights during an orderly transition period. Just how long that period was to be was never made clear. UBS’s plan would have grounded Swissair after October 3, while Corti and the government were eager to prolong operations for a few days or weeks. The outcome was anything but orderly.

On Tuesday morning, October 2, Corti called UBS to ask for extra funds to get through the day. The bank now contends that Swissair had sufficient funds in its UBS accounts to finance operations, but Corti disagrees, contending the bank had barred pooling among corporate accounts. “It is patently, absolutely untrue that on the morning of October 2 we had enough money,” he states. Meanwhile, work on signing the Crossair purchase contract, which would have freed up the bridge loan, dragged on through the day while Ospel was out of contact - he had boarded a morning flight from Zurich to New York for meetings.

Seeing no other choice, Corti suspended Swissair flights shortly after noon and then grounded the entire fleet three hours later, stranding 18,000 passengers around the world and tarnishing forever the Swissair brand. An enraged Moritz Leuenberger, then president of Switzerland, railed at UBS in front of a near-record television audience, saying he had been unable to reach Ospel to prevent the grounding.

“Never in the history of the confederation has a democratically elected government in Switzerland been so humiliated by a banker,” thundered the front-page editorial of Tages Anzeiger Zürich, the country’s largest newspaper. In the days that followed, UBS lost hundreds of accounts as customers registered their fury. The UBS building had to be evacuated because of a bomb threat.

The exact reason for the grounding remains a matter of dispute. Finance Minister Villiger told Parliament that UBS had been unfairly vilified but that he did not fully understand what had happened. UBS continues to insist that Swissair had enough money in its accounts to keep flying. The cost of the grounding was unquestionably immense, though. The Swiss Federal Council extended emergency aid of Sf450 million to Swissair on October 3, allowing it to resume flights for the rest of the month. The airline was placed in receivership the next day.

Project Phoenix was approved on October 22, under the guidance of Switzerland’s éminence grise, Rainer Gut, chairman of Nestlé and Mühlemann’s predecessor as chairman of Credit Suisse and a former Swissair board member. As part of the package, the Federal Council provided a further Sf1 billion to keep Swissair alive through March and invested Sf600 million for a 19.2 percent stake in Crossair. Regional governments and Swiss businesses chipped in Sf2.1 billion for Crossair, and UBS and Credit Suisse invested a combined Sf350 million for a 19.5 percent stake.

The whole experience has left Corti bitter. He believes that the banks deliberately precipitated receivership to get rid of Swissair’s mountain of debt, and he rejects their claims that the airline had too feeble a grasp of its own financial situation to allow for a smooth transition. “The same banks that said they had all the answers in March say they don’t have the information now? It’s a joke. It’s a smoke screen,” he says.

But there’s no shortage of criticism for Corti and his predecessors. “Swissair was not far away from bankruptcy at the end of 2000,” says the Treasury’s Siegenthaler. “It’s really a question of why they waited so long to act. It’s a question for the board of directors; it’s a question for the CEOs; it’s a question for the accountants.”

Privately, some bankers say Mühlemann should shoulder a large share of the responsibility for the collapse because of his long and close association with the airline as a director and chief banker. “He has by now lost all credibility,” one senior banker says. “Mühlemann today can’t talk to the Swiss government because he had to come to them for Sf2 billion. He can’t talk about liberalism, about free-market reforms.”

As for broader lessons, the standing of the Swiss financial elite has never been so low, but that doesn’t mean change is imminent. Talk of corporate governance reform is widespread in the wake of Swissair’s collapse. The research arm of the Swiss Business Federation has published a code of good corporate governance, and Novartis has announced the creation of a governance committee. But is the clique that runs Switzerland ready to change its chummy ways?

One senior executive with extensive experience in Switzerland has his doubts. “What is corporate governance?” he asks. “You have to have the ability to challenge, to criticize, to question, without it being viewed as non-Swiss or hostile. A board has to be a place where conflicts are raised and resolved. If your whole national psyche avoids conflict, it can neither be raised nor resolved.”

Luqman Arnold: Grounded

Assigning official blame for the collapse of Swissair Group could take months or even years. But the affair has already claimed one prominent banker in what appears to be a case of collateral damage.

Luqman Arnold, 51, was the highly regarded president of the executive board of one of Swissair’s main banks, UBS Group. As the bank’s CFO from 1999 until April 2001, he had played a critical role in restructuring UBS and in increasing its profile, while winning kudos from the investment community for candor and straightshooting as he helped then-CEO Marcel Ospel steer the bank away from ill-considered risk-taking. “The market liked Luqman Arnold,” says Didier Valet, a bank analyst with SG Securities in Paris. “People liked the fact that he was bringing some Anglo-Saxon culture into Zurich.”

Arnold, however, was the rare outsider in Switzerland’s tight-knit banking circles: The son of a British father and an Indian mother, he was the first non-Swiss to run UBS. Sources close to the bank say that when Arnold was named president of the executive board last spring, rather than formally designated CEO, it was a portent of problems with Ospel, who moved up to chairman last April.

Arnold believed that he was effectively UBS’s CEO, say those sources, but Ospel insisted on exerting more sway over operational matters than was customary for a Swiss bank chairman. “I don’t think Ospel thought of Luqman as his commander in chief,” observes one UBS insider dryly.

The Swissair episode ignited tensions that had been building between the two, sources say. A showdown took place on October 2, the day that Swissair was forced to ground its fleet for lack of funds in a blow to Swiss pride.

Ospel had flown to New York that day (infuriating many Swiss, including the country’s president). There he was confronted by Arnold, who sharply criticized Ospel’s handling of the Swissair matter. UBS, after all, had signaled problems at the airline as long ago as March 2001 at a meeting with Swissair CEO Mario Corti. The bank had subsequently cut its exposure to the airline by several hundred million francs to a modest Sf200 million ($124 million).

Now Ospel was proposing that UBS back a Sf1.35 billion rescue of Swissair’s regional subsidiary, Crossair. The exposure worried Arnold, sources say, but he was also said to be annoyed by the high-handed way in which Ospel had negotiated the deal without ever consulting him or the UBS board. As Arnold saw it, for Ospel to seize a leadership role in the rescue negotiations rather than wait for a government-led bailout, and to enrage Swiss citizens and politicians in the process, put UBS’s capital and reputation at risk.

Nevertheless, on December 18 the bank announced that Arnold would be the one leaving, to be replaced by Peter Wuffli, a close Ospel ally. UBS shares fell 4.2 percent on the news. At a press conference, Ospel said Arnold’s departure had nothing to do with Swissair. He and Arnold both declined to comment. - Tom Buerkle and Jenny Anderson