FLUG REVUE June 2004: Austrian Airlines turnaround

AUSTRIAN PUSHES FOR EXPANSION

By Christiane Rodenbücher/SST

“A difficult year lies behind us. The first six months were particularly difficult,” says Vagn Sörensen, Chief Executive Officer of the Austrian flag carrier, commenting in an interview with FLUG REVUE on the recent results for 2003, during which it carried some 8.5 million passengers. This four percent decline on the previous year he attributes primarily to the SARS crisis, the Iraq war and tougher competitive conditions.

Airbus A319

“We did best on the long-haul routes. Utilisation in that area was high and growth was above the European average,” says the 59-year-old Dane. The routes to China and Japan, flown with A330's and A340's, were particularly successful, also the flights to Australia. Austrian is the only airline to fly direct from Europe to Australia, using Boeing 777's from the inventory of Lauda Air. This year the Austrian Airlines Group expects to carry a total of 9.4 million passengers. The first quarter of 2004 has already seen double-digit growth in passenger numbers, with the long-haul routes up by as much as 30 percent. This has been accompanied by an impressive 5.9 percent increase in utilisation to 70.7 percent.

Seven percent more seat miles are on offer this year. With a workforce of 7,200, the strength of Austria's national carrier lies in its route network in the regions which up to now have experienced strong growth, and it is expanding its summer flight schedules by a further 102 connections on top of the previous 461 weekly flights offered. As well as the long-haul destination of Australia, which is being expanded to include Singapore, the airline is planning higher frequencies for its Bangkok and Japanese routes in Asia, and Shanghai is now to be offered for the first time. Otherwise, central and eastern Europe are the strategic focus. As a long-established hub, Vienna is extremely well placed for this traffic to the east.

“The eastwards focus is also based on cultural and economic relationships. After Germany, Austria is often the second most important trading partner in east European countries,” explains Sörensen. With 31 destinations in central and eastern Europe, Austrian is currently the biggest supplier in this region. “Expanding in the markets in which we are already active has obvious advantages: firstly, it costs little and secondly it is less risky,” explains Austrian's CEO. Another point of focus lies in networking these well developed markets. With an extra 60 flights in the 2004 summer flight schedule, Austrian is expanding eastwards. One example is the Caucasus, which in the opinion of the Austrians, who currently serve 123 flight destinations in 64 countries, continues to offer a lot of potential. The routes offered to Austria's neighbours are to be boosted by new services to Ljubljana, Zagreb, Tirana, Bucharest and Prague, aimed at extending the catchment area of Vienna Airport.

“We have also added Bratislava to our flight schedule, and from there we shall be flying to Brussels, Paris in London,” says Sörensen. To participate in the expected traffic growth in the east European countries, where sales and purchasing power are expected to rise in the wake of EU enlargement, Austrian will even be stationing one of its Boeing 737's in Bratislava. If all goes well, Austrian will also base aircraft in other east European cities.

Even the corporate philosophy follows the economic pull towards the east, according to Sörensen: “We are putting this strategy into effect and are concentrating on specifically building up competencies, linguistic skills and cultural understanding for that area.” After over two years of rigorous reform, which have seen unit costs fall by 20 percent and €800 million of debts repaid, the airline now feels “in a better position to go on the offensive.”

With a strong cost assessment, internal process optimisation and reorganisation of business fields, the Austrian Group succeeded in 2002 in making a start to the process of turning things around. Its earnings before interest and taxes (EBIT) rose from €41.4 million in 2002 to €63.3 million in 2003. Its profit for the year rose from €42.8 million to €45.8 million, even though revenues declined from €2.2 billion to €2.0 billion.

A strike by Austrian pilots delivered a hefty blow to the airline last year, costing around €4.5 million. Nevertheless, the company's management is satisfied with the results of the negotiations: the pilots have accepted lower salaries, pensionable age has been lowered, new working hours and rest periods have been agreed along with a crisis package which, for example, allows for reduced working time during an economic recession. The four directors have set a shining example: since 2002 they have foregone an average 10 percent of their annual salary.

