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The grounding of the flying bankAaron Hermann

The University of Adelaide Business School, Adelaide, Australia, andHussain G. Rammal

International Graduate School of Business, University of South Australia,Adelaide, Australia

Abstract

Purpose The purpose of this paper is to demonstrate the importance of effective, knowledgeableand accountable management and board structures in business organisations. Using the case ofSwissair, the paper aims to demonstrate the importance of competent industry knowledgeableexecutive boards, with regard not only to company profits and sustainability but also to stability andsocially responsible decision making.

Design/methodology/approach An explanatory and descriptive case study approach wasundertaken utilising historical data and literature-based information and research on Swissair. Theanalysis of the case is guided by the use of the Resource Dependence and Group Conformity theories.

Findings The findings suggest that the alliance and acquisition strategy pursued by Swissairsmanagement and the lack of leadership and accountability by the CEO and Chairman of the boardwere the main contributing factors to the companys collapse.

Practical implications The implications include impacts on the way in which Europeanorganisations are governed and the composition of the management teams and Board of Directors.Additional implications include changes to the legislation in Europe, more specifically Switzerlandand the European Free Trade Alliance, aimed at the prevention of similar future collapses.

Originality/value The papers originality stems from the application of decision making andgroup theory, coupled with corporate governance ideas applied in a practical sense to thecontemporary case of Swissair in a manner previously not considered, to demonstrate the importance

of effective, knowledgeable and accountable management and board structures in organisations.Value is demonstrated with the recent issues experienced by Austrian Airlines and its subsequentacquisition by Lufthansa, indicating a need to address the corporate governance requirements in theEuropean airline industry.

KeywordsEurope, Boards of directors, Airlines

Paper typeCase study

IntroductionThe term Swiss corporation has for some time been synonymous with good managementpractices (Swissair Grounding, 2009). Since the early part of the twentieth century Swisscompanies have prided themselves on their good governance practices, systems andstructures (Buerkle and Smith, 2002). However of late the image of Swiss corporate

stability has somewhat come into question given the collapse of a number of Swisscompanies. Of these perhaps the best known has been SAirGroup or Swissair whichdeclared Nachlasstundung (bankruptcy) and protection from creditors on October 4,2002 (Knorr and Arndt, 2003). Yet this was only the corollary of a number of years ofwhat has been suggested was mismanagement and poor decision making by their chiefexecutive officers (CEOs) and chairmen of the board of directors at the helm of Swissairand its parent company SAirGroup (Richter, 2001; Jud, 2007). While it is stillacknowledged that a series of external events also played a significant part in Swissairs

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(3) Facilitate the channels for communicating between external organisations andthe firms.

(4) Provide preferential access to commitments or support from important elementsoutside the firm (Pfeffer and Salancik, 1978; Pfeffer, 1991).

Group conformity theories: the Asch paradigm and GroupthinkThe Asch Paradigm as it has been referred to by Marlowe and Gergen (1969) pertainsto the experiments conducted by Asch in the early 1950s concerning the distortion andalteration of decisions as a result of group pressure especially to conform (Asch, 1951),very much resulting in a less then optimal outcome to the decision process. The resultsof these experiments clearly demonstrated that many people have a tendency to simplyagree with a publicly or announced decision even though it may be in contrast toavailable facts; primarily due to the existence to group pressures and the desire toconform. Furthermore that a member of a group with ideas differing from thedominant party find reason to suppress such ideas and thus be in agreement as

opposed to a disruptive factor (Asch, 1951). While this research was conducted in asocial sense the business decision making ramifications are apparent and as such canbe considered relevant to the situation in regards to Swissair.

A somewhat similar phenomenon was first coined by Janis in, 1972, this being thetheory commonly known as Groupthink. This theory very much relates to groupnorms and further as with the Asch Paradigm group pressures to conform detract fromcritical evaluation of all possible opinions on the decision by the group; the result beinga hindrance on performance and furthermore less than optimal decisions. It has beensuggested that the occurrence of Groupthink usually originates within groups thathold a high positive image of themselves, and thus feel the need to protect that positiveimage (Turner and Pratkanis, 1997).

