Austrian Airlines AG (Österreichische Luftverkehrs AG)
Austrian Airlines AG (Österreichische Luftverkehrs AG)
Sales: EUR 1.38 billion (1998)
Stock Exchanges: Vienna
Ticker Symbol: AUAV.VI
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation; 481211 Nonscheduled Chartered Passenger Air Transportation; 56152 Tour Operators; 532411 Commercial Air, Rail, and Water Transportation Equipment Rental and Leasing
Austrian Airlines AG (Osterreichische Luftverkehrs AG) has traditionally been known as “little brother” to its German rival, Lufthansa. Its strategic location at the crossroads of East and West helped Austrian Airlines (AUA) attain early dominance in the Eastern European market and the uncongested hub at Vienna International Airport has allowed for ferocious growth. Strategic alliances, such as with long-time partner Swissair and, more recently, the Star Alliance, have extended AUA’s reach to all corners of the world. Although it carries three million passengers a year, the company typically makes more money through its financial services companies.
Early 20th Century Origins
Austria was a pioneer in scheduled international air service, introducing a Vienna-Krakow-Lvov-Kiev route on April 1, 1918. Vienna-Budapest followed within a few months. The original Osterreichische Luftverkehrs-AG (ÖLAG) operated three-engined transports between 1923 and 1938 and never lost a passenger in nearly five million miles. ÓLAG was the fourth busiest European airline in 1935 after Deutsche Lufthansa, KLM, and Air France. It became a part of Deutsche Lufthansa in 1938.
Civil aviation was banned by the Allies after World War II until the signing of the State Treaty in 1955. The new Austrian Airlines (AUA) was founded on September 30, 1957 as a government-owned company with a start-up capital of A$ 60 million. The next year, AUA began flying four chartered Vickers Viscount 779s. Vienna to London was its first scheduled route; soon AUA was flying to several capital cities across continental Europe, including Rome, Warsaw, and Paris, as well as a few important German-speaking destinations. The company carried more than 25,000 passengers and 186 tons of freight in its first year of operations.
AUA bought six Vickers Viscount 837s of its own in 1960. Domestic air service was launched with a DC-3 in January 1963. AUA’s first jet, the Caravelle VI-R, began operations the next month. By the end of the decade, AUA had begun flying a Vienna-Brussels-New York route in conjunction with Belgian carrier Sabena, which supplied the Boeing 707 flown on it. AUA received its first DC-9 in June 1971.
AUA underwent an extensive reorganization in 1969. Thereafter, it focused on developing its role as the link between Eastern and Western Europe. In 1972, it entered into a technical cooperation agreement with Swissair, the beginning of a close, long-lasting alliance. AUA also posted its first annual profit: A$ 8.6 million. It would remain profitable for the next two decades. In fact, earnings grew markedly, reaching A$ 17 million in 1972 and A$ 20 million in 1973. In 1976, it began paying its first dividend based on 1975 earnings of A$ 22 million.
In 1974, the growing carrier set up its own maintenance facility. Later, with 1977 earnings of A$ 35 million, AUA acquired a 50 percent interest in WA-Wien Airport Restaurant und Hotelbetriebsges.m.b.H., a catering company. This later became Airest Restaurant und betriebsges m.b.H., expanding beyond Vienna to several airports. In 1981, the company bought 50 percent of Touropa Austria, the country’s leading tour operator.
In 1977, it placed its first orders for the DC-9-80. Later known as the MD-80, this plane would become a workhorse of the AUA fleet. In 1980, AUA and Swissair became launch customers for the DC-9-81 variant. In 1984, along with Finnair, AUA was a launch customer for the MD-87. The next year, it ordered two Fokker 50s for shorter routes.
In the mid-1980s, AUA was carrying two million passengers a year and posting profits of A$ 95 million. It started its own travel organizer, Austrian Holidays Ltd., London, in 1987. The next spring, AUA began listing shares on the Vienna stock exchange. Swissair acquired three percent, and the Republic of Austria remained the majority shareholder.