New solutions have also been found for Austrian's subsidiary, Lauda. Only Austrian arrows has still to be sorted out. Pilots of this Austrian subsidiary have up to now been paid a mere 46 percent of the salaries at the parent company, and their pension provision was also a lot less generous. Recently they have seen an improvement in their lot. Since 2000, Austrian arrows has no longer shared in the profits of the company, although the highly profitable regional has often found itself covering the losses of other parts of the Group. According to Sörensen, in future every employee of the Group will have the opportunity to participate in a company bonus scheme.

According to the Austrian CEO, production costs are everywhere lower in regional transport than in the parent companies. He attributes the different conditions at Austrian to the two different product lines. “The two cultures are quite different. The reason why Tyrolean and Austrian arrows are so successful is that those airlines are lean, cheap and simple. The structural difference is also reflected in the pay. Tensions are unavoidable here.” To stay competitive, he argues, it is necessary to position oneself in such a way that one can survive on the market even in bad times.

As part of the restructuring process, the brand has undergone a makeover. Here the company has gone for a mixture of tradition and optimism. The red arrow on a white background (a reference to Austria's national flag) has become more pronounced, and its shape is supposed to symbolise an aircraft taking off. Austrian arrows is following the parent company with the new standard design. On the other hand, Lauda is keeping its old colours. “Lauda is strong brand with a reputation for innovative drive, quality and good service. It has also established itself extremely successfully in the chartered sector, so we do not intend to change its external appearance at all.”

Another element in Austrian's redirection is its pricing policy. “Consumer behaviour has changed, customers are looking for a fairer price:performance ratio. As an industry, perhaps we have neglected that somewhat,” he admits. For this reason the Economy Class has been simplified, while the Business Class product has been upgraded. The 14 low-cost airlines that operate in Austria have also made changes. “We have to keep up with trends in this segment, so we have developed a business model with all price elements, although we are not planning to set up our own no-frills airline,” says Sörensen, commenting on the new price structures. Austrian tickets are now available from €70. On routes which are subject to fierce competition, such as from Vienna to Cologne/Bonn, Berlin, Hamburg, Stuttgart or Düsseldorf, fares have been cut. “To expand our main markets, we need a high load factor, which means that we also have to be strong in the local transport.”

The fleet, in which average aircraft age is 6.2 years, is to be brought in line with the economic conditions. In the regional area, Austrian arrows is to concentrate on the Dash 8-300/Q400, the CRJ and the Fokker 70. Only at the end of March Austrian arrows announced it was buying nine second-hand Fokker 100's from American Airlines' surplus stocks. On the other hand, the existing Embraer 145 jets have been leased out for several years. The aircraft featured in the parent company's scheduled flight programme are primarily the Airbus A340, A330, A321 and A320. The A319 arrived in March,while the MD-80 will be retired by 2005. Lauda's charter business is operated with Boeing types, mainly the Boeing 737-800. The company's management plans to retain both types in the future as well.

The Austrian Group expects further concessions in the future from Vienna airport, over 60 percent of whose turnover is contributed by Austrian, according to its CEO. “We need totally competitive conditions, other companies have to share the healing process too,” says Sörensen. Costs have fallen as far as customers are concerned, therefore the external costs must fall as well. “Our costs at the airport are too high. That's why our management has put forward a series of cost proposals.” A reduction in costs, he argues, is important when one considers that Austrian is continually expanding the infrastructure at the airport.

In Vagn Sörensen's view, the charges levied at Vienna airport are higher than the norm. Relatively little revenue is generated from the airport's non-aviation activities. Moreover, the airport's high personnel costs reflect the fact that productivity is not as high as it could be. Vienna International Airport is making fantastic profits, but this is at the expense of airlines and customers. All the parties should have a financial stake as part of a balanced value chain. Nevertheless, the CEO of Austrian is optimistic: “I am confident that we will continue to work together constructively in future. After all we have the same goal: more passengers.”

From page 22 of FLUG REVUE 6/2004

Last updated 7 May 2004

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