The combined use of Resource Dependence and Group Conformity theories help

describe the reasons for Swissairs collapse. The theories analyse two aspects ofSwissair that were blamed for the companys collapse. These include the boardmembership and the decision making of the board. The Resource Dependence theoryhelps evaluate the board membership and the resources the board members were ableto bring to the firm, while the Group Conformity theory is used to analyse the decisionsmade by the board members. In particular the focus would be on how the thinking ofthe group influenced the decisions of the individual board members. The next sectionprovides the history of Swissair.

History of SwissairThe origins ofSchweizerische Luftverkehrs[1]AGor Swissair date back to 1931 withthe merger of two Swiss airlines Ad Astra Aero AG based in Zurich and Luftverkehr a

Basler (von Schroeder, 2002). Since its formation Swissair successfully engaged in ahigh-quality management strategy that emphasised safety, punctuality, reliability, andpassenger comfort, and as such Swissair won numerous Best airline awards (Knorrand Arndt, 2003, p. 5). From 1946 through to the late 1980s Swissairs managementdecisions demonstrated a very cautious approach to risk, with many observerslabelling the overall strategy to be risk averse (Knorr and Arndt, 2003; Nwabueze andMileski, 2008). This was perhaps unique in the Swiss context as Hofstedes (1983, 2001)findings on Switzerland revealed that the country ranked low on uncertainty avoidance

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in comparison with other European nations, and was therefore as a society moretolerant of ambiguity and unusual situations and ideas. This approach to managementpaid off for Swissair, who by the 1980s had become one of the airline industrys largestand most stable companies with a good credit rating (Gratenau, 2002, p. 5). These

strong financial results saw the company being labelled the Flying Bank (Knorr andArndt, 2003, p. 4; BBC News, 2007a).

Swissair had a long history of implementing strategic managerial decisions thatcontributed to its good standing in the global airline industry. Some examples of theseinclude the introduction in 1932 of the Lockheed Orion passenger jet which enabledSwissair to travel to destinations twice as fast as other European airlines, and beingamong the first airlines in 1934 to introduce air-hostesses on flights (Knorr and Arndt,2003). In the early years Swissair was very much focused on the business consumerand business class. However by the end of the 1960s the company had decided todiversify into related activities, including but not limited to repair and maintenance,information technology, ground handling, aircraft leasing, hotels, aerial photography,and even agriculture. By 2001 these non-core business activities accounted for over halfof SAirGroups employees and significant amounts of its profits.

The liberalisation and the deregulation of the airline market in 1978 resulted innational airlines being exposed to competition in order to make a profit. Furthermore,with the removal of government subsidies and routes guaranteed by the government,the airline industry became increasingly competitive (Kaynak and Kucukemiroglu,1993; Richter, 2001; Chang and Williams, 2002). It was around this time that the marketbegan to see its first no-frills discount airlines which paid less wages and cut out allnon-necessities. These airlines were in some cases able to attract some of Swissairsbusiness customers to make the change.

But low cost airline companies such as EasyJet and Delta were not the onlycompetitors Swissair had to face. By the end of the 1970s Europe had some 26 different

airlines ranging from domestic airlines, through budget airlines, to big corporationssuch as Lufthansa, Air France and British Airlines. Furthermore many of Swissairsdirect competitors had hubs or headquarters very close to that of Zurich and Basel,Swissairs main hubs, providing significant competition. Yet despite these close tohome competitors SAirGroup still had both a strong domestic market share, mainlythanks to their share of the Switzerland regional airline, Crossair. By the year 2000 thecompany had 71,900 full time employees worldwide, with 218 cities serviced by theirair routes and over 19 million passengers annually (von Schroeder, 2002).

