Identifier
Created
Classification
Origin
08VIENNA1005
2008-07-16 10:52:00
UNCLASSIFIED
Embassy Vienna
Cable title:  

AUSTRIAN AIRLINES REDUCES SERVICE TO U.S., SEARCH FOR

Tags:  EAIR ECON PGOV AU 
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VZCZCXRO8160
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #1005/01 1981052
ZNR UUUUU ZZH
R 161052Z JUL 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 0542
INFO RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC
RUCNMEM/EU MEMBER STATES
RUEHBS/AMEMBASSY BRUSSELS 1356
RUEHFR/AMEMBASSY PARIS 0924
RUEHFT/AMCONSUL FRANKFURT 8365
UNCLAS SECTION 01 OF 02 VIENNA 001005 

SIPDIS

STATE FOR EB/TRA AND EUR/AGS
BRUSSELS FOR FAA (PFELDMAN) AND FOR TSA (PJRODGERS)
PARIS FOR FAA
FRANKFURT FOR TSA

E.O. 12958: N/A
TAGS: EAIR ECON PGOV AU
SUBJECT: AUSTRIAN AIRLINES REDUCES SERVICE TO U.S., SEARCH FOR
STRATEGIC PARTNER ON HOLD

REF: (A) VIENNA 0965; (B) VIENNA 0871; (C) VIENNA 0675;
(D) VIENNA 0395

Summary
-------

UNCLAS SECTION 01 OF 02 VIENNA 001005

SIPDIS

STATE FOR EB/TRA AND EUR/AGS
BRUSSELS FOR FAA (PFELDMAN) AND FOR TSA (PJRODGERS)
PARIS FOR FAA
FRANKFURT FOR TSA

E.O. 12958: N/A
TAGS: EAIR ECON PGOV AU
SUBJECT: AUSTRIAN AIRLINES REDUCES SERVICE TO U.S., SEARCH FOR
STRATEGIC PARTNER ON HOLD

REF: (A) VIENNA 0965; (B) VIENNA 0871; (C) VIENNA 0675;
(D) VIENNA 0395

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


1. Austrian Airlines' (AUA) will stop service to Chicago, reduce
frequencies of flights to New York, Washington and other long-haul
and Western European destinations, and increase the fuel surcharge.
The GoA collapse puts AUA's search for a strategic partner on hold.
The delay in the privatization decision could become problematic for
AUA, since the previously projected loss of up to Euro 90 million
for 2008 looks likely to be much higher, draining AUA's cash
reserves of about Euro 200 million. However, the final decision on
AUA's future most likely will have to wait for the new GoA, which is
expected to take office between the end of November and early 2009.
End Summary.

AUA's Cost-Cutting Stops Service to Chicago
--------------


2. In a cost-cutting effort, AUA will stop service to Chicago as of
October 25 and from mid-January to end-March 2009 reduce the number
of flights to Washington from seven to six per week and to New York
from six to five. AUA will also reduce service to Mumbai and cut or
reduce seasonal frequency to other destinations in Western Europe.
AUA's route network in the growth markets of Central and Eastern
Europe and the Middle East will not be affected. According to AUA
CEO Alfred Oetsch, this will result in a 21% cut in production
(measured in available seat kilometers) on the North Atlantic
routes, a 5% cut in overall production, and the use of three fewer
aircraft in 2009.


3. As of July 15, 2008, AUA increased its fuel surcharge for short-
and medium-haul flights from Euro 24 to 27, and for long-haul
flights from Euro 92 to 98. Further, in reaction to the continued
uncertain oil markets, AUA, which now hedges 20% of its annual
kerosene requirement with forward contracts, announced an expansion
of its hedging strategy by securing the rest of its annual fuel
requirement with call options.

GoA Collapse Puts AUA's Strategic Partner Search on Hold
-------------- --------------


4. The collapse of the GoA (ref A) puts AUA's search for a
strategic partner on hold. Since mid-June AUA officially has been
looking for a strategic partner and OIAG, the GoA's holding company
and majority owner of AUA, hired the Boston Consulting Group (BCG)
to work out a detailed recommendation for a strategic partner (ref
B) and Merrill Lynch to find a buyer. BCG is expected to produce an
interim report by the end of July, at which time AUA will publicize
its results for the first half of 2008, which due to a "not so good"
second quarter could be a negative surprise. Some experts feel that
the loss of up to Euro 90 million for 2008, projected only two
months ago, could be considerably higher.


5. An AUA source confirmed that the outgoing GoA has not yet
formally authorized OIAG to sell its shares in AUA. Plans for
taking this decision in an August 6 cabinet meeting seem shaky
because of different opinions between the ruling OVP and SPO and
within the SPO. The OVP supports seeling all but a blocking
minority of 25% plus one share, while the SPO generally woud prefer
to block privatization. Transport Minister Werner Faymann,
nominated as the SPO candidate for Chancellor, who seemed open to
"reasonable solutions," is under increasing pressure from other
prominent SPO reps to pursue a strict anti-privatization course.
Thus, a final decision on AUA's future most likely will have to wait
for the new GoA, which is expected to take office no earlier than
the end of November 2008, but more likely in early 2009.

Comment
--------------


5. The GoA collapse creates a highly uncomfortable situation for
AUA. The airline does not seem to be on the verge bankruptcy, with
sufficient liquidity to survive the rest of the year and into 2009.
However, political factors that seem likely to delay the search for
a strategic partner for half a year will make the situation worse
for AUA and depress its price, since AUA's financial situation is
unlikely to improve significantly in the near future.


VIENNA 00001005 002 OF 002


GIRARD-DICARLO