Unloading Austrian Air

Lufthansa buyout stalls; the future remains murky at best

Austrian Airlines, Austria’s flagship carrier, is set for a crash landing. Failed management and a bungled attempt to sell the airline – and now the financial crisis – threaten to undo the anticipated sale of the company to German carrier Lufthansa. The closing is seen as a last-ditch attempt to recoup at least some of taxpayers’ money that was recently injected into the airline group, and would allow the Austrian government to relinquish its 41.56% stake in the airline.

Last year alone, Austrian Airlines Group, comprised of Austrian, Lauda Air and Austrian Arrows, lost a record €430 million. Half of that amount, at best, would be recovered through Lufthansa’s buyout, and the government has pushed for the sale to avoid further losses.

After realizing that independent operations were no longer profitable, given the shaky conditions of the airline industry as a result of high fuel prices and a failing global economy, the government started pursuing the sale in the summer of August 2008. It favored Lufthansa as a buyer, a position the government allegedly took to the point of disadvantaging other interested bidders. This preferential treatment was the result of Lufthansa’s previous takeover of Swiss airline in January 2005 – a profitable model Austrian authorities hoped would be repeated.

Moreover, with government backing Lufthansa eventually prevailed, reaching an agreement on Dec. 5, 2008, and the Austrian government agreed to supply fresh capital to the ailing airline to offset the debt-burden. A €200 million emergency loan was guaranteed by the government and approved by the European Commission, to be repaid by Austrian Airlines once the sale was concluded.

In return ÖIAG, the holding company for the Austrian government, would receive a nominal €366,268.75 – one euro cent per share – as well as a debtor warrant, which, depending on the future performance and price of the Lufthansa shares, could lead to future payments of up to €164 million.

That is, if the deal is approved by the European Union. On Feb. 11, the European Commission announced it would investigate the deal, as it had “doubts concerning… whether this state aid can be declared compatible with the common market.”

The declared cause for concern is not the fear of a Lufthansa-led monopoly, but because of an additional €500 million in state subsidy promised to Austrian Airlines if the sale went through. This subsidy, however, was supposedly only promised if Lufthansa took over, which incited British Airways, Air France-KLM and Ryanair, among others, to launch formal complaints.

Lufthansa CEO Wolfgang Mayrhuber responded in an interview with Der Standard on Feb. 27 that if the €500 million grant is not approved, then “the deal is off.”

But there is more trouble ahead: In mid-April, the latest figures for Austrian Airlines in the first quarter of 2009 revealed a 15.5% drop in passenger volume. At the same time, the European Commission questioned the conditions of the sale: There is a particular concern that Austrian Airlines would not be able to repay the €200 million emergency loan after closing the deal. Going against the Commission’s own rules, it might allow the Austrian government to accept a delay in recovering the debt, depending on the airline’s performance.

In addition, the debt may be devalued, again going against the Commission’s rulebook; Austrian Airlines would therefore not be sold at market value.

“The house (AUA) is burning ablaze,” Mayrhuber said, appealing his airline’s personnel. “We have to extinguish the fire and avoid lamenting the potential shortcomings of the past.” They evidently heard his message: Cabin staff has agreed to working short-hours, while pilots and management have forgone a portion of their pay for a year.

But it might all be for nothing: As the European Commission prolongs its decision, Austrian Airline’s financial situation worsens by the day.

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