VZCZCXRO5969
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #1372/01 2621440
ZNR UUUUU ZZH
R 181440Z SEP 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 0971
INFO RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC
RUCNMEM/EU MEMBER STATES
RUEHMO/AMEMBASSY MOSCOW 2243

UNCLAS SECTION 01 OF 02 VIENNA 001372 
 
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: BIDDERS FOR AUSTRIAN AIRLINES SHOW CARDS 
 
REF:  (A) VIENNA 1130; (B) VIENNA 1005 and previous 
 
¶1.  SUMMARY: The privatization tender for Austrian Airlines (AUA), 
which closed September 12, now has a shortlist:  Lufthansa, KLM/Air 
France and the Russian S7 (Air China, Aeroflot, British Airways and 
Turkish Airlines are out).  S7 is making a major effort -- in 
particularly by promising to keep Vienna operations intact -- but a 
Russian takeover of AUA would entail problems for its operating 
license and traffic rights.  An ongoing labor-management conflict 
within AUA could provoke a strike, but is unlikely to be a decisive 
factor in the carrier's sale.  END SUMMARY. 
 
¶2.  On August 12, the government cabinet formally approved its 
earlier decision to fully privatize AUA with the caveat that private 
and institutional Austrian shareholders must hold 25% plus one share 
(it is possible that OIAG would retain this stake on behalf of the 
government), enough to block major decisions under Austrian 
corporate law (ref A).  Interested bidders had to submit non-binding 
offers by September 12;  the three short-listed bidders have until 
October 21 to submit binding offers. 
 
The Shortlist 
------------- 
 
¶3.  The shortlisted bidders are Lufthansa, KLM/Air France and the 
Russian S7.  British Airways submitted a non-binding offer, but was 
selected out;  Turkish Airlines reportedly submitted its offer too 
late for consideration. 
 
¶4.  Lufthansa is still seen as the clear favorite due to its close 
technical and commercial cooperation with AUA and the fact that both 
are already Star Alliance members (an alliance change could post 
huge costs for AUA).  Another argument for Lufthansa is that Germany 
is by far the most important market for Austria.  A sale to 
Lufthansa poses though the greatest risk to AUA's Vienna operations 
and Central/East-European network, since Lufthansa already covers 
those markets from Munich.  For that reason, there is growing 
affinity to Air France-KLM who have a serious chance in the tender. 
 
 
¶5.  The Russian S7, backed by Gazprom-Bank and Sberbank, is making a 
major public effort and has reportedly engaged highly regarded 
lobbyists, including German ex-chancellor Gerhard Schroeder and 
former Austrian Interior Minister Franz Loeschnak. Noteworthy is 
that the role that Vienna International Airport (VIE) would plays in 
an S7 takeover:  S7 says it would make VIE its transit hub for 
Russians flying to Western Europe and the U.S. (NOTE: S7 is also 
building new terminals at Moscow Domodedovo and the St. Petersburg 
Pulkovo and committed to involve VIE in those projects).  S7 would 
also consider joining the Star Alliance.  AUA's purchase price is no 
barrier for S7, according to analysts. 
 
Problems Associated with the AUA Sale 
------------------------------------- 
 
¶6.  In case of an AUA takeover, Lufthansa (and Air France-KLM, to a 
lesser degree) may face some problems with EU merger/competition 
regulations to prevent abuse of a dominant market position, and 
could be forced to divest slots or routes to third carriers.  They 
probably would also have to renegotiate some traffic and landing 
rights with third countries (i.e., non-EU member states).  However, 
these problems seem manageable in the case of either carrier. 
 
¶7.  S7 would pose greater challenges.  Authorities would have to 
find a solution for AUA's operating license, because under EU 
Council Regulation EEC 2407/92, member states are obliged to grant a 
license to an air carrier only if its principal place of business 
and registered office are located in that member state.  Moreover, 
the Regulation stipulates that the air carrier shall be owned and 
continue to be owned directly or through majority ownership by the 
EU-27 member states and/or nationals of member states and/or 
countries having an agreement with the EU (e.g. the U.S.).  Problems 
of traffic and landing rights with third countries would also be 
more serious than in the case of a European takeover. 
 
Strike in the Air? 
------------------ 
 
¶8.  A wage and labor conflict currently affects 3,400 technical and 
commercial AUA personnel (about 40% of AUA's staff but not including 
pilots and other flight personnel who have separate collective 
bargaining agreements).  Shop stewards oppose management plans to 
extend the workweek from 38.5 to 40 hours without compensation, the 
cutting of bonuses, and tougher conditions for shift workers.  Since 
management has postponed collective bargaining negotiations for 
 
VIENNA 00001372  002 OF 002 
 
 
those employees until after the decision on a strategic partner, a 
strike or slowdown cannot be excluded but is unlikely to be a 
decisive factor in the privatization. 
 
GIRARD-DICARLO