Austrian Airlines AG Tuesday reported that it swung to a net loss in the second quarter of 2006. Rising fuel costs still weigh on the bottom line, and it cut its full year forecast. Commenting on the Austrian Airlines Group’s results for the first half-year of 2006, Alfred ?-tsch, Chief Executive Officer of the Board of Management of the Austrian Airlines Group, made the following statement:

“The continued expansion of our market leadership in Eastern Europe in the first half-year has enabled us to achieve respectable, usually double-digit, levels of traffic growth, build market share gains and generate over 70% of the passenger growth at Vienna Airport. We have improved our adjusted EBIT by EUR 16.3m to EUR -47.8m compared to last year, despite having had to overcome an increase in kerosene expenditure of EUR 72 million.

Had kerosene prices remained at last year’s level, we would actually have seen a substantial improvement in our result. As the second half of 2006 is likely to be dominated by factors including continued high kerosene prices that exceed our budgetary assumptions (already set high as a precautionary measure) and because of the negative consequences of the capacity bottlenecks that have emerged at Austrian air traffic control since spring, it has become necessary to correct our forecast result for the year as a whole. It will probably not be possible to achieve a balanced adjusted EBIT. Depending on the political and economic framework conditions, the annual result will prospectively be better than the previous year.’

CEO Alfred ?-tsch offered a summary of the new package of offensive measures: ‘Against the background of the current kerosene price trend in particular, we must shift the focus of our expansion from quantitative to qualitative growth, and work to move forward on this basis. The result of this will be that first yields and then load factors will continue to increase. The key to increasing our yields is a comprehensive quality offensive, which we will use to raise both yields and customer loyalty. The installation of our lie-flat sleeper seats in our long-haul Business Class sections and the decision on principle to also offer a free meal and drink service in Economy Class on short- and medium-haul flights are the quality measures with which we will be faced in the coming months. This new service concept will be presented in more detail this autumn.

‘Qualitative growth in our network, particularly against the background of the high kerosene prices, demands consistent optimisation of the route portfolio, which leads to the suspension of individual, and consequently low-yield, routes. Subject to these points of view, we have decided to suspend our Australian routes to Sydney and Melbourne from end-March 2007. We are currently looking into alternative long-haul destinations that correspond to our strategic orientation and provide adequate contributions to our overall European route network.

‘With the aim of strengthening the quality, market and customer view of the company, and of designing our production processes to be as streamlined and smooth as possible, we have now launched a restructuring of the Group, to be implemented by September. The merged Network & Sales Division now has 10 departments instead of 22, as used to be the case. In future, ‘frontline’ customer services, including Cabin Services, will be merged for the entire Group in the newly conceived Product and Customer Service Division. A Group-wide process and quality control will ensure performance stability.

‘As the foundation for a further productivity increase in all divisions, we have now begun exploratory talks with staff representatives and the trade union over new collective agreements. Our aim is to produce a greater commitment to flexibility by staff in order to effectively counteract the strongly seasonal nature of the aviation business, provide a stronger correlation between salary models and Group performance and to remove excessive industry regulation. In the interest of creating a constructive, objective and harmonious atmosphere within the company, we shall only be presenting the results of these talks once they are complete.

‘In addition to taking extensive measures within the Group, we shall continue to optimise our customer / supplier partnerships. Due to the fact that, in our view, OMV has abused its dominant market position in supplying the Austrian aviation industry with kerosene, and the unjustified additional costs that this is creating for us, we shall now be calling in the competition authorities, since bilateral discussions have not produced a result (see separate press release).

‘Although the Austrian Airlines Group is well positioned both strategically and in the market, all at the company need to be aware that the framework conditions demand rapid and consistent consolidation of our yields and costs, as well as continued productivity increases. There will be no exceptions to this rule, just as there will be no uneconomic, isolated solutions. I remain entirely confident that we can bring the Group back onto a positive results course.’

Improvement in results situation
Despite the considerable additional expenditure on fuel, the EBIT improved by EUR 26.4m in the second quarter to reach EUR 9.1m. The EBIT adjusted for exchange rate valuations on the reporting date and profits from sales of assets increased from EUR 2.1m to EUR 6.1m. Cumulatively, the EBIT improved by 55.6% to EUR - 41.0m in the first half-year of 2006, while the adjusted EBIT reached EUR -47.8m (2005: EUR -64.1m).

Due to a poorer financial result as a consequence of the USD trend, the second quarter reported a loss for the period of EUR -3.9m (previous year: profit of EUR 3.4m). Cumulatively, the loss for the half-year period improved from EUR -79.0m to EUR -61.0m.

