Austrian Airlines Gets Fresh Capital

UNCLAS SECTION 01 OF 02 VIENNA 003464 SIPDIS SIPDIS STATE FOR EB/TRA AND EUR/AGS PARIS FOR FAA (LLIU) USEU FOR FAA (PFELDMAN) FRANKFURT FOR TSA (ABROWN) E.O. 12958: N/A TAGS: EAIR AU SUBJECT: Austrian Airlines Gets Fresh Capital REFS: A) VIENNA 2972 B) VIENNA 1907 Summary -------------- ¶1. The Austrian Airlines (AUA) group (Austrian Airlines, Lauda Air, Austrian Arrows, and Slovak Airlines) has launched a capital increase to raise more than Euro 400 million ($500 million) in fresh money. AUA needs a cash infusion to steady its serious financial situation, resulting from a high debt burden, an unfavorable cost structure, high fuel prices and the failure to hedge against rising fuel costs. AUA plans further cost saving measures, including eliminating unprofitable long-distance routes, selling six Airbus aircrafts, and slashing as many as 1,000 jobs. Despite the aggressive strategy to reduce costs, many analysts believe this might be AUA's last chance to return to profitability and avoid becoming a target for a takeover. End Summary. Equity Increase for AUA -------------- ¶2. On November 8, Austrian Airlines (AUA) implemented a capital reduction by cutting the face value of AUA shares from Euro 7.27 to Euro 3.00 per share. The total capital reduction in nominal shares, which shareholders had approved on October 2 (ref A),amounted to Euro 43.18 million ($53.98 million). Concurrently, AUA launched a capital increase on November 15 to provide the airline with more than Euro 400 million ($500 million) in fresh money by the end of ¶2006. The capital reduction was necessary, because a regulation in AUA's corporate act would not allow for a capital increase at a price below the share's face value. Additional Cost Saving Measures -------------- ¶3. In addition to the capital restructuring, AUA plans to implement a series of additional measures to improve AUA's profitability. According to these measures, which AUA's supervisory board approved on November 1, AUA will: -- terminate service to the following destinations in early 2007: Colombo/Male, Katmandu, Mauritius, Melbourne, Phuket, Shanghai, and Sydney. AUA lost approximately Euro 80 million on scheduled long-distance flights in 2006. -- review the possibility of terminating additional long-haul destinations in China, India and Japan. -- postpone possible start-up service to Karachi, Pakistan and Chennai (Madras),India. -- commence regular service to Chicago in May 2007. -- in connection with the reduction in long-haul service, assign AUA's Boeing fleet (three 777s and six 767s) to the remaining long-distance flights. AUA hopes to sell four Airbus A330s and two Airbus A340-300s in 2007, which it had employed on its long-distance routes. -- eliminate Lauda Air's long-haul charter segment in 2007 and eventually abolish the Lauda Air brand name. -- concentrate the entire AUA group's Fokker fleet within AUA's subsidiary Austrian Arrows. -- following up on the elimination of 350 jobs announced on October 3 (ref A),eliminate an additional 700-1,000 positions (from a total of 8,500). AUA hopes to realize these reductions through the elimination of long-distance routes and the sale of its planes mentioned above. AUA To Remain in Star Alliance -------------- ¶4. AUA CEO Alfred Oetsch confirmed that AUA would remain in the Star Alliance, rather than change to Air France-KLM's Skyteam Alliance. Press reports had speculated that AUA might switch alliances. However, Oetsch noted that Air France had been unwilling to share the estimated cost of Euro 100 million required to change alliances. As a result of this decision, Air France sold its 1.5% in AUA, which it had held for many years. VIENNA 00003464 002 OF 002 Comment -------------- ¶5. AUA's strategy will be to concentrate on its medium-haul routes within Europe, with a special focus on destinations in Central and Eastern Europe (CEE) and Southeastern Europe (SEE). This business segment is not only more profitable with strong growth potential, it is also critical for Vienna International Airport and the numerous Austrian and multinational businesses that cover CEE/SEE out of Vienna. However, many analysts believe that the capital restructuring and the elimination of routes, fleet and jobs might be AUA's last chance to become profitable again and avoid becoming a target for a takeover. MCCAW