After the offering, AUA had cash and the newest planes kept arriving. Its first Airbus 310 was delivered in late December 1988 and an MD-83 was ordered the next year. Earnings remained robust, with profits of A$ 154 million in 1989. That May, All Nippon Airways bought 3.5 percent of AUA’s shares as Swissair raised its holdings to eight percent. A year later, both increased their holdings again, to nine percent and ten percent, respectively. AUA placed the largest aircraft order in Austria’s history in October 1990. The 13 Airbus A320s and A321s, due for delivery in 1996, were valued at ATS 22 billion. However, with existing planes flying only half full, AUA was not quite prepared for the coming deregulation of European aviation.
Expanding Horizons in the 1990s
Profits slipped to A$ 130 million in 1990. That year, AUA joined the European Quality Alliance (EQA), which then included SAS, Swissair, and Finnair. This extended AUA’s long period of cooperation with Swissair. All four carriers operated the DC-9/MD-80 series of aircraft, making shared maintenance logical. This new teaming, however, extended into route selection and marketing as well. Together, the four airlines employed 80,000 people and carried 30 million passengers a year. They controlled 42 percent of the market for western-based carriers flying into Eastern Europe.
The dismantling of the Soviet Empire gave Austrian Airlines access to exciting new markets in Eastern Europe. With a strategy of connecting as many points as possible, AUA added frequent service to carefully selected destinations ranging across the Baltics, Ukraine, and Russia. It even fielded six flights a day to Prague and Budapest. By the mid-1990s, the Eastern European market was the world’s second fastest growing after Southeast Asia, accounting for 40 percent of AUA’s passenger load. Cooperation with local carriers extended AUA’s reach further. These new routes provided the rationale for more larger, long-range aircraft.
In 1993, KLM, SAS, Swissair, and AUA discussed forming a new huge airline, named Alcazar after a Spanish fortress with four towers. It would have hubs devoted to specific regions: Copenhagen for northeast Asia; Amsterdam for the Americas; and Zurich for the southern hemisphere and southeast Asia. AUA would have held ten percent of the shares to the other carriers’ 30 percent each. As Austria had not yet joined the European Union, Alcazar would have improved AUA’s position with the coming liberalization of the aviation industry. Simultaneous talks with Air France, Lufthansa, and All Nippon Airways were revealed, however. Alcazar was to have been based at Amsterdam, with Swissair head Otto Loepfe as CEO. According to Air Transport World, it was KLM’s insistence upon choosing Northwest Airlines as a U.S. partner that crumbled the concept. KLM owned 20 percent of Northwest. The other partners, however, preferred Delta Air Lines, feeling it to be more financially stable.
After Alcazar, AUA, Swissair, and SAS focused on their own existing EQA alliance. Each also looked for a partner among the European “big three”—British Airways, Air France (which acquired 1.5 percent of AUA’s equity), and Lufthansa (LH). Both LH and Swissair seemed likely merger possibilities for AUA. AUA promptly announced its own code-sharing link with Delta on the New York-Vienna route, whereupon Delta would rent seats on AUA’s planes. The EQA was scuttled when SAS teamed up with Lufthansa, leaving AUA vying for a role in the Delta/Singapore Airlines/Swissair Global Excellence alliance.
AUA lost millions of schillings in 1993 and 1994 as the Alcazar drama played itself out. In addition to a global recession in the wake of the Persian Gulf war, the carrier faced relentless cost competition from Lufthansa and Lauda Air. A new dual presidency was appointed to meet the crisis. Marketing executive Dr. Herbert Bammer and Mario Rehulka, formerly chief of charter operations, took over in July 1993 and immediately set out upon a restructuring of the company. The two felt AUA had far too many vice-presidents. They cut 900 other jobs, leaving a work force of about 3,900. Since the company had so many new planes, heavy maintenance jobs were cut significantly. Some remaining employees worked longer hours.