Management and structureIn its 70-year history Swissair had undergone some significant structural changes, themost notable of which occurred in 1996 with the establishment of a holding structure

named SAirGroup consisting of four divisions: SAirLines (Swissair and Crossair),SAirservices (Airport activities), SAirLogistics, and SAirRelations (Hotel and Catering)(Ruigrok, 2004) At the time of Swissairs collapse, the organisation ownership structurewas set up in a way that it had both public and private ownership of the firm. About 30percent of Swissair/SAirGroup was owned by the Government of Switzerland whilethe remaining was divided between shareholders/investors and finally the executivesand CEO. Furthermore European Union (EU) and the European Free TradeAssociation (EFTA) regulations for aviation require that any air-carrier firm must

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have at least 50 percent of its ownership in EU/EFTA hands at all times (EuropeanUnion, 1992; Carney and Dostaler, 2006) and as such at the time of Swissairs collapsemore than 50 percent of Swissair was indeed owned by nationals and the Governmentof Switzerland. Further adjustments were made to the SAirGroup (2001) structure

resulting in a hybrid organisational structure consisting of both functional andgeographic divisions. While SAirGroup operated almost wholly from Zurich, giving ita centralised structure, it still had hubs, outlets and some components of its operationsbased internationally.

During the final years of Swissairs operation the company went through a numberof CEO changes. For the years leading to 1997 Otto Loepfe was in charge of thecompany, which at the time underwent the aforementioned restructure from Swissairto SAirGroup (Ruigrok, 2004). From 1997 to 2001, the period of decline and collapse,Swissair was managed by Jeffrey Katz, and the SAirGroup was managed by PhilippeBruggisser, who until 2007 was on trial for corporate mismanagement. The last CEO ofSAirGroup was Mario Corti, a former chief financial officer of Nestle, who took up theposition in 2001 and during the collapse, oversaw the sales of assets of the company(Tierney and Matlack, 2001).

Following the collapse of Swissair and SAirGroup the company was restructuredand sold off to Crossair, one of the domestic airlines previously owned by SAirGroup.The company became known as Swiss International Airlines (SWISS for short), andwas majority owned by investors, with the Swiss Confederation, Swiss cantons, andcommunities, owning the remaining shares (Swissair Grounding, 2009). On March 22,2005 Swiss International Airlines was purchased in its entirety, by Lufthansa, and thechangeover came into effect in 2007 (SWISS, 2007). On June 7, 2007 the Swiss courtsclosed the case into corporate crimes linked to the collapse of Swissair. The courtsfound that of the 19 defendants accused, none were guilty of corporate crimes (BBCNews, 2007b). Despite this, Swissair legacy in the European air industry still makes

this case relevant. In September 2009, Lufthansa airline bought the ownership sharesof Austrian Airlines, which previously had 10 percent of its shares owned by Swissair(Bienk, 2009). Table I provides a timeline of the key events in the Swissair history.

The acquisition strategy pursued by Swissair still has implications for airlinesoperating in the European market today. The next section analyses the reasons for thecollapse of Swissair.

Reasons for collapseThe collapse of Swissair was sudden and unexpected ( Jorissen and Otley, 2004). Therewere many internal and external events that led to the companys demise. In particularthe two issues that were responsible for Swissairs collapse were the alliances andacquisitions strategy and the management and decision making on the board and CEO.

Alliances and acquisitionsIt has been suggested that Switzerlands decision not to join the European EconomicCommunity Treaty (EEC) in 1992 was perhaps the first nail in the coffin for Swissair(Richter, 2001). Yet many other Swiss companies that would have also benefited fromthe EEC treaty did not collapse and as such perhaps the importance of EU membershipin this regard is perhaps somewhat exaggerated. Extant research on Swissair tends tohighlight the Alcazar talks as one of the prime reasons for the companys collapse

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(see Knorr and Arndt, 2003; Morrell, 2004; Ruigrok, 2004). The Alcazar talks were heldin 1993 between Austrian Airlines, Scandinavian Airlines, KLM, and Swissair with aview to establishing an alliance to promote greater profit, code sharing agreements and

new organisational structures. In the beginning, the talks went well with ownershiprights and location of hubs having been agreed on (Ruigrok, 2004). However the boardof directors on Swissair soon became concerned that they would not have enoughinfluence and standing in the new agreement (Knorr and Arndt, 2003). By NovemberSwissairs CEO and executive board had vetoed the agreement and pulled out due toinsurmountable difference of opinions (Knorr and Arndt, 2003, p. 11). At the time thedecision was justified as protecting the interest of the people of Switzerland, whichperhaps appealed to the general Swiss public. In reality, Swissair was not clear on therationale for forming strategic alliances (Elmuti and Kathawala, 2001; Vahtra andLorentz, 2005). This decision can be explained with the aid of the Resource Dependencetheory which states that the firms ability to interact with the external environment andthe ability to manage the interdependence with other firms would be an important

consideration for the board. As the Swissair board was not convinced of the controlover the potential alliance, they decided to not pursue it further.

