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Viewing cable 08VIENNA1606, AUSTRIAN AIRLINES? PRIVATIZATION IN TROUBLE

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Reference ID Created Released Classification Origin
08VIENNA1606 2008-10-31 13:18 2011-08-26 00:00 UNCLASSIFIED Embassy Vienna
VZCZCXRO0138
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #1606/01 3051318
ZNR UUUUU ZZH
R 311318Z OCT 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 1256
INFO RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC
RUCNMEM/EU MEMBER STATES
RUEHBS/AMEMBASSY BRUSSELS 1400
RUEHBS/USEU BRUSSELS
RUEHRL/AMEMBASSY BERLIN 1784
RUEHFR/AMEMBASSY PARIS 0944
UNCLAS SECTION 01 OF 02 VIENNA 001606 
 
SIPDIS 
 
STATE FOR EB/TRA AND EUR/AGS 
BRUSSELS FOR FAA (PFELDMAN) 
BRUSSELS FOR TSA (PJRODGERS) 
PARIS FOR FAA 
BERLIN FOR TSA (JRANDOL) 
 
E.O. 12958: N/A 
TAGS: EAIR ECON PGOV AU
SUBJECT:  AUSTRIAN AIRLINES? PRIVATIZATION IN TROUBLE 
 
REF:  (A) VIENNA 1372; (B) VIENNA 1130 and previous 
 
1.  Summary:  The GoA?s plans for selling AUA by the 
end of October failed because of the miserable handling 
of the privatization process, which was aggravated by 
the financial crisis and the stock market problems, 
which alone should have triggered calling off or 
postponing the sale.  On October 29, the GoA extended 
the privatization deadline to year?s end 2008.  Since 
the major problem for the bidders is AUA?s debt burden 
of about Euro 1 billion, the GoA also decided on a 
maximum Euro 500 million state subsidy for AUA by way 
of a debt relief or equity injection.  The GoA still 
has to coordinate this state subsidy with the EU 
Commission for compatibility with EU competition 
regulations.  AUA?s latest financial report will only 
make potential buyers even more cautious.  End Summary. 
 
Messed-Up Procedure 
------------------- 
 
2.  As in earlier privatization cases, the GoA and its 
holding company (and majority owner of AUA), the OIAG, 
showed unprofessional handling of the AUA case ? aside 
from the financial crisis and the stock market 
problems, which alone should have triggered calling 
off or at least postponing the sale, according to many 
experts.  Lufthansa reportedly was the only bidder to 
submit a binding offer, but this reportedly included a 
request for a debt relief and rejection of any 
guarantee for AUA?s continued existence.  The Russian 
airline S-7 reportedly submitted a non-binding offer, 
stipulating conditions under which it would consider 
an investment.  Air France/KLM refrained from 
submitting an offer. 
 
3.  It is no surprise, however, that AUA?s 
privatization ended up in such difficulties, not only 
because the GoA first delayed it?s privatization 
decision and then tried to sell the airline in a rush. 
The information policy of all involved parties, GoA, 
OIAG, and AUA, was miserable and left the public and 
potential bidders confused.  The openly shown bias of 
many for Lufthansa was certainly not helpful, either. 
Moreover, GoA/OIAG expectations for a high sales price 
under the conditions stipulated (i.e., taking over 
AUA?s debts, maintaining the AUA brand name, 
guaranteeingAUA employees? jobs, accepting that 
Austrian shareholders hold a blocking minority of 25% 
plus one share, and maintaining Vienna International 
Airport (VIE) as CEE/SEE hub), were  probably deal- 
breakers from the beginning. 
 
Government Extends Deadline for AUA?s Privatization 
--------------------------------------------- ------ 
 
4.  When it became clear that the privatization 
procedure would not be completed by the end of 
October, particularly given Lufthansa?s request for 
considerable debt relief, the GoA on October 29 
extended the privatization deadline by two months to 
year?s end 2008.  The GoA also agreed on a maximum 
Euro 500 million state subsidy for AUA, whether in 
form of a debt relief or equity injection remains 
unclear.  The most pressing problem now for the GoA is 
to make this state subsidy compatible with EU 
competition regulations, so that it will not qualify 
as forbidden state aid.  The EU Commission reportedly 
has sent a letter to the GoA requesting notification 
of any measures and offering help in structuring them 
according to EU regulations. 
 
5.  The fresh GoA capital for AUA presents a new 
situation and indications are that Air France/KLM, and 
possibly S7, will reconsider submitting an offer. 
 
AUA?s Needs in Case Privatization Fails 
--------------------------------------- 
 
6.  If the GoA?s Euro 500 million injection is 
 
VIENNA 00001606  002 OF 002 
 
 
approved, AUA should not face a liquidity squeeze in 
the near future.  However, if privatization fails 
completely, the airline will likely need additional 
fresh money in the coming year to survive.  Also, 
expectations are that AUA would have to shrink 
considerably to a regional airline and implement harsh 
cost-cutting.  AUA would likely have to cut more long- 
haul destinations (limited cuts were announced Oct. 
28), ground its six Boeing 767 jets used for these 
destinations, and cut up to 2,000 of the current 8,000 
jobs. 
 
AUA?s Performance in 2008 
------------------------- 
 
7.  AUA recently published miserable third quarter 
results and a higher-than-projected loss for 2008. 
News also leaked that AUA?s debt, so far estimated at 
some Euro 900 million, has meanwhile exceeded Euro 1 
billion.  AUA?s third quarter 2008 results show a net 
loss of Euro 16.4 million and of Euro 65.1 million for 
the first three quarters.  Since AUA reports that the 
economic downturn has already led to a decline in 
flight bookings and expects that a further drop in 
demand in the fourth quarter as well as negative 
effects from fuel hedging and an increasing US$ 
exchange rate, the projected net loss in 2008 will 
likely reach Euro 100-125 million rather than the so 
far projected Euro 70-90 million. 
 
GIRARD-DICARLO