Swiss International Air Lines (SWISS) fosters Switzerland’s classical national values such as quality, punctuality and hospitality. SWISS offers a three-class product on all intercontinental routes, with first, business and economy class. Well established in the private travel sector as the airline of Switzerland, SWISS recently embarked on a new advertising campaign that embodies its emphasis on Swiss quality and proximity to the customer. Their new logo is now a tail fin and the Swiss cross, accompanied by the slogan “Our sign is a promise”.

Cédric Suchet joined Swiss International Air Lines in 2004 as Treasury Risk Manager. Two years later, he became Head of Treasury and Risk Management. In 2007, when Lufthansa Group bought SWISS, he drove the integration of a part of treasury activities, primarily for cash management and risk management, and designed the new internal controls. Prior to that, Cédric was Financial Analyst in Operational Treasury of Novartis’ Pharma Division and Head of Financing of BMW wholesalers at BMW Financial Services, in France. Cédric has a Business Masters from Ecole Supérieure des Sciences Commerciales d’Angers.

Back in 2007, SWISS treasury recommended to its management Board that it adopt the risk management policy of the Lufthansa Group (Swiss International Air Lines AG is 100% owned by Lufthansa Group). Naturally, this has an impact on how the treasury department operates, according to Cédric. “Within SWISS, we ensure that our internal reporting to Lufthansa, from fuel burn volume to currency exposures, matches the requirement of the group risk policies and leads to full compliance of our own entity,” he says.

SWISS are responsible for their figures, particularly risk figures such as foreign currencies and fuel exposures but report these into the systems of Lufthansa. These figures are then aggregated with the other affiliates’ exposures, before Lufthansa executes the necessary transactions externally. “Simply put, a share of the external transactions executed is transposed to internal transactions. Therefore, our unique counterparty when it comes down to hedging activity is Lufthansa,” says Cédric.

The Swiss airline has managed to transport 7,701,225 passengers in the first six months of 2012, a 4.5% increase on the same period last year. With a continuous focus on expansion, SWISS’ fleet is expected to expand further by 36 aircraft, including more A330-300s and A320s and 30 Bombardier CSeries, which are to replace the Avro-RJ regional fleet successively from 2014. With a current fleet of 93 aircraft, of which eight are operated under wet leases, SWISS has the necessary flexibility to cope with the highly volatile environment in the industry.

As the Director Head of Treasury and Risk Management in a team of four, Cédric reports to the CFO of SWISS. This lean team covers the duties of front office, back office and corporate controlling. It is synchronised with the various departments of Lufthansa, be they treasury or accounting, so as to ensure the compliance of SWISS to group policies, reporting and accounting standards. In this interview, Cédric tells us more about how the SWISS treasury department operates.

How is your treasury run?

SWISS’ treasury front office is responsible for all the activities related to short-term cash management and short-term currency management (including FX spot transactions). The back office activities involve all of the administrative duties as well as the accounting entries of all treasury transactions; the execution and monitoring of bank guarantees; e-banking platform administration; and it also serves as the main contact point for the internal and external audit.

We have a controller who is dedicated to treasury and she’s in charge of all the duties surrounding budgeting, planning, and forecasting – mainly mid to long-term liquidity and currency risk planning – based on the input from corporate controlling. She handles the internal and external reporting activities, ie within SWISS and Lufthansa as well as towards external partners.

Which are your main cash management banks? How have your relationships with them changed in recent years?

In terms of bank relationships, we make a distinction between two groups: our banking landscape outside Switzerland and our financial network within the country. Because of the significant improvement potential, and because we adopted the cash and risk policies of Lufthansa group, we have had to introduce major changes to our banking relationships outside Switzerland. We have transferred most of our cash operations to Deutsche Bank (DB) and Citi – who are among the core banks of the group. They offer a global footprint, moving away from the heterogeneous partners formerly managed only locally. Thus we have achieved several milestones, key for SWISS and for the group.

How did you choose your cash management banks? How successful have these relationships been?

Firstly, we listed our requirements in several RFPs, one per country, in co-ordination with Lufthansa, where we outlined the type of transactions and services that SWISS needed. In this way, we have selected banks in various countries worldwide together. One of our main goals was to achieve standard payment processes across the globe.

The majority of our branch offices – before that change – did not have integrated standard processes and were doing most of their payments manually. Now they are able to do their mass payments through batches, straight through, from the unique ERP system in use at SWISS. This opened up the opportunity to transfer routine activities to the shared airline accounting centres (AACs) based in Poland, Thailand and Mexico. The prerequisite for this transfer of activities was to have standard group payment processes and a harmonised banking landscape.

Today, the AACs can prepare mass payments from the ERP alone and always in the same way, irrespective of the countries they work on. AACs’ teams are now trained on fewer e-banking platforms, which are identical for all Lufthansa’s affiliates covered by these centres. All authorisation rights are managed centrally in SWISS Treasury.

Though this project is not 100% completed, we have nevertheless already achieved a significant reduction in the number of bank accounts and the number of banks, thus reducing bank fees. Using the same core bank as Lufthansa, we could integrate our cash into their cash pooling structure. The standard payment process benefits our treasury too in the sense that we also release all payments in the HQ in Basel for SWISS worldwide and this gives us a perfect picture of what our cash spend is. This enhanced visibility of our short-term cash flows (as we are involved in the payment process itself) gives us sufficient lead time and accuracy as to when and what to advise Lufthansa, ie the amount of cash that will be swept.

What pooling structure do you use? What are the biggest problems you face when pooling your cash?

