Austrian Airlines in Turbulence - On the Path

UNCLAS SECTION 01 OF 02 VIENNA 001907

SIPDIS

SIPDIS

STATE FOR EB/TRA AND EUR/AGS/VVIKMANIS-KELLER
PARIS FOR FAA (LLIU)
USEU FOR FAA (PFELDMAN)
FRANKFURT FOR TSA (ABROWN)

E.O. 12958: N/A
TAGS: EAIR AU
SUBJECT: Austrian Airlines in Turbulence - On the Path
of Swissair?

REF: 05 VIENNA 3292

Summary
--------------


1. The Austrian Airlines (AUA) group, after losses of
Euro 173 million ($216 million) in 2005, is on track for
another loss in 2006 due to high debt levels, a
burdensome cost structure, and high fuel prices. AUA's
major creditors are reportedly very concerned with AUA's
debts of Euro 1.8-1.9 billion ($2.3-2.4 billion). AUA's
new CEO, Alfred Oetsch, has denied rumors that the
airline is facing liquidity problems. AUA's problems
have unleashed a debate whether or not a strategic
partner, probably Lufthansa, could save AUA. Many
analysts caution that should Lufthansa subsume AUA,
Munich and/or Zurich would supplant Vienna as the gateway
to profitable destinations in Central, Eastern, and
Southeastern Europe (CEE/SEE). In such a scenario,
Austria could lose 33,000-44,000 jobs. End Summary.


AUA's Current Problems
--------------


2. The Austrian Airlines (AUA) group (Austrian Airlines,
Lauda Air, Austrian Arrows, Slovak Airlines) reported a
net loss of Euro 173 million ($216 million) in 2005,
despite higher sales, an increase in passengers, a rising
load factor, and more cargo business. AUA's financial
problems have worsened in the first half of 2006, and
analysts expect a negative balance for 2006. Alfred
Oetsch, AUA's new CEO, described the situation as
"serious, but not hopeless." The problems result from
AUA's high debt levels, an unfavorable cost structure,
high fuel prices and increasingly fierce competition in
Europe. AUA's fuel costs jumped by Euro 145 million
($181 million) in 2005, pushing up the share of fuel in
total operating costs to 17% from 14% in 2004. The fuel
surcharges of Euro 62 ($78) for a long-distance flight
and Euro 12 ($16) for a medium-distance flight covered
less than half of the additional cost in 2005.


3. According to media reports, AUA desparately needs
fresh money for investments and even to maintain daily
operations. AUA's major creditors -- Bank Austria
Creditanstalt, Erste Bank, BAWAG, and Raiffeisen
Zentralbank are -- reportedly concerned with AUA's
current debts of Euro 1.8-1.9 billion ($2.3-2.4 billion).
There are rumors that, as part of a solvency package,
creditors will buy new AUA shares following a capital
increase, remit debt, and assume positions on AUA's
Board.


4. In a recent statement, Oetsch rejected rumors of a
liquidity squeeze that could endanger flight operations.
Oetsch warned that AUA would take legal action against
those spreading unfounded rumors. He maintained that AUA
would not increase its share capital in 2006. Oetsch
referred to positive business developments in the first
four months of 2006, including a 13% increase in
passengers. (Note: The May 25 general shareholders
meeting authorized a Euro 125 million stock capital
increase. AUA could use this fresh money within the next
five years, provided AUA's share price is below the Euro
7.27 face value. End Note.)


Lufthansa as Savior or Scourge?
--------------


5. A major question remains as to whether AUA can
survive alone or will need a partner. Helmut Kukacka,
State Secretary for Aviation in the Ministry of
Transport, Innovation and Technology, and Oetsch support
maintaining AUA as an independent carrier. Some, such as
Claus Raidl, CEO of Boehler Uddeholm and one of
Chancellor Wolfgang Schuessel's informal economic
advisors, believe AUA needs a partner now, preferably the
Vienna airport company (VIE),so that AUA's problems do
not translate into problems for VIE, too. AUA is

VIENNA 00001907 002 OF 002


responsible for 56.6% of VIE's passengers.


6. Many analysts point to Lufthansa, AUA's partner in
the Star Alliance, as the most likely AUA suitor.
However, Lufthansa is the primary airline at two airports
- Munich and Zurich - that have underutilized capacity.
Hence, there exists a risk that Lufthansa would divert
profitable destinations in Central, Eastern, and
Southeastern Europe (CEE/SEE) from Vienna to Munich
and/or Zurich. VIE's hub function for CEE/SEE flights is
an important incentive for many international firms with
regional headquarters in Vienna. Studies indicate that,
should Munich supplant Vienna as the gateway to CEE/SEE,
Austria could lose 33,000-44,000 jobs. Prominent
businessmen, including Raiffeisen Bank CEO Walther
Rothensteiner, have criticized the GoA, which holds a
39.7% share in AUA, for not taking a more active role to
ensure AUA's survival as an independent carrier.

KILNER