Austrian Airlines To Go to Lufthansa

UNCLAS VIENNA 001672 SIPDIS STATE FOR EB/TRA AND EUR/AGS BRUSSELS FOR FAA (PFELDMAN) AND TSA (PJRODGERS) PARIS FOR FAA BERLIN FOR TSA (JRANDOL) E.O. 12958: N/A TAGS: EAIR ECON PGOV AU SUBJECT: Austrian Airlines To Go to Lufthansa REF: (A) VIENNA 1606; (B) VIENNA 1372 and previous ¶1. SUMMARY: Austrian Airlines will be sold to Lufthansa -- officially the only remaining bidder -- but its is unclear whether the EU will approve a GOA EUR 500 million state subsidy as part of the sale. The bid process evinced a strong preference for Lufthansa stemming from the carriers' already close alliance, even though Lufthansa will likely dissolve key AUA functions. In Austria, there will be probably be many losers starting with the Vienna International Airport (VIE),whose role as a hub for central/southeast Europe (CEE/SEE) may quickly erode. END SUMMARY. Lufthansa Gets AUA -------------- ¶2. Austrian Airlines (AUA) will go to Lufthansa, always the front runner. After high-level talks on November 13, OIAG stated that Lufthansa is the only remaining bidder, while Air France/KLM and the Russian S7 are officially out. OIAG will continue negotiations only with Lufthansa; the sales contract appears a formality to be signed in early December. ¶3. Since Lufthansa will reportedly pay only a symbolic price for AUA and the GoA will provide an additional EUR 500 million subsidy, the deal practically results in a negative purchase price and could well constitute illicit state aid under EU competition regulations. It is unclear what would happen if the EU Commission does not approve the state subsidy. ¶4. According to media reports, Lufthansa will provide no guarantees for AUA employment, nor for maintaining Vienna International Airport (VIE) as CEE/SEE hub. Lufthansa will also not accept an Austrian shareholders blocking minority of 25% plus one share. COMMENT -------------- ¶5. Many have questioned why the OIAG, after the decision to subsidize AUA with EUR 500 million, did not reopen the bidding process. Air France/KLM is reportedly considering a legal challenge in Brussels against the state subsidy and/or the bidding process. Even though the Austrian body politics evinces an extreme bias for Lufthansa -- perhaps a preference for the status quo -- it is interesting to note that the GoA is prepared to marry off AUA (with a significant dowry) without Lufthansa fulfilling any of the initial non-monetary conditions in the tender. Since Lufthansa now has three hubs -- the closest being in Munich -- it seems natural that the Vienna International Airport's (VIE) function as CEE/SEE hub will quickly erode. It is no doubt difficult to sell an airline in the current environment, but AUA's privatization leaves many losers on the Austrian side -- taxpayers, AUA employees, the Vienna International Airport, and AUA's minority shareholders -- who may well try to overturn or revise the decision. GIRARD-DICARLO