In 1994 the companys executive board hired the services of McKinsey and Co., a USconsultancy firm, to assist the airlines desire to form alliances. The decision to hireMcKinsey was questioned by some industry observers who believed that theconsultants were not well versed in Swiss culture or business partners and as suchwould make decisions that best suited US consumers. In December 1994 thesupervisory board of Swissair on the recommendation of McKinsey and Co. decided to

Year Events

1931 Founding of Schweizerische Luftverkehrs from Ad Astra Aero and Balair1932 First airline to introduce Lockheed Orion passenger jet to its fleet

1934 First airline to introduce air-hostesses1967 Joint venture formed between Swissair and Austrian Airlines1968 Technical agreements signed between Swissair and KLM1978 Deregulation of airline industry1978 Ex-Swissair Pilot Moritz Suter founds Cross-air1992 Switzerland rejects EU membership1993 The Alcazar talks fail and Swissair pulls out1994 McKinsey and Co. hired

Swissair purchases 49.6 percent of Sabena1996 Establishment of holding structure SAirGroup1997 Jeffrey Katz and Philippe Bruggisser: new CEOs of Swissair & SAirGroup

Introduction of the Hunter Strategy1998 Formation of the Qualiflyer group program

Crash of Swissair flight 1112001 Mario Corti becomes CEO of SAirGroupSwissair formally Grounded

2002 SAirGroup declares Nachlasstundung (bankruptcy)Swiss International Airlines formed from Swissairs remains

2005 Swiss International Airlines purchased by Lufthansa2007 Court case against 19 SAirGroup/Swissair staff is closed2009 Lufthansa purchases Austrian Airlines

Table I.Swissair timeline of key

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purchase a 49.6 percent share of Belgiums national airline Sabena (New York Times,1995). By 1997 most of the larger airlines in Europe had formed alliances and posed asignificant threat to Swissair. To counter this threat SAirGroup adopted the TheHunter Strategy, a Swissair-led equity-based and acquisition alliance with smaller

European airlines designed to establish Swissair as one of the key European airlines inthe market with a 20 percent market share being the stated objective (Marwa and Zairi,2008). These airlines included some from the East European countries such as LATPolish and Ukraine International Airlines. The use of this strategy was prompted byBurggissers decision not to pursue an alliance with British Airways (Seibt, 2007).Execution of the Hunter Strategy began in 1998 with the formation of the Qualiflyergroup program, which included among others Swissair, Austrian Airlines andCrossair. This group was then extended to include smaller airlines that Swissairacquired. Many of these smaller European airlines had never registered any profit butwere expected to perform strongly once they were seen as part of the Swissair. TheHunter Strategy was seen more favourably as it gave Swissair more control oversmaller airlines due to the market power the company held. This decision wasconsistent with Swissair boards emphasis on control over the operations of otherairlines they had relations with.

The alliance and acquisition strategy had shortcomings that in the long run affectedthe profitability of the company. Swissairs decision to acquire Sabena was a surprisefor many airline observers as in Sabenas 75 year history it had never made a profit,and even the much larger Air France refused to purchase a percentage of the company(Jud, 2007). There are numerous possible explanations for this decision but it seemsclear that at the time many thought it necessary to form some type of larger alliance inorder to combat the budget airlines and ensure continued profitability (Morrell, 2004).The possible lack of knowledge about the European airline industry by McKinsey andCo. may have been a contributing factor in the final decision taken by Swissair

(Morrell, 2004). Furthermore with the failure of the Alcazar alliance, perhaps Swissairsboard felt it was more logical to purchase shares of smaller airlines to ensure Swissairremained the top airline in the industry.