 

Sharp increase in revenue and operating revenue
Due to the strong trend in demand, flight revenue rose by 10.7% in the second quarter of 2006 to EUR 642.3m, and to EUR 1,158.9m (+14.4%) in the first six months of the year. Operating revenue rose by 9.9% to reach EUR 694.7m in the second quarter report period, while cumulative operating revenue rose in the first half year by 13.2% to EUR 1,260.3m.

Expenses rise due to high fuel costs
In the first six months of the year, operating expenses reached a total of EUR 1,301.3m (+7.9%). In the second quarter, operating expenses rose by 5.5% to EUR 685.6m, slightly below the increase in production of 5.9% (as measured in available seat kilometers). Expenses on materials and services rose by 13.6% on last year, driven above all by increased kerosene prices. As a result, fuel expenditure in the second quarter increased by EUR 32.1m to EUR 140.2m, leaving it EUR 72.3m up on the first half-year compared to the same period in 2005. The average kerosene price in the second quarter, at USD 684/ton, was 23.9% above the figure for the previous year. As a result, the proportion of total expenditure before exceptionals accounted for by fuel expenditure increased from 16.6% to 20.4% within one year. The resultant cost increases could only be passed on to passengers through surcharges to a limited extent.

With the price of oil rising to more than USD 70/barrel, the company was forced to increase fuel surcharges on its long-haul routes from 5 May 2006. The increase in production, combined with our continuing restrictive staffing policy, enabled us to improve productivity. Personnel expenditure increased to EUR 132.5m (+4.9%). Due to strict cost management in the area of overheads and exchange rate valuations at the reporting date, other expenses fell by 20.6% to EUR 48.2m.

Cash flow from operating activities remains stable
Cash flow from investing activities in the first six months of the year fell from EUR 167.8m to     EUR 10.2m as a result of lower outflows for the acquisition of aircraft and higher inflows from the sale of aircraft and financial assets. Cash and cash equivalents increased in comparison to 31 December, 2005 by EUR 60.1m to EUR 180.9m and reflect an increase of EUR 102,7m compared to the balance sheet date 30 June 2005.

Expansion continues into core markets
In scheduled services, the strategy of expansion continued in the first half-year of 2006. Routes previously being operated by Lauda Air in the charter segment were incorporated in part into scheduled operations. Seen cumulatively, the load factor improved by 2.1 percentage points to 72.1% in the January-June period. In the second quarter, with the load factor stable, availability (measured in available seat kilometers) was expanded by 9.9% and successfully sold in the market. Particularly worth a mention here is the sharp increase in Business Class passengers on long-haul. The number of passengers carried rose by 10.2% to 2,379,782. Overall, revenue in the scheduled segment increased from EUR 902.7m to EUR 1,047.9m (+16.1%) in the first half-year. The EBIT improved to EUR -38.5m in the report period (comparison period 2005: EUR -81.4m). 

The charter segment reported a reduction in availability of 12.3%. The number of flights operated fell particularly sharply in the long-haul segment, although this reduction was partly a result of the transfer of individual routes into the scheduled segment. Despite reduced availability, the number of passengers rose by 2.2% to 490,838. Although there was a sharp fall in production, revenue in the charter segment in the first six months of the year remained stable at EUR 111.0m             (2005: EUR 110.4m). The EBIT improved from EUR -13.5m to EUR -4.6m. 

Taken by geographical segment, the growing availability saw a strong increase in long-haul traffic. The biggest increases in passenger volume were reported in the Far East region. On short- and medium-haul routes, too, scheduled traffic growth was exceptionally strong. The biggest growth was achieved on routes to Scandinavia, Switzerland, the Middle East and Central Europe.

In the long-haul charter segment, there was a reduction in availability and a shift into scheduled business in the form of integrated long-haul scheduling. Popular seasonal holiday destinations such as Cancun, Varadero, Punta Cana and Montego Bay will once again be served in the winter of 2006.

Fleet adjustment continues
One Airbus A319 and one B737-800 were newly transferred into the fleet in the first half-year. Fixed orders are currently in place for one B777-200ER, with delivery due to take place in January 2007. Further important steps were taken in the strategic fleet adjustment. One Canadair Regional Jet   CRJ-100 was sold and transferred at end-March 2006. One Airbus A340-200 was also taken out of service at end-March, and transferred in May.

At end-June 2006, due to the consistent reduction in unnecessary capacity and the fleet adjustment, one Boeing B737-600, one Dash-8/300 (with purchase agreement) and three Embraer 145 were being leased outside the Austrian Airlines Group. One Boeing B737-300 and one Fokker 100 were in use at the Group’s Slovak Airlines subsidiary.
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