The demise of Sabena and Swissair has badly dented the hub status of Brussels and Zurich - though the two carriers do seem to be coming back from the dead

last year's collapse of Swissair and Sabena was seen by many as a watershed. Painful as these events undoubtedly were, there were hopes that this could finally be a sign that Europe was to see some consolidation among its patchwork of flag carriers and national hubs. As ever, news of their deaths has proved to be somewhat exaggerated. In both cases, a new quasi-flag carrier is emerging from the ashes of the bankrupt airlines, formed around their regional subsidiaries of Crossair and DAT. Nevertheless, the collapse raises some important questions, for flag carriers and their national hubs alike.

There is no doubt that Swissair, together with its intended merger partner Sabena, had ambitions to play in the major league of European hubbing. As such, the aim was to build large and highly efficient connecting hubs at both Unique Zurich Airport, as its home base has styled itself, and Brussels National. Before the collapse, each of the airports counted just above 20 million passengers a year, with Zurich sneaking into the European top 10 and Brussels just behind. Even with the new start-ups in place, the collapse of their old home carriers has faced the hubs with a reduction in their passenger throughput of perhaps 10-20%. It also raises fundamental strategic issues about their future role as connecting hubs.

For both airports, the loss of their main home carriers could not have come at a worse time, with major expansion schemes in progress and due to come on stream over the next couple of years. The investment decisions were, of course, taken at a time when they were home to major network carriers intent on ramping up their hub traffic.

In Zurich's case, it has chosen to go ahead with a SFr2 billion ($1.2 billion) expansion, calculating that this is the cheaper option as much of it had already been completed by the time of the Swissair collapse. It also faced heavy penalties if it did not meet its obligations to suppliers. The expansion is the largest in the airport's history and includes a new docking area with a maximum of 23 stands. The work will be partly financed by a bond, which is due for repayment by the end of 2003.

Armin Rechberger, financial analyst at Zürcher Kantonbank, warns that, with traffic levels likely to be much lower than forecast, the investment gives the airport a potential headache - but it should at least be able to count on considerable government backing.

A crucial factor in Zurich's future will be the degree to which the newly named "Swiss" can continue Swissair's battle for transfer traffic. There is no shortage of industry sceptics who doubt that a hubbing strategy can succeed. Swissair's transfer traffic had reached a high of 60%. The new Swiss will scale that back to a more modest 40%, having at the same time cut around a third of capacity.

Aided by Swissair, Zurich airport too had been punching above its weight as a hub, with over 40% of passengers connecting. Rechberger says that this will fall back to a "normal" level more in line with near competitors, such as Munich and Vienna, at around 30%. Perhaps the biggest decline is likely to be seen on markets connecting to North America. Swissair flew over 30% of its seat capacity on the North Atlantic, making it the biggest single market in terms of seat kilometres.

Andr‚ Dos‚, the Crossair chief executive who now heads the re-emerged Swiss, argues that Zurich's quick transfer times could still prove a strong marketing point, especially when compared with congested hubs. However, Swiss will be working with a much smaller network, based on a fleet of only 26 short-haul and 26 long-haul aircraft (the so-called 26/26 strategy). The number of services it offered out of Zurich were down by a clear 25% in January compared with the previous Swissair/Crossair grouping.

However, there are many who doubt the strategic case to be made for building a new hubbing strategy. Dr Christoph Brützel, principal at consultancy AT Kearney in Düsseldorf, is among the doubters about the viability of any intra-European hub. And if they do rely more on direct service, he points out that the cost and complexity of keeping hub services in place could prove an expensive luxury. Not only is connecting traffic less lucrative, for airports and airlines alike, but it is also more expensive to handle in terms of complex baggage and passenger handling systems. For example, hubs tend to be designed with direct gate access for quick transfer, rather than buses. Brützel points out that gates are four times more expensive than buses, and questions whether airlines focusing on origin-and-destination traffic will be willing to pay for services they clearly do not need. With Lufthansa's powerful hub presence at neighbouring Munich, Zurich and Swiss may well be wise to look for a niche rather than compete head-on. Austrian Airlines and Vienna have done just that by creating a leading gateway to Eastern Europe.

Clearly the demise of Swissair has left a hole at its home airport, and in more than one way. Besides the service cuts, the Swiss group also had sizeable subsidiary businesses, such as maintenance and logistics, based at the airport. Many of these are being sold, or, as in the case of Swisscargo, shut down. Rechberger warns that the airport may be forced to write down some of these assets, as finding new tenants will be tough.

In terms of passengers, Zurich took a significant hit last year, with an annual decrease of 7.4%, to just under 21 million. Rechberger expects this slide to continue this year, with a further fall of 12%, before recovery by 2003. He says early-year passenger figures indicate the dip in traffic is still continuing. Year-on-year, services were down 19% in January.

The local canton of Zurich has agreed to provide a credit line of SFr100 million, part of which is being used to acquire former Swissair subsidiaries seen as crucial to the airport's operations. Rechberger predicts that the airport may try to bridge any financial shortfall by raising tariffs. Zurich airport's share price has held up relatively well, all things considered, perhaps reflecting the confidence in continued state support.

Sabena successor

The collapse of Sabena, combined with the downturn after 11 September, equally made last year a traumatic one for Brussels National. Traffic was down by 9% at 19.6 million by year-end. However, that marks the depth of the decline in the dark days towards the end of last year. Following Sabena's slide into bankruptcy, traffic was down a huge 43% in November. Since then, there has been a recovery of sorts, with the decline easing to 20% in December and 15% in January. Before the collapse, around 30% of traffic at Brussels was transfer traffic, with about 90% of that handled by Sabena for at least one of the legs.

Like Zurich, Brussels was also in the middle of a massive revamp, with a new terminal to replace the old 1950s era section of the airport. Again, there is likely to be considerable government help, although plans to sell the state's majority stake in airport operator BIAC could well be hit, despite the airport's claims that a sale will take place this year.

Government backing has also been a major factor in the emergence of DAT as a successor to Sabena, in a copy of the Swissair rescue. Unlike Swiss, however, DAT is placing less emphasis on intercontinental hub status, although it hopes to win back at least some of the niche services to Africa which were one of Sabena's greatest strengths. The African market accounted for over 15% of seat capacity, coming in third behind Europe and North America.

Although there will be possibilities for European connections through Brussels, one senior Belgian airline executive predicted that this would be so low-yielding that it would barely be worthwhile, and that point-to-point would be the core of the new business.

Virgin question

DAT has also had to resolve another issue: the presence of no-frills Virgin Express at the airport. From the outset there was widespread agreement about the wisdom of merging the two carriers. Despite their different cultures, most agree that a merger does look workable. The betting is that the merged company would seek a transatlantic partner to reopen links to the USA. Despite the rush of new services from European competitors to fill the vacuum at Brussels, the US majors have been slow to add transatlantic service. US Airways has actually dropped its Philadelphia service launched just last year.

American Airlines, which codeshared with Sabena before the latter's collapse, is seen as one possibility. Virgin Atlantic may be another possibility. Richard Branson, majority owner of Virgin Atlantic and minority owner of Virgin Express, is reportedly prepared to invest if the merger succeeds. This would also provide a link to Virgin Atlantic's 49%-shareholder Singapore Airlines and perhaps to the Star Alliance. Such partnerships and niche direct services may ultimately provide the best hope of a future for the reborn carriers at both Brussels and Zurich.

Source: Airline Business