We have a zero balancing structure set up in many countries and the number is growing. Basically we have this set up in all countries where we have currency hedging in place. As I mentioned above, currency hedges are internal transactions with Lufthansa and as such, at maturity we must deliver the amounts to the parent company. A zero balancing agreement helps to smooth this process out as cash is already pooled to Lufthansa, in the original currency. We actually sweep daily but it is fairly efficient as we use the same bank.

The greatest challenges we came up against were related to the banking documentation required to set up the zero balancing agreement initially. Other challenges can simply not be overcome as they are either related to taxation or other currency obligations, which may render the sweep inefficient or worse, impossible. We face these issues in various Asian countries.

How significant is the company’s debt?

Debt at SWISS is reasonable and is related to aircraft leasing. As an affiliate of Lufthansa Group we co-ordinate our requirements in this area with corporate finance, in light of our needs and the Group’s overall need. The outlook for our debt will depend upon our business success and upon our investment plans, which are yet to be finalised and approved. Thereafter we will co-ordinate action (borrow) internally, first, and externally if needed, always in co-ordination with corporate finance.

Do you use a TMS and/or ERP system? If so, which?

In terms of ERP, we use SAP for our accounting needs all around the world, in our head office as well as in all of our local branch offices. This unique ERP for accounting has facilitated the shift of most of our accounting and payments processes from the multiple local accounting organisations to the three AACs, which are in charge of accounting for all suppliers’ invoices and preparing the payments accordingly, which, are then all released centrally. The entire process is straight through, down to the morning uploads of most of the electronic bank statements into SAP. We plan to extend the straight through processing of bank statement collection to bank accounts in local banks, which are as yet out of scope. This will take several months to complete.

For our treasury transactions, we have been using the treasury module of SAP for several years now and we use this to record, monitor and account for our treasury transactions – internal and external – although almost 100% are internal transactions with Lufthansa. From the treasury module of SAP, we post into the general ledger of SAP, a function that falls under the remit of the back office.

Unfortunately, we are still using Microsoft Excel for cash forecasting activities but we are currently assessing the possibility of moving to a more reliable tool. We may lose a bit of flexibility but we would be gaining in terms of reliability, accuracy and completeness. Hence, one of our main targets is to facilitate the aggregation of the various contributors into the cash forecast and to have the flexibility to enlarge the scope of the contributors. For now, we have templates that we exchange via email, which is common to many corporates but certainly not state of the art. Our goal is to have this new forecasting model live by the beginning of next year, though such investment is subject to internal approval.

Can you tell us about your FX exposures?

As an airline, we are exposed to a wide basket of currencies around the globe. Basically, our currency risk on the revenue side depends upon the location of the departure of our customers, whereas on the cost side it’s linked to the currency of our procurement contracts. Per currency, we net the revenue with the costs and hedge the remaining exposure according to group policy. Hence to reduce the need (and the cost) for ‘financial’ hedges, we regularly review the main drivers of currency risks and try to improve natural hedges, by amending our procurement contracts and shifting them into those currencies where revenues exceed costs.

Though there are plenty of currencies at risk, we hedge only those above certain risk thresholds. In a nutshell, like many European carriers we are short of US dollars as fuel and leasing expenses exceed revenues in US dollars: the higher the oil price, the shorter we are. We are also short of US dollars because our largest investments are in aircraft, which is a US dollars market. At the same time, the SWISS regional network serves many European destinations and we thus bear large exposures against EUR and GBP. From the intercontinental revenues, we bear most currency exposures in JPY, CAD, AUD, and ZAR. On all these currencies, revenues are clearly exceeding costs.

Group risk management policy addresses the above risks in various manners depending on the nature of the risk. Risks from operating cash flows, from investment cash flows or from liabilities in foreign currencies each have their hedging policy.

What are your thoughts on the sovereign debt crisis in Europe?

We are really concerned with counterparty risk management but this has been the case since the start of the crisis in 2008. As soon as another source of risk arises, we do our best to reduce the level of cash that we have in these countries. We transfer just enough to cover what is required to be paid. To ensure efficient use of cash within the group, we have always tried to lower the excess of cash on local accounts but, of course, the incentive to do that now is much greater. Unfortunately, should one or several countries of the Eurozone come to default; the local cash balance is really the smallest part of the issue. The greatest challenge we will face will definitely be the business outlook for these countries.

What does the future hold for your treasury? What projects and system upgrades do you have in the pipeline?

The top priority at the moment is the cash flow forecasting tool which I have already mentioned above. The second is eBAM which is currently being rolled out. We have decided to move away from the Excel templates we use to track bank account authorisation rights. This is not only an audit requirement but it will also help us move towards a paperless and standardised process, because the tool is web-based. Though it is not connected to a banking platform, eBAM is a stand-alone tool that various colleagues around the world can have access to and with which they can verify whether the authorised signatures match the bank confirmation they regularly seek.

This would be utilised as our reference tool and we would report to our audit based on that tool. Beyond the flat data storage, we plan to use it to manage the approval workflow when a change of authorisation rights is required by internal colleagues. At the moment, these requests to change authorisation rights are managed internally with paper circulating around the globe to seek various approvals before the changes are sent to the banks. With eBAM, however, we can manage the internal approval in a paperless way. This solution will be used also to archive the relevant documentations related to bank authorisation rights.

Working for an airline, what are your summer holidays like?

Working for an airline opens the gate to great destinations. This year will be the second year running that we have gone abroad for summer holidays with the children. In 2010 we enjoyed the crowd, the noise and the superb museums of New York and Washington. This time we chose Tanzania to combine a short safari with several relaxing days in Zanzibar. Different places, different cultures, different charms and all in all, a great break from the office.