Quotes of the Day
Sunday, Oct. 20, 2002
It was a gamble, one of those hugely risky decisions that can make or break a company — and in this case broke it. In late 1997, the Belgian airline Sabena was poised to order 17 new Airbus planes, to renew and expand its fleet of 37. At the last minute, the order mysteriously doubled to 34 aircraft. The price tag would be $1 billion — five times the company's entire capital at the time. Even more surprisingly, Sabena's board of directors had neither a business plan justifying the higher number nor a watertight financing arrangement in place when they approved the deal. The order strained Sabena's already precarious finances to the breaking point and was the root cause of the carrier's collapse last November, the worst business failure in Belgian history, which destroyed 8,000 jobs and prompted the establishment of a parliamentary commission of inquiry, which next month will hear testimony from Prime Minister Guy Verhofstadt. "It was an astonishing episode," says Raymond Langendries, president of the commission.
As America's business scandals resonate throughout Europe — triggering a slew of safeguards meant to improve corporate transparency and accountability — the unmistakable sound of tut-tutting can be heard across the Continent: many business leaders contend that Enron-style abuses simply couldn't happen on their turf. "Our situation is profoundly different from the American one," says Daniel Bouton, CEO of the French bank Société Generale and head of a corporate governance group set up by French business. "We already have the supervision here that is now being put in place in the U.S."
Maybe so, but in Brussels a very different picture is emerging about the efficacy of European corporate oversight. Over the past nine months, dozens of people involved with Sabena, from ground staff to pilots to top management executives and board members, have testified before
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Langendries' 15-member commission. While sometimes contradictory and self-serving, their testimony adds up to a devastating indictment of the way Sabena was run. It's the tale of a chronically undercapitalized and uncompetitive company driven to ruin by a flawed expansion policy and an ill-fated alliance with Swissair. And throughout, a passive and heavily politicized board of directors signed off on one strategic blunder after another. Langendries says he doesn't want to pre-empt the commission's official findings, which are due by the end of the year, but one conclusion is indisputable. "There were bizarre goings-on everywhere at Sabena," he says, "and not just with the Airbus."
Bizarre may be too mild a term. Parallel to the commission's work, Belgian magistrate Jean-Claude Van Espen is conducting a criminal inquiry into Sabena. His probe is based on three separate suits filed by former workers. Details of his investigation and the suits themselves are confidential, and no charges have yet been filed. But the plaintiffs have handed over evidence they say indicates criminal wrongdoing. Union activist Philippe Doyen has made especially explosive allegations, which he says he'll substantiate in court. Last month, Van Espen raided Airbus headquarters in Toulouse and took away documents. An Airbus spokesman says the company doesn't comment on legal affairs.
Sabena was in trouble for years. Founded in 1923, it flew routes across Europe and within the Congo, Belgium's African colony, and grew rapidly in its late-1940s-and-1950s heyday. Then came the end of the colonial period, the 1970s fuel shocks, labor strife and mounting losses requiring regular government bailouts. By the 1980s Sabena was being lampooned as a bottomless pit. An attempt at restructuring in 1982-83 brought some respite, but in the rapidly changing world of commercial airlines, the carrier was too small, its costs too high. Sabena needed a partner to survive.
The fateful deal with Swissair was signed in May 1995, after Sabena's attempts to ally itself first with SAS, British Airways, KLM and finally Air France collapsed. The Belgians were delighted. "Swissair was seen as a flying bank," says Gérard Gobert, a commission member. Under the agreement, Swissair took a 49.5% stake in the Belgian carrier with an option to increase that later. At the time, Swissair was embarking on an aggressive expansion, later dubbed its hunter strategy, which involved making alliances with and taking equity stakes in other small airlines in a bid to become one of the big players in Europe. Doing a deal with Sabena gave the Swiss access to a hub in Brussels, the heart of the European Union. Even without a majority stake, they were given operational control of Sabena.
Sabena's new Swiss CEO, Paul Reutlinger, the former marketing chief at Swissair, began pushing a rapid-expansion policy. During his tenure, from February 1996 until August 2000, Sabena more than doubled the number of passengers it transported, to over 10 million, and added two-dozen new destinations. Its overall capacity grew by 97%, three times the average of European airlines, according to an audit carried out on behalf of Sabena pilots. When it reported a profit in 1998, the first in more than a decade, all of Belgium applauded. But behind the scenes, the true picture was far from pretty: the results were a fluke, buoyed by strong industry conditions and onetime earnings. In reality Sabena's finances were chronically weak even before the gigantic Airbus bills.
Reutlinger left Sabena to take over Swissair's French airline operations in August 2000. Veteran Lufthansa executive Christoph Müller took over as Sabena CEO and immediately realized the danger. Within a month he outlined a drastic restructuring plan, dubbed Blue Sky. "You didn't need to be a rocket scientist" to know Sabena was in serious trouble, Müller says. "You just needed to read the balance sheet." The Airbus deal in particular saddled Sabena with impossible red ink. Müller points out that the Sabena order at the time was twice the stock-market value of Swissair, its bigger partner. "You cannot commit to an investment volume that exceeds the capitalization," he says. "It doesn't require airline operating experience to know that."