Forty successful years in aviation. As an Austrian aviation company, we have been providing services tailored to our customers on the global markets for 40 years now. As an Austrian aviation group, we work together with our partners Lauda Air and Tyrolean Airways to serve all segments of air transport, from scheduled and charter service to cargo service. To round out and optimize our range of services, the Austrian Airlines Group comprises numerous other companies associated with flight operations in the transportation, tourism, financing, IT and insurance sectors. We are the market leader in Austria, our home market. Our powerful domestic position provides a strong base for developing other expanding markets. At the center of these efforts is our further buildup of Vienna as a hub between West and East. Strategic alliances are the foundation upon which we are expanding our business. Through our close cooperation with other airlines, we offer our customer essential benefits while improving our own market position.
In March 1994, AUA bought a 42.85 percent stake in Tyrolean Airways, into which it incorporated its subsidiary Austrian Air Services, Osterreichischer Inlands und Regional-flugdienst Gesellschaft m.b.H. This turned tiny Tyrolean, based in Innsbruck, into a serious regional airline, flying more than a million passengers a year. AUA enjoyed the benefits of a vigorous tourist market through its charter subsidiary Austrian Airtransport and Touropa Austria, wholly owned since December 1994. Charters accounted for half its European traffic.
AUA started service to Beijing, Tokyo, and Johannesburg with two Airbus A340s in early 1995. These long-range jets permitted the elimination of fueling stops on many routes. A new corporate identity appeared on new “X-Large” Fokker 70 Jets delivered in October 1995. New staff uniforms were unveiled with the January 1996 maiden flight of the new Airbus 321 from Vienna to Moscow. In the mid-1990s, AUA’s network incorporated 80 cities in 46 countries on four continents—an impressive task for a fleet of just 29 planes, as Air Transport World noted. AUA turned a $5.3 million profit in 1995, reversing two years of losses. It had to contend, however, with a domestic challenger, Lauda Air, founded by champion race car driver Niki Lauda in 1979 and 39.7 percent owned by Lufthansa.
New Alliances at the End of the Millennium
Swissair’s purchase of a 49.5 percent stake in Sabena brought its partner AUA closer to the Belgian flag carrier. In late 1995, AUA, Swissair, and Sabena pressed on with a concept similar to Alcazar. Joined by Delta, they asked for a U.S. antitrust exemption similar to the one that allowed KLM and Northwest to join forces. By this time, AUA also had agreements with EVA Air, Asiana, KLM, Alitalia, Air China, and Air Mauritius. Swissair, AUA, and Sabena placed a $1 billion order for new Airbus A330 widebody jets in December 1996. Their first joint procurement order also included the lease of eight more A330s. In February 1997, the trio’s collaboration with Delta took wing under the “Atlantic Excellence” banner.
Lufthansa sold AUA a 19.7 percent stake in Lauda Air in April 1997. AUA had already acquired 9.7 percent from Niki Lauda and 5.9 percent from a private investor, giving it 36 percent control of voting capital. This kicked off consolidation among Austria’s three carriers, AUA, Lauda Air, and Tyrolean. Lauda Air, a lean, stylish operator, specialized in leisure travel to Asia and the Pacific. It had 1,270 employees to AUA’s 4,040 and Tyrolean’s 810. Joint sales and increased bookings were expected to save the three carriers as much as $200 million per year. A reduction of fees at Vienna International promised more savings. In fact, profits of ATS 189.4 million for 1998 were the best in AUA’s history.
Many alliances shifted in the late 1990s. In July 1998, AUA joined the Qualiflyer Group with ten other European airlines including Swissair, Sabena, Air Portugal, Turkish Airlines, Air Littoral, and Air Europe. In May 1999, All Nippon Airways sold its shares to Australian investors. After a capital increase, the Republic of Austria was left with a 39.7 percent stake. Delta Air Lines dropped its Atlantic Excellence partners (AUA, Swissair, and Sabena) in October 1999 to concentrate on its relationship with the much larger Air France. Swissair and Sabena were themselves working more closely with American Airlines on trans-Atlantic code shares. AUA announced plans to join the massive Star Alliance in the summer of 2000. Its expansion plans for the first few years of the new millennium called for an investment of EUR 1.5 billion to bring its fleet to 100 aircraft.