The decision on the alliances and acquisitions not only hurt the companysreputation and profitability but also brought into question the skills, knowledge anddecision-making abilities of the board and the management of Swissair andSAirGroup.

Management and decision makingThe alliances and acquisitions strategy indicates that many of the poor decisions andthe eventual collapse of SAirGroup/Swissair might not have occurred had thesupervisory board contained industry experts (Strebel, 2004; Goll et al., 2007). Such

experts could have demonstrated the importance of alliances while also pointing outthe lack of profits of Sabena, and further refusing to engage in strategies that to anindustry experienced executive would seem inappropriate. This weakness is related tothe human capital one would expect board members to posses. According to theResource Dependence theory the experience, expertise and reputation of theindividuals are the main criteria for selection to company boards. In the case ofSwissair it would seem that the board members did not have the industry expertise andexperience to make decisions that would have ensured Swissairs stability.

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In addition to this in 1998 a decision was made by Swissairs then CEO Jeffrey Katzto elect to this new smaller board Lukas Muhlemann, the head of Credit Suisse Group(Swissairs main financial investor) and ex-CEO of McKinsey in Switzerland (Ruigrok,2004). This decision presented a clear conflict of interest given the prior position of

Lukas Muhlemann and the importance of the position he now held. Serious thoughtshould have been given to the decision and at the very least should have raised somealarms.

As was noted by Ruigrok (2004) that at the time of Katz reign as CEO the executiveboard had changed from consisting of a number of industry savvy airline experts tomany politicians and financial people. Furthermore by 2001 the board numbers haddropped from 26 members to only ten consisting entirely of politicians andfinance/banking professionals, all lacking inside knowledge of the airline industry.Even in the years leading to SAirGroups collapse it would seem that numerouswarning signs were present. The mere fact that no one on the executive board let alonethe CEO had any significant level of airline industry knowledge may have been such asign. One point worth mentioning is the option of delegation to experts, given the lackof specific industry knowledge of both the board and the CEO, this may have been aprudent and logical option. While the company did select McKinsey and Co. as theiradvisors, McKinseys lack of expertise in the European and Swiss markets hurtSwissairs reputation and one could argue that there was some level of negligence bynot including experienced personnel in the decision making (Steyrer et al.2006). Manycorporate governance laws throughout the world contain a duty of supervision inregards to CEOs delegating work, and while many of these laws have been introducedin hindsight following a number of high profile corporate failures (for example Enronand Worldcom) one could still say that in such cases the CEO needs to be careful inregards to any delegation (Fannon, 2006; Leblanc, 2006; Goll et al., 2008). Yet this stillshows that those who managed Swissair before and during the collapse can perhaps

still be held responsible for its collapse, and that the staffing approach may have hadsignificant impact on not only the decisions made but also on the sustainability of thefirm.

As discussed earlier, the decision by Jeffrey Katz (Swissairs CEO) to reduce the sizeof the board to ten members eliminated much of the industry expertise, paving the wayfor further mismanagement (Player, 2002). Eric Honegger, the then chairman of theboard even went as far to say I am . . .not a friend of the notion that at the board levelone should in a way duplicate the management requirements. Management has theknow-how to lead the airline (cited in Ruigrok, 2004, p. 58). It would seem that thisstatement was perhaps Honeggers way of saying that he and CEO were more thancapable of making the necessary decisions and the board was unneeded, thus violatinghis legal duty of care, fair dealing and that of supervision (Hermeset al., 2007). It is the

responsibility of the board members to be aware of what decisions are being made andensure that they supervise the activities of the management (Kiel and Nicholson, 2003;Clarke, 2007). Furthermore, if the CEO and chairman are responsible for makingunchecked decisions without a board to verify this presents a risk of bothabuse/mismanagement and a conflict of interest especially when the CEO andChairman also have investments and shares in the corporation. It would lead toaccusations of personal profit taking and further breaches of their fiduciary duty andthe European law of unjust enrichment (Williams, 2001).


