Austrian Airlines Repositioning

With the first half-year of 2003 characterised by negative trends such as war in Iraq, the outbreak of SARS and continuing weakness in the global economy, the Austrian Airlines Group generated Earnings Before Interest and Taxes (EBIT) of EUR -23.3m. Profit before tax (EGT) for the half-year was EUR -28.6m, compared to EUR 4.3m for the comparison period the previous year. Based on the developments in the first half-year, the full year result is forecast to break-even at EBIT level or to be slightly positive respectively. Due to the negative effects outlined above, the passenger volume of the Austrian Airlines Group fell by 5.8 % in the first six months of the year to 3,847,698 million passengers carried.
Mr. Vagn Soerensen, Chief Executive Officer of the Austrian Airlines Group, made the following statement upon the release of the balance sheet results for the half-year: “By introducing two cost-savings programmes at the beginning of this year, making extensive cuts in production and launching a number of offensive marketing campaigns, we have succeeded in offsetting the negative trend to an extent. Now, having come through a difficult six months, we intend to go on the offensive. We will use the eastward expansion of the European Union to boost our core business and make active use of the market for East-West/West-East transfer. We have set ourselves the objective of increasing our market leadership in this region by a further 50 % over the next five years. In addition to this, we will be bringing a range of innovative new products onto the market in the autumn, integrated into a new market presence.”

Fall in result:
In the first half-year, the result fell in comparison to the previous year. The EBIT reached a level of EUR -23.3m, a fall of EUR 53.0m, while profit before tax was EUR -28.6m, compared to EUR 4.3m in the same period last year. At the time of writing, 2003 had primarily been characterised by weak economic activity, war in Iraq and the outbreak of SARS. In this context, we anticipate the full year result to break-even at EBIT level or to be slightly positive respectively.

Thomas Kleibl, Chief Financial Officer of the Austrian Airlines Group, made the following statement on these results: “Despite falling demand and a similar revenue trend, we succeeded in reducing our interest-bearing liabilities by a further EUR 120m in the first six months of this year. In the second half of 2003, we need to concentrate our efforts on raising efficiency by reducing costs and increasing revenue. Structural weak points such as the competitiveness of AUA Flight Operations have to be solved in discussions currently underway between the social partners and we need to bring down the charges of certain external providers within further negotiations!”

Reduction in revenue:
Despite an increase in passenger kilometers, flight revenue fell by 8.7 % from EUR 960.2m to EUR 877.1m due to changed patterns of demand and reduced yields. Exchange rate valuations of foreign currency liabilities at the reporting date produced other operating income. The operating revenue of the Austrian Airlines Group in the first half-year of 2003 was EUR 1,066.7m, down by 8.0 % on the figure for the comparison period last year (EUR 1,160.0m).

Substantial reduction in expenditure:
Operating expenses in the first half-year fell by 3.6 % to EUR 1,090.0m. The rapid implementation of the cost-cutting programme (down by 5% for the full year and by 10% for a period of three months) began to have a more significant effect, particularly in the second quarter, and the Group succeeded in forcing down its operating expenses by a full 13.0 %.

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Despite this positive development, it continues to be necessary to reduce costs, particularly those resulting from Austrian Airlines Flight Operations and the charges of certain external service providers.

Due to its policy of hedging fuel prices since 2001, the Austrian Airlines Group was able to offset the effects of oil price increases in the first half-year of 2003. Up to 80 % of these price rises came in reaction to the conflict in Iraq.

Liabilities reduced:
As the Group worked consistently to reduce its liabilities, it made further significant progress. Compared to the position at the end of 2002, interest-bearing liabilities fell by EUR 120.9m. The level of net gearing fell to 267.7 %, compared to 290.4 % as at 31 December 2002.

Fall in cash flows from operating activities:
Due to the reduction in the inflow of funds from working capital compared to the first half-year of 2002, cash flows from operating activities fell from EUR 305.6m last year to EUR 149.0m in the reporting period.

As a result of the Group’s sharply reduced volume of investment, its stocks of cash on hand and at bank and short-term investments increased by EUR 78.6m to EUR 313.7m compared to the end of last year.
Marketing offensives partially offset negative traffic trend:
Capacity on scheduled services increased in the first half-year of 2003 compared to the weak first six months of 2002. Available seat kilometers rose by 5.9 %. However, due to the global uncertainty surrounding the Iraq conflict, SARS outbreak and weakness in the economic cycle, revenue passenger kilometers - used as a measure of demand - increased by just 1.9 %. The passenger load factor fell to 66.0 % (-2.6P) as a result. The number of passengers carried fell by 7.0 % to 3,254,238. Revenue in the scheduled segment reached EUR 768.9m, compared to EUR 854.8m the previous year, a fall of 10.0 %. EBIT for the scheduled segment fell from 26.0m to EUR -20.1m.
Due to the rapid conception and implementation of its global special offers and fare offensives, the Austrian Airlines Group managed to acquire new business in a period when neither the market nor demand grew. Chief Commercial Officer Dr. Josef E. Burger summed up the Group’s successful strategy for dealing with a difficult period across the industry: “We succeeded in bringing in almost 300,000 additional bookings with our two Magic Price Offensives. We’ll be launching further innovations in the autumn, and using these to boost demand in every one of our customer groups. In addition to these initiatives, we will try to capture parts of the business Swiss left with its withdrawal from selected markets!”
In the charter service segment, production increased compared to the preceding year. Available seat kilometers increased by 4.8 %. As levels of demand became progressively weaker, however, revenue passenger kilometers fell by 1.0 %.
Revenue in the charter segment totalled EUR 108.2m, compared to EUR 105.4m the previous year. EBIT fell from EUR 1.5m in the first half-year of 2002 to EUR -4.4m in the same period in 2003.

Full Results www.aua.com
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