AUA Beteiligungen Gesellschaft m.b.H.; Austrian Airtransport, Ósterreichische Flugbetriebsgesellschaft m.b.H. (80%); Tyrolean Airways, Tiroler Luftfahrt-AG; Lauda Air Luftfahrt AG (35.9%); GULET TOUROPA Touristik (50%); Ósterreichische Verkehrsbüro AG (13.4%); TRAVIAUSTRIA Datenservice fur Reise und Touristik Gesellschaft m.b.H. (61%); Austrian Airlines Lease and Finance Company Limited (Guernsey); AUA Versicherungs-Service AUA Versicherungs-Service Gesellschaft m.b.H.; Airest Restaurant- und Hotelbetriebsgesellschaft m.b.H. (35%); Austrian Aircraft Corporation, Ósterreichische Luftfahrzeug Gesellschaft m.b.H. (51%); AVICON Aviation Consult Gesellschaft m.b.H. (38%); ACS Aircontainer Services Gesellschaft m.b.H. (76%); Ósterreichische Luftfahrtschule Aviation Training Center Austria Gesellschaft m.b.H. (26%).
Airline Companies; Tourism/Sales; Financial and Insurance Services; Other Services.
Deutsche Lufthansa AG.
- Ósterreichische Luftverkehrs-AG (ÓLAG), precursor to the current Austrian Airlines, takes wing.
- Deutsche Lufthansa acquires ÓLAG.
- Allies ban civil aviation in Austria.
- State-owned Austrian Airlines (AUA) founded.
- AUA commences domestic service after years of international flights and receives first jets.
- Extensive reorganization focuses company on the East-West connection.
- AUA begins technical cooperation with Swissair.
- AUA pays first dividend.
- Initial public offering launched in Vienna.
- AUA joins European Quality Alliance with SAS, Swissair, and Finnair.
- New dual presidency begins cutting jobs and costs as proposed Alcazar alliance with Swissair, SAS, and KLM falls apart.
- AUA signs huge $ 1 billion Airbus order with Swissair and Sabena.
- AUA joins Qualiflyer Group with ten other European airlines.
Adams, Jeremy, “Hedging Secrets of Ambitious Austrian Airlines,” Corporate Finance, February 1997, p. 29.
“Austrian Airlines Move to Closer Cooperation,” Airfinance Journal, April 1997, p. 19.
Benisch, Reginald, “Vienna: Austrian Airlines Compete,” Europe, November 1997, pp. 39-40.
“Case Study: Austrian Airlines,” East European Markets, August 2, 1996.
Feldman, Joan M., “Strength in Numbers,” Air Transport World, July 1997, pp. 161-63.
“Four-Airline European Cooperative Alliance Sets Its Sights on Eastern European Market,” Aviation Week & Space Technology, May 14, 1990, pp. 95 +.
Goldsmith, Charles, and Margaret Studer, “Swissair, Sabena, Austrian Airlines Will Buy Jets—Joint-Fleet Purchase Marks Extensive Collaboration; Delta Will Participate,” Wall Street Journal, December 20, 1996, p. 9A.
Hill, Leonard,” ‘Grand Prix’ Airline,” Air Transport World, July 1997, pp. 165-67.
——, “Up from the Fiscal Brink,” Air Transport World, February 1996, pp. 80 +.
Norden, Walter, Flieg mit uns: Reportage vom Werden und Wirkden der osterreichischen Luftverkehrsgesellschaft Austrian Airlines, Vienna and Munich: Verlag fur Jugend und Volk, 1965.
O’Connor, Anthony, “Austria’s Airline Evolution,” Airfinance Journal, October 1997, pp. 24-27.
Reed, Arthur, “The Tumbling of Alcazar,” Air Transport World, January 1994, pp. 33 +.
—Frederick C. Ingram