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The lack of coordination within the management of the organisation washighlighted by the competition between Swissair and Crossair during the Hunterstrategy period. Both of these companies were owned by SAirGroup however JeffreyKatz and the senior executives came to the decision that for some reason Crossair was a

competitor and refused to coordinate with them, thus causing inefficiency and loss ofprofit. The reason for this may be one of power and influence, where perhaps JeffreyKatz wanted to boost his standing with the head of SAirGroup by taking market sharefrom Crossair and thus moving higher in the company. Such short sightedness couldhave very easily been rejected had there been industry knowledgeable members on theboard who undertook the necessary duty of supervision.

The board of directors and management refused to acknowledge their past mistakesand continued to back their decisions. For example, even though smaller airlines likeSabena were continuing to record losses, Swissairs management continued to investmoney into it. Perhaps they simply did not want to admit defeat or perhaps there wereother motives, but nonetheless an additional 200 million CHF were invested in thoseairlines that were losing 224 to 384 million euro each year. This was a very poordecision especially given the faltering financial results reported by Swissair in the yearending 2000 (Morrell, 2004). One would expect that since the Government ofSwitzerland had ownership stake in the company that they would play a role viashareholder activism but this did not eventuate (Solomon, 2007). This was reflective ofthe governments approach towards market-driven business and enterprise withminimal intervention.

There were also a number of external events that affected the airlines viability.The first was the crash of Swissair flight 111 in 1998; which reduced investor andcustomer confidence in the airline and may have caused airlines like Canadian Air,who may at one time have considered entering an alliance with Swissair, toreconsider their plans. Critics argue that this specific event, which was blamed on

faulty wiring (Transport Safety Board of Canada, 1998), could have been avoidedhad Swissairs management not decided to outsource repairs and maintenance. Butthe event that truly ended Swissair and SAirGroups chance of recovery were theterrorist attacks on the USA on September 11 2001. Across the board the airlineindustry suffered due to the terrorist attacks on New York, and with all thepervious hardships, mismanagement and poor decisions made by the leaders ofSwissair in the years leading to 2001, Swissair simply could not handle the effectsand as such on October 2 2001 Swissair was officially grounded (Wall StreetJournal, 2001). One could argue that the events of Swissair flight 111 and September11 coupled with the continuous pressures to perform may have significantlycontributed to the poor decision making of the Swissair group.

It seems prudent at this point to discuss the manner in which group theory

relates to the specific case of Swissairs group decision. Internal pressures coupledwith the external threats may well have had an effect on the optimal decisionmaking of Swissair. Group phenomenon such as Groupthink and in-group biases(Flippen et al., 1996), such as the Asch Paradigm may well have had a detrimentaleffect on the decisions made. In particular there are two symptoms of Groupthinkwhich seem particularly relevant: first the belief that the group is invulnerable;and further belief in the morality of the group (Sims, 1992; Choi and Kim,1999; Auer-Rizzi and Berry, 2000; Eaton, 2001; Eadman, 2006). Given some of the

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decisions made by Swissair, one could argue that to some extent these elements ofGroupthink would seem to have been present. Moreover it could also be argued thatsaid group may indeed have had a positive image of themselves. And as the conflictwith Crossair demonstrates they have a fiercely competitive urge to upkeep this

positive image. Given that many of the board members had a somewhat similarbackground and thus somewhat similar norms and values. Additionally this mayhave well created additional internal pressure to conform so not to appear as thedisruptive factor.

Furthermore, the size and relative decision making processes and outcomes of theSwissair board may further support the notion that in smaller groups poor decisionsmay be attributed to flawed information bases, lack of knowledge and defectivereasoning (Hirokawa and Scheerhorn, 1986; Cruz et al., 1997). One could argue thatgiven the small size of the board, coupled with the rather limited industries from whichthe members originated, these may further add credence to the ideas.

After the collapse and the restructure under the banner of Swiss International AirLines, the company was managed by Dr Christoph Franz, who was both the CEO, andchairman of the Board of Directors. The lack of accountability in organisations thathave the dual role of CEO and chairperson has been highlighted in extant literature(Kiel and Nicholson, 2003; Malik, 2006) but the airlines decision to combine the rolesdemonstrated a lack of accountability and long-term vision. The next section detailsthe implications of the Swissair case for business in general and the aviation industryin particular.

