The near collapse that has taken place at the SAirGroup serves as a cautionary tale of how quickly fortunes can turn sour in the airline business. Even now it is not clear just how far the fallout will reach as the Swiss group fights to steady itself.

It is hard to recall when an airline last saw its strategy unravel so spectacularly. In the space of a year SAirGroup has seen its world fall to pieces. Not only has it been brought low, but in dramatic fashion. The boardroom battles, which resulted in the resignation of chief executive Philippe Bruggisser earlier this year, were then rounded off in style with the mass resignation of the supervisory board. It was only left to new chief executive Mario Corti to present the worst loss in Switzerland's usually prudent corporate history - and arguably the worst in aviation history too.

The theatre continues. The year-end conference in early April was so packed they had to book a bigger room as press and analysts turned up from all corners to pick over the pieces. Attendance at the live televised annual investors meeting too was also billed as a new Swiss record. Law suits have already started to fly. Add to this a narrowly averted cash crisis and some potentially horrible fallout for SAir's airline subsidiaries in Belgium and France, and it is clear that Corti, already dubbed "Super Mario"by the press, has his work cut out.

Beneath this unfolding drama, there are some fascinating questions as to how it all happened in the first place and, more importantly, where the group goes from here? The answers to both could be instructive. Given the delicate state of airline alliance play in Europe there is even talk of the SAir implosion providing a defining moment in the region's consolidation. Whether that comes to pass still remains to be seen. However, Corti has already made clear that SAir's days as a would-be global alliance leader are over. Although he has wisely given himself time before having to create a fresh strategy - financial survival coming first - he is clear that "the ship has changed course".

The airline alliance strategy was, inevitably, a large part of the problem at SAir. The group and Bruggisser, it seems, had been sucked in too deep by the vision of creating a powerful alliance of second-tier flag-carriers.

Bruggisser's arrival four years ago, at what was then the Swissair group (the name now being revived by his successor) had started promisingly enough. He outlined the need for harsh cost-cutting at both Swissair and Sabena - an inherited investment which he threatened to pull out of unless losses turned around.

He then set about reorganising the non-flying businesses into a coherent group structure. So far so good. SAir, as it had become, might not be able to lead a world airline alliance but it could build a leading position in engineering, logistics, handling and catering. Alliance strategy was kept alive with the launch of the Qualiflyer group, but as a purely European venture, plus some strategic minority stakes in the likes of LOT Polish Airlines and South African Airways. The end point seemed clear - SAir was building an array of strategic positions as dowry for marriage to one of the true global groupings.

The theory was that so long as SAir kept its nerve and avoided over-stretching its finances then it would have a strong hand to play in future alliance negotiations. In the end it broke both of those golden rules. Stress in the boardroom began to show a year ago, perhaps not helped by the arrival of a new chairman. There were also boardroom jitters as British Airways, seen as SAir's most natural partner, opened talks with KLM.

The more catastrophic mistake was to attempt to build a position in France. Over the past three years SAir effectively took over AOM and Air Littoral, finally last year adding Air Liberte after BA sold out. Even Air France chairman Cyril Spinetta had expressed amazement at the plan, pointing out that investments in regionals should be made for strategic reasons - to feed hubs - not for profit. The failure of BA's attempt to gain a French foothold should have been a warning. In the words of one analyst it is advisable to "leave the French market to the French".

At the same time, Sabena, apparently forgetting the pain of its early rationalisation, was coming to rue what looks like an over-ambitious spell of expansion. Mounting losses from all these investments left SAir facing a cash crisis. The rest is history. So where from here?

The first step has already been taken by acknowledging the scale of the problem. The French stakes need to be ring-fenced and abandoned. Sabena too cannot remain as a drain, but the issue is whether the exit costs will prove higher than the price of staying to sort out the mess. If SAir does stay, it will at least be in a position to insist that unions accept radical action on costs. After all, Sabena has nowhere else to go. With those drains gone, the Swiss group should be in a position to salvage the profitable parts of the business - provided of course that it can get through the roller-coaster ride of the next few months. That will not be easy. Once sentiment turns bad in financial markets and media it is extremely tough to turn around.

Source: Airline Business