Sabena's final months were an ugly mess. Up in arms over Müller's proposed cutbacks, unions staged work stoppages and at one point blocked a Swissair plane on the runway in Brussels. Swissair abandoned its hunter strategy and kicked out its CEO in early 2001 after reporting a $1.9 billion annual loss. It reneged on agreements to raise its stake in Sabena to 85% and inject more funds. The Belgians sued, and a compromise was finally agreed. Then came the terrorist attacks of Sept. 11. Air traffic worldwide nose-dived. Within a month, Swissair grounded its fleet and Sabena sought protection from creditors. On Nov. 7, the president of the Brussels commercial tribunal declared Sabena bankrupt. "Until the last day we believed it would be impossible for Sabena to go bankrupt," says Karel Gacoms, a leader of the powerful metalworkers' union, who acknowledges that labor bears some blame for the collapse.
But the post-Sept.11 downturn didn't kill Sabena. Corporate misconduct did. As the commission has dug into company files, it has unearthed troubling details about a range of decisions, most notably the Airbus deal. Sabena was a longtime Boeing customer and a group inside Sabena lobbied hard to buy Boeing planes. But Swissair flew Airbus and Reutlinger insisted Sabena should, too; at one point he even threatened a Swiss withdrawal if the decision went against Airbus, according to several testimonies. The board signed off on the 34-plane order at its Nov. 17, 1997 meeting, even without seeing the paperwork. One month later, directors finally received a business plan justifying the higher number. Gobert says that document has the words "Please destroy earlier versions" written on the front cover. The financing was also highly problematic. Minutes of the board meeting say "it was proposed" that Swissair would help pay for the planes; a separate financing company that would acquire the planes and lease them to Sabena was supposed to be set up jointly by the two companies, together with Airbus. A side agreement was drafted, but Swissair never signed it — and the Sabena board never checked. Valère Croes, the board chairman at the time, testified he didn't even know of the existence of the side agreement, let alone that the Swiss hadn't signed it. The result: when Sabena's financial crisis boiled over, Swissair argued it wasn't obliged to help.
There were other big errors. Sabena signed a costly eight-year code-sharing agreement with Richard Branson's Virgin Express in 1996, under which Virgin flew some Sabena routes to London and other European destinations — though the board apparently was only told about a one-year deal. In 1999, Sabena merged its sales and marketing operations with those of Swissair into a new company, London-based Airline Management Partnership, with the goal of cutting costs — only to be hit by huge start-up fees and bills that appeared inflated, according to testimony given by John Lindekens, one of the few Belgians in a senior position at AMP. For example, he said Sabena's in-flight magazine had been funded entirely by advertisements until AMP took over and began charging the carrier $1.4 million per year for it. AMP also billed Sabena for 9,000 "irregularity kits" with toiletries for stranded passengers at a cost of $5.50 apiece — enough for 11 years — and $250,000 for 40,000 unnecessary telephone cards.
For the most part, the Swiss haven't spoken in their own defense, and the Belgians can't force them. (Suits have been filed against Swissair and some of its top executives by several of the Swiss carrier's European partners and others, and a Swiss magistrate is separately conducting a criminal inquiry). But former CEO Reutlinger has testified, telling the commission in July: "My conscience is clear." He tried to justify the Airbus order by saying the planemaker offered a low price at a time when commercial aviation was booming, but wouldn't discuss details of the transaction."When I quit Sabena, I left a company in good shape," he contended. Above all, he pointed out that every key decision taken by the company during his tenure had been approved by the board of directors, the majority of whom were Belgian.
So where was the board? Jan Huyghebaert, a director for nine years, told the commission that the image of a passive board blindly carrying out Swissair's wishes was "a caricature." Nonetheless, he conceded: "Perhaps we underestimated the risks of Swissair's strategy."
The problem may be systemic. For years, directorships of Belgian state-owned companies have been handed out according to political affiliation, with each major party being represented on boards and a balance being struck between French-speaking and Flemish-speaking directors. "It's our political etiquette," says Gobert, whose Ecolo party is pushing to end the practice. Others say the real problem may lie elsewhere: "As far as the politicians were concerned Sabena had been sold and they weren't interested in it any more," grouses Gacoms.
When Sabena was nosing into its death spiral, in the summer of 2001, a remarkable meeting took place at the sumptuous Astoria Hotel in Brussels. Over dinner on July 16, four months before the company tanked for good, Prime Minister Verhofstadt and the new head of Swissair cobbled together an agreement — in secret. In exchange for a Swiss commitment to inject j258 million into Sabena and take over nine of the Airbus orders, the Belgians would drop their suit and let Swissair off its commitment to become the majority shareholder. The next morning the five-point deal was announced to widespread relief in Belgium — and to the astonishment of company insiders. For the Astoria accord had been struck without the knowledge or participation of the three people who by law were supposed to run Sabena: the chairman of its board, its chief executive officer and the government minister who controlled the Belgian state's majority shareholding. In the end, not even that agreement could make a difference. Sabena was going down.
Sitting in a café in downtown Brussels, a former Sabena baggage handler named Giacomo Riolo talks with two colleagues about who's to blame for the debacle. Forty-three years old and a father of three, Riolo lost his job a year ago and is still unemployed. His friends are equally disgusted. It was the Airbus deal, says one. It was the Swissair deal, says the other. "It was just terrible management," says Riolo. After nine months of commission hearings, hardly anyone in Belgium would disagree.
- PETER GUMBEL/BRUSSELS
- A look inside Europe's very own corporate scandal
Photo: BRUSSELS INTERNATIONAL AIRPORT COMPANY | Source: When Belgium's national airline crashed and burned, was it hard times or mismanagement? A parliamentary investigation shines a light on European-style capitalism