ImplicationsThe historical account of the decline and collapse of Swissair would seem to indicatethat many of the errors could have been averted if the board consisted of at least a fewairline experts; board members with experience and knowledge of the specifics of the

airline industries intricacies. However, it can be said that there were indeed somepeople on Swissairs executive team at least by 1997 that must have recognised threatsto Swissair as can be seen by the attempts to form another alliance of smaller airlines.However, these experienced and knowledgeable board members seemed to have beenremoved by 1997 with the complete restructuring of the board thus leading to perhapsthe most damaging of all the decisions.

The downturn in air travel immediately after the September 11 attacks on NewYork in 2001 harmed the earnings and profitability of Swissair. But this affected theentire industry and many of the smaller airlines survived the downturn which againindicates that perhaps the poor decisions of Swissairs board played the biggest part inits collapse. While a conclusion of the trials of various individuals involved in thecollapse has found none acted illegally, it can still be argued that the decision were poor

and could have been avoided with appropriate steps.The analysis of the case in the light of the Resource Dependence and Group

Conformity theories highlight a number of issues with the way Swissairs board andmanagement operated. The analysis highlight that the decision to pull out of apotential alliance with well-known airlines was a result of the boards reservationsregarding control over the alliance. The Resource Dependence theory states thatthe way a firm networks with the external environment is one of the skills that aboard is required to display. In the case of Swissair it could be argued that the


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relationship with the external environment was not handled appropriately, and thefocus on control led to the introduction of the Hunter Strategy. Similarly, thehuman capital of experience, expertise and reputation that one expects the boardmembers to bring to the firm seem to be lacking in the case of the smaller board.

The board members did not have the airline industry experience and expertise andleft much of the decision to consultants and the management team without fulfillingthe duty of supervision.

The decision making of the board can be explained with the use of the GroupConformity theories. The decisions relating to the alliances and mergers would suggestthat the boards approval was in part a result of group conformity and group think.The fact that none of the board members appeared to oppose Swissairs decision to putaside a potentially lucrative alliance opportunity for the Hunter Strategy could be aresult of the individual board members reluctance to display what could be construedby the group as disruptive behaviour.

The Swissair case has a number of lessons on how such collapses could bepotentially averted and has implications for managers, regulators and policy makers.Overall though the best option to prevent these problems from recurring may well bethe introduction of more stringent corporate governance laws into the EFTA, muchlike the Sarbanes-Oxley Act (2002) in the US. Similar laws have already beenintroduced in the EU (European Union, 2001, 2007) and a similar alteration to theEFTA statutes may well limit the possibility of similar events as Swissairs collapsefrom reoccurring. Further legislative changes could be made to the corporategovernance requirements so that industries either with significant importance to thenation or high technology industries (both of which are fulfilled in the airlines industry)could be required to have CEOs or at least a majority of the board composed ofindustry knowledgeable and experience members. This would eliminate many of theerrors experienced by Swissair leading to its collapse and enable greater sustainability

and profitability for its shareholders. The recent issues with Austrian Airlines, whichat one time Swissair had a stake in, and the subsequent acquisition by Lufthansa hasonce again demonstrated the contemporary relevance of this case to the Europeanairline industry.

Note

1. In 1996 Swissairs was restructured under SAirGroup.

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About the authorsAaron Hermann teaches international business, management and law at the University ofAdelaide. He holds undergraduate degrees from the University of Adelaide and FlindersUniversity of South Australia, and Masters degrees from Adelaide University, FlindersUniversity and the Australian National University. His primary research interests include:International conflict management and negotiations, Leadership and corporate governance,International law, Organisational psychology and behaviour, Cross-cultural studies, andCorporate social responsibility. He also has a background in the archaeology and biotechnology


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industries. Aaron Hermann is the corresponding author and can be contacted at:[email protected]

Hussain G. Rammal is a lecturer in International Business at the University of SouthAustralia. He holds an undergraduate degree from the University of Melbourne and a Masters

degree from Flinders University. He has published in numerous international business andmanagement journals. His primary research interests lies in international business, particularlyin cross-cultural communication and international business negotiations, governance issues inIslamic banking and finance, and trade in services. He also acts as a consultant for various tradebodies and business organisations.

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