VZCZCXRO3113
PP RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHVI #1907/01 1791207
ZNR UUUUU ZZH
P 281207Z JUN 06
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 4034
INFO RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEANHA/FAA NATIONAL HQ WASHDC
RUCNMEM/EU MEMBER STATES
RUEHSW/AMEMBASSY BERN 1065
RUEHBS/USEU BRUSSELS
RUEHFT/AMCONSUL FRANKFURT 7719

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