Austrian Airlines forced to think strategically as investor walks away

So news that its Middle Eastern white knight has pulled out of a proposed investment has forced a review of the airline’s future structure. This is perhaps not a bad thing.

Vienna Airport reported 15% passenger growth in March, assisted by an early Easter; traffic to Eastern Europe was up a remarkable 24%. A quarter of the total throughput was transfer passengers, so Austrian should be doing reasonably well. However, the aggressive entry of lower cost point-to-point airlines, partly helped by Vienna Airport’s helpful website, which gives prospective passengers the ability to construct their own routings, is taking its toll on Austrian’s market share – and yields.

So, while Saudi Sheikh Al Jaber’s pulling out is a short term negative – and has not immediately helped its market capitalisation - the reality is that Austrian would be better placed establishing a more comprehensive strategy that will serve it better in the longer term.

Apart from the attractiveness of a slumping share price, the Sheikh’s interest had been attracted by Austrian’s growing role in the premium travel market to the Middle East. As a prime gateway to eastern Europe, Vienna offers excellent connections for the burgeoning business traffic between the two regions.

Austrian’s management has previously been focused on a future as an independent airline, but it is now becoming “neutral to questions of ownership”. This shift explains why the airline is apparently in discussions with carriers in the Middle East – reportedly Emirates Airline – with a view to some form of partnership. Lufthansa, which has been linked with virtually every needy European carrier, is also reportedly interested.

Support from partnership with a strong, non-European airline would give Austrian the independence it seeks from its powerful airline neighbours in Europe. It might coincidentally suit Emirates too, or even Abu Dhabi’s Etihad. Emirates is suffering badly from the slowdown in deliveries of its fundamentally strategic investment in A380 expansion, a development that could cause it to look more to alliances (and/or investments), where previously it has chosen to go it alone.

Emirates also last month terminated its long-standing management role in SriLankan Airlines, so has no further distraction in that direction. And both Emirates and Etihad have developed a very strong network of connections to smaller gateways in Europe, as well as to the larger hubs.

With timing now looking good, Austrian’s apparent loss could be a major long term gain.