VZCZCXRO3419
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSL RUEHSR
DE RUEHVI #0910/01 2031234
ZNR UUUUU ZZH
R 221234Z JUL 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 3038
INFO RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 VIENNA 000910 
 
SIPDIS 
 
STATE FOR EB/TRA AND EUR/CE 
PARIS FOR FAA 
BRUSSELS FOR FAA 
BERLIN FOR TSA (RANDOL) 
 
E.O. 12958: N/A 
TAGS: EAIR ECON PGOV AU
SUBJECT: Austrian Airlines Skates on Thin Ice as Lufthansa Takeover 
Enters 11th Hour 
 
REF: (A) VIENNA 0585; (B) VIENNA 0225 and previous 
 
¶1. SUMMARY:  As the buyout of Austrian Airlines (AUA) by Lufthansa 
(LH) nears its contract deadline of July 31 (AFTER which LH can back 
out or seek modified terms), AUA is preparing for the worst while 
hoping the European Commission and LH can come to an understanding. 
Commission approval for key elements of the merger -- its effects on 
competition and the implicit GoA subsidy (in the form of debt 
forgiveness) -- has proven more difficult than expected by the GoA, 
which supports the deal.  AUA capital is drying up as it loses money 
and passengers, so interim management have responded with further 
job cuts.  If LH walks away entirely, AUA would have to shrink by 
almost half into a regional carrier -- and would ask for an EUR 1 
billion GoA subsidy to cover legacy costs (again requiring 
Commission approval).  END SUMMARY. 
 
Commission Playing Hardball 
- - - - - - - - - - - - - - 
 
¶2. Examining the competitive impact of the AUA-LH merger, EU 
competition authorities (COMP) found it would lead to fewer carriers 
serving certain routes and potentially higher fares, a situation 
they termed incompatible with the Single Market.  COMP 
representatives called LH?s package of remedies insufficient, with 
Competition Commissioner Neelie Kroes saying she hoped to find a 
mutually acceptable solution but was not optimistic.  Since 
mid-July, LH and COMP have oscillated between public brinkmanship -- 
with COMP saying that it would not be bound by the deal?s July 31 
deadline and LH saying it had already ?paid? for any reduced 
competition at the time of its alliance with AUA -- and conciliatory 
signals.  Kroes and Lufthansa CEO Wolfgang Mayrhuber met behind 
closed doors on July 20, but gave no further indications where the 
takeover stands (NOTE: Mayrhuber is an Austrian national). 
 
¶3. Austria?s Finance Ministry is reportedly in regular contact with 
both LH and the Commission, trying to facilitate a solution. 
Austrian Chancellor Werner Faymann has repeatedly lobbied Commission 
President Jose Manuel Barroso in favor of the deal as important for 
AUA, Vienna?s airport, and the Austrian economy. 
 
¶4. COMMENT:  While the Commission recently approved LH takeovers of 
British Midland (May 14) and Brussels Airlines (June 22), the AUA 
deal appears to have higher stakes since AUA is a full-service 
network carrier with an important hub in Vienna and two subsidiaries 
(Lauda Air and Tyrolean Airways).  Since any EU carrier can already 
serve any EU route, the critical point of contention appears to be 
primetime slots held by LH and AUA, particularly in Frankfurt. 
 
More Cuts at AUA 
- - - - - - - - - 
 
¶5. AUA's financial situation is grim and deteriorating;  if the LH 
takeover fails, AUA may have to file for bankruptcy soon (though 
there are no public indications that AUA will run out of cash in the 
coming days).  For 2008, AUA reported a loss of EUR 429.5 million 
(ref A) and another loss of EUR 88.1 million in Q1/2009.  Financial 
results for the first half of 2009 are not yet available, but the 
passenger drop in June (-13.7% from June 2008) and for the first 
half of 2009 (?14.3%) do not bode well.  By comparison, LH?s 
passenger traffic fell in the first half by ?only? 6.1%. 
 
¶6. In early July, AUA interim management announced new austerity 
measures on top of EUR 425 million in cuts announced in February 
(ref B).  The new cuts are significant --  1000 jobs (of about 8000) 
would disappear by mid-2010, as would 14 out of 55 small fifty-seat 
aircraft -- but the cuts affect AUA subsidiaries (whose employees 
are paid less) more than AUA?s own highly-paid staff.  AUA is 
reviewing all of routes, frequencies and transfer points for service 
reductions.  All AUA staff will be subject to unpaid leave.  A 
special general shareholder meeting on July 14, originally intended 
to bless the LH takeover, authorized an equity increase of EUR 132.2 
million by issuing new shares. 
 
COMMENT 
- - - - 
 
¶7.  With barely a week until the takeover?s July 31 deadline and 
tough backroom negotiations by LH and COMP, it is entirely unclear 
whether the Commission can and will provide antitrust clearance in a 
timely fashion.  The Commission must also approve GoA debt 
forgiveness subsidy (in a separate investigation under EC Treaty 
state aid rules), but this appears less problematic.  Niki Lauda of 
Fly Niki (a competing carrier that works with AirBerlin) has been a 
vocal critic of the LH takeover;  it may be that KLM / Air France 
(who protested the GoA?s conduct in the AUA tender, ref B) are also 
 
VIENNA 00000910  002 OF 002 
 
 
lobbying against the deal. 
 
¶8. If AUA is not taken over, experts here say it would have to 
shrink drastically (by up to half) into a regional carrier -- but 
legacy costs and contract commitments mean the carrier would need 
another GoA subsidy of about EUR 1 billion in that case.   According 
to Merck Finck analyst Robert Heberger, if the current LH share 
offer falls through, it wouldn't necessarily hurt LH;  LH might even 
benefit from an AUA bankruptcy / restructuring by picking up AUA?s 
core business more cheaply or expanding in markets where AUA is 
forced to retreat. 
 
¶9. The current AUA share price (about EUR 4) reflects market 
uncertainty over prospects for the current Lufthansa takeover -- 
it?s a 10% discount to the LH offer of EUR 4.49 / share) -- but 
suggests that markets are not entirely pessimistic about Austrian 
Airlines? future, inside or outside of Lufthansa.  END COMMENT. 
 
HOH