VZCZCXRO3551
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHVI #0225/01 0571518
ZNR UUUUU ZZH
P 261518Z FEB 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 2047
INFO RUCNMEM/EU MEMBER STATES
RULSDMK/DEPT OF TRANSPORTATION WASHDC

UNCLAS SECTION 01 OF 02 VIENNA 000225 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EB/TRA AND EUR/CE 
PARIS FOR FAA 
 
E.O. 12958: N/A 
TAGS: EAIR EUN AU
SUBJECT: Austrian Airlines Financial Situation Grim; 
EU May Pose Hurdles to Lufthansa Merger 
 
REF:  08 VIENNA 1773 
 
¶1. (SBU) SUMMARY.  Austrian Airlines (AUA) is in 
increasingly dire financial straits despite bridge 
loans from the GoA.  On February 19, new management 
announced a 2008 operating loss of EUR 100-125 
million which would wipe out half of AUA's remaining 
capital base.  Including financial items (write- 
offs,  hedging losses, etc.) AUA's 2008 loss could 
total EUR 500 million.  The management is confident 
that a bridge loan in December (EUR 200 million) and 
planned short-term savings (EUR 225 million) will 
keep AUA in the air until the Lufthansa sale closes 
in June. 
 
¶2. (SBU) Lufthansa's takeover of AUA is not a done 
deal.  The EU Commission has signaled it will 
critically review several aspects of the takeover 
including the GoA subsidy, the modest sales price, 
and the tender process.  If the EU Commission 
rejects key aspects of the deal -- giving Lufthansa 
the right to pull out -- AUA would be forced to 
down-size radically into a regional carrier and 
could go bankrupt.  END SUMMARY. 
 
¶3. (SBU) AUA is in a critical financial situation 
despite a EUR 500 million GoA subsidy (as part of 
the merger) and a EUR 200 million bridge loan from 
state holding company OIAG.  On February 19, new AUA 
co-managers Andreas Bierwirth and Peter Malanik 
(NOTE: CEO Alfred Oetsch was forced out in late 
January) announced that operating losses for the 
past thirteen months were in the range EUR 100-125 
million -- half the company's issued share capital 
of EUR 264 million, requiring public notification 
under the Austrian Stock Corporation Act.  Including 
write-offs, exchange rate losses, and other 
financial items, total losses for 2008 will be in 
the range EUR 400-500 million.  Cash-on-hand is 
reportedly is down to about EUR 130 million. 
Management expressed confidence that the carrier can 
survive until the Lufthansa buy-out this summer 
based on the EUR 200 million OIAG bridge loan and 
planned short-term savings of EUR 225 million. 
 
¶4. (U) AUA has not weathered the economic crisis 
well: 2008 saw a 1.1% decline in passenger numbers 
(Lufthansa: up 1.2%) and a passenger load factor of 
75.2% (Lufthansa: 78.6%).  In January 2009, AUA's 
passenger numbers were down 13% year-on-year and 
passenger load fell to 65.4%. 
 
¶5. (SBU) Bierwirth and Malanik presented austerity 
measures of EUR 425 million and launched labor 
negotiations (to be concluded by the end of 
February).  The EUR 225 million short-term package 
consists of measures including another 5% capacity 
reduction in 2009 (on top of an earlier 5% cut, i.e. 
10% total) with closure of routes to Ankara, Baia 
Mare, Burgas, Mumbai, Nuremberg, and Nizhny 
Novgorod, and reduced frequency on various other 
routes, particularly domestic flights.  Other 
measures include more flexible working hours, 
drawing down accrued leave and compensatory time, a 
temporary salary waiver, and suspending pension fund 
contributions for a limited period.  For the medium- 
term (through 2012), AUA is targeting additional 
cost savings of EUR 200 million.  NOTE: an AUA 
representative told us OMV charges more for jet fuel 
in Vienna than it charges Lufthansa in Munich:  AUA 
expects that the Lufthansa merger will give AUA more 
clout to drive a harder bargain with OMV in Vienna. 
END NOTE. 
 
Problems with Lufthansa Merger 
- - - - - - - - - - - - - - - - 
 
¶6.  The Lufthansa takeover is not written in stone. 
Lufthansa has said it will back out if AUA's 
economic situation at closing (expected in 
June/July) is much worse than when the deal was 
signed in December.  Lufthansa also has the right to 
back out if the EU Commission does not approve the 
deal by the end of June.  Assuming the takeover 
happens, Lufthansa will reportedly have to invest 
upwards of EUR 1 billion to restructure AUA and 
reduce its debt (currently EUR 2 billion).  AUA's 
 
VIENNA 00000225  002 OF 002 
 
 
net gearing (debt load/equity) for the first nine 
months of 2008 was 135.4% versus 28.5% for 
Lufthansa. 
 
¶7. (U) On January 19, the EU Commission authorized 
the GoA's mid-December guarantee of the OIAG EUR 200 
million bridge financing loan for AUA (which must be 
repaid upon the closing of the AUA/Lufthansa deal). 
In contrast, on February 11, the Commission opened 
formal investigations on the sale of AUA to 
Lufthansa and reportedly will scrutinize in detail: 
-- the deal's symbolic price:  Lufthansa will pay 
the GoA one euro-cent for each OIAG share -- 
totaling only EUR 366,268.75 for the 41.56% GoA 
stake (NOTE: Lufthansa will pay smaller shareholders 
a fair-market price base on AUA's share price last 
year) 
-- the debtor warrant the GoA will receive, which 
may lead to an additional payment, and 
-- the GoA's EUR 500 million subsidy to 
AUA/Lufthansa as part of the sale. 
 
¶8. (U) The Commission indicated it will review 
whether the sale was truly open, transparent, and 
final -- pointing to several potential 
inconsistencies with common market regulations: 
-- the EUR 500 million subsidy may be excessive 
-- AUA's restructuring plan may not restore long- 
term viability, necessitating future subsidies 
-- the sale price (including the debtor warrant) may 
not reflect a fair market value for AUA. 
 
¶9. (SBU) COMMENT: If the European Commission rejects 
the takeover or the deal falls apart for other 
reasons, AUA could quickly go bankrupt and its only 
chance for survival would seem to be as a radical 
down-sized regional carrier. 
 
How will the takeover affect AUA's fleet? 
- - - - - - - - - - - - - - - - - - - - - 
 
¶10. (U) AUA operates a longhaul Boeing fleet (four 
new Boeing 777 and six older 767, along with two 
737) and uses Airbus only for short-haul flights. 
AUA also operates Fokker, Bombardier, und Canadair 
Jet aircraft on smaller routes.  It plans to sell 
six planes (unspecified) in the medium term in the 
course of its capacity reduction/cost-cutting 
program. 
 
¶11. (SBU) Contacts point out that while Lufthansa 
has a mixed Boeing-Airbus fleet, it does not operate 
the Boeing 777 which might raise future questions 
over their long-term role at AUA (but the carrier 
sees no reason for change at present).  Lufthansa 
also bought the A-380 as its new-generation long- 
haul aircraft.  At some point in the future, AUA 
will have to consider which aircraft would replace 
its ageing 767 fleet.  AUA sees bargaining 
advantages as a Lufthansa partner since it can 
piggyback on larger purchases with lower unit costs. 
 
KILNER