The Last Days of Sabena

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

SABENA'S FLIGHT PATH TO DISASTER One of the oldest European national carriers, Sabena ended as the largest business failure in Belgian history. Here's how they went from highflyers to bankrupts May 1923 Société Anonyme Belge d'Exploitation de la Navigation Aérienne (Sabena) is founded, flying commercial routes within Europe May 1995 Belgians give Swissair 49.5% of Sabena and operational control Feb 1996 Paul Reutlinger takes over as CEO and embarks on expansion strategy Nov 1997 Sabena board approves order of 34 Airbus planes, later blamed as cause of its financial meltdown 1998 Sabena reports profit for first time after a decade of losses — and for the last time in its 78-year life Sep 1999 Sabena and Swissair agree to merge sales and marketing operations in new company, Airline Management Partnership Apr 2000 Swissair agrees to increase its Sabena stake to 85% Aug 2000 Incoming CEO Christoph Müller immediately judges Sabena's situation as critical and unveils Blue Sky restructuring plan Jan 2001 Swissair rips up its expansion strategy and fires CEO after huge losses. Later all but one board member resign Jun 2001 Swissair refuses to participate in recapitalization plan and backs away from commitment to take a majority stake in Sabena. Belgian government files suit Jul 16, 2001 Secret deal at Hotel Astoria between Belgian Prime Minister and Swissair CEO. Swiss to inject €258 million but not raise stake in Sabena. Suit is dropped Oct. 2, 2001 Swissair grounds all flights, prelude to its own collapse Oct. 3, 2001 Sabena files for a "concordat," creditor protection Nov. 7, 2001 Brussels commercial court declares Sabena bankrupt Jan 2002 Belgian parliamentary commission examining Sabena collapse, headed by Raymond Langendries, starts work. Belgian prime minister scheduled to testify Sep 2002 Belgian magistrate raids Airbus HQ in Toulouse, France, looking for evidence of possible wrongdoing

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."