Offering an overview of the Austrian Airline Group’s annual results, which were released today, Chief Executive Officer Alfred Ötsch said: “In the business year 2006, the Austrian Airlines Group has introduced crucial restructuring steps and started out on an important new course. We have significantly improved our operating performance and result. The key factors in this have been the increase in our flight revenue and the significantly stronger growth in our yields compared to unit costs. On the other hand, extraordinary effects – overwhelmingly the result of the restructuring of the Group’s long-haul segment and the personnel cost provisions this necessitated – had a negative influence on the result. In this challenging environment, it proved impossible to achieve a positive result. Following the successful conclusion of the capital increase, however, we have taken another important step towards completing our restructuring programme, and are now in a position to implement key measures more quickly. We are pursuing a clear strategy focussing on the markets of Central and Eastern Europe, basing that strategy on a well-established, strong brand. We shall continue to move forward with our quality and product offensive in 2007.”

Improvement in result situation
Although the adjusted EBIT of the Group remained marginally negative at EUR –8.3m, this figure was up by EUR 43.7m, a major improvement on the previous year. The unadjusted EBIT including extensive extraordinary positions - mainly provisions for the redimensioning of long-haul routes, exchange rate gains and value adjustments for Slovak Airlines – improved from EUR –100.0m to EUR –89.0m.

The balance of financial income and expenses improved in the report period, overall the financial result of the Austrian Airlines Group decreased by EUR 19.5m to EUR –49.1m in 2006 (2005: EUR –29.6m) due to exchange rate-related depreciations of securities in the report period and appreciations in 2005. On this basis, the result before tax reached a value of EUR –138.1m (2005: EUR –129.6m). Overall, this produced an annual result of EUR –129.9m (2005: EUR –129.1m). However, one of the most important factors in this result trend, which was below expectations, were the continuing high kerosene prices experienced in 2006, which generated total additional costs for the Group of EUR 75.7m.

Chief Financial Officer Thomas Kleibl made the following statement on the balance sheet of the Austrian Airlines Group: “The key objectives of the Austrian Airlines Group in 2006 were to continue reducing the Group’s liabilities and to improve the balance sheet structure. The past year has seen us bring down net debt from EUR 1,083.5m to EUR 715.7m and improve our net gearing (net debt in relation to shareholders’ equity) from 191.6% to 91.2% through the increase in our shareholders’ equity. The capital increase successfully completed last year also helps to reinforce our equity position, making us substantially more resistant to external crises.”

Increases in revenue, operating revenue and yields
The Austrian Airlines Group succeeded in improving its flight revenue by 8.8% to EUR 2,458.8m in 2006 (2005: EUR 2,260.5m). This increase was considerably stronger than the rate of expansion in production of 1.6% (measured in ASK) over the same period. The key factors here were the improved market environment, the increase in passenger numbers, the fuel surcharges and higher average revenues achieved through the introduction of a traffic flow management system designed to optimise average revenue.
Other revenue also increased slightly in the report period, at EUR 134.4m (2005: EUR 132.4m), while other income fell from EUR 92.9m to EUR 69.6m. In total, operating revenue rose by 7.1% to reach EUR 2,662.8m.

The yields of the Austrian Airlines Group improved substantially in the report period 2006. A number of different factors played a role in this result, including the partial offsetting of increased fuel costs with continued fuel surcharges.

Increase in expenses
As in the preceding business year, the expenses trend of the Austrian Airlines Group was strongly influenced by the development of kerosene prices in the report period. Another significant factor was the increase in personnel cost provisions for the redimensioning of the Group’s long-haul activities and the reduction in staff numbers this involved. Overall, however, the operating expenses of the Group increased at a rate of 6.4% to reach EUR 2,751.8m, markedly less than the rise in operating revenue. While total expenses for materials and services increased by 7.3% to EUR 1,659.4m in the report period, the growth in fuel expenses – which rose by 16.7% to EUR 530.0m – was substantially above the expansion in production of 1.6%.

The background to this increase in costs is the trend in the price of kerosene, which climbed sharply above the preceding year’s figure once again. The average price of kerosene, USD 562 per ton in 2005, rose to USD 645 per ton in 2006, also exceeding the internal planning assumptions of the Austrian Airlines Group of USD 615 per ton. The trend was uneven over the course of the year: while the price of kerosene increased steadily throughout the first half of 2006, reaching a new record level of more than EUR 750 per ton at the beginning of the 3rd quarter, by September it had fallen back to around its level at the beginning of the year. By the end of the year the kerosene price eventually stood at approximately USD 600 per ton.

The fuel hedging policy of the Austrian Airlines Group is based on the comprehensive evaluation of all associated risks. In the past, however, the tight financial position of the company has meant it has been unable to engage in hedging. Now, following the successful completion of the capital increase, the Group is set to launch a staged hedging programme to strategically hedge against future fluctuations in kerosene prices. The aim is to hedge anything up to 20% of the Group’s annual kerosene requirement on a step-by-step basis.

In an effort to partially absorb additional expenditure on kerosene, the Austrian Airlines Group – like the majority of its competitors – has levied staged fuel surcharges since May 2004, which appear as additional revenue in the flight revenue position. The company has only been able to cover a proportion of its additional costs with these surcharges, however.

The personnel expenses of the Austrian Airlines Group increased by 21.7% to EUR 611.3m in the report period. This increase was primarily the result of personnel provisions made in the course of the restructuring, which had an effect on net income. When adjusted to account for the effects from the formation of personnel provisions during the redimensioning of the long-haul segment, the Group’s personnel expenses increased by EUR 27.9m. This is the equivalent of an increase of 5.6% compared to the previous year.

Rise in net cash flow from operating activities
At EUR 360.2m, the net cash flow from operating activities of the Austrian Airlines Group was 38.6% above the level for the previous year. This was based on an improvement in working capital. A greater increase in provisions and a reduction in receivables also contributed to this figure,particularly compared to the previous year.

Despite having clearly oriented its business strategy towards growth in CEE, the Austrian Airlines Group continues to pursue a restrictive investment programme. In 2006 no further aircraft orders took place. An Airbus A319 and a Boeing 737-800 which have been incorporated into the fleet in 2006 strengthen and modernize the medium haul segment.

Despite these acquisitions, payments (investments) from the purchase of tangible and intangible assets fell by 33.6% in the business year 2006 to EUR 194.7m (2005: EUR 293.4m). Due to the lower investments in aircraft, net cash flow from investing activities improved to EUR –2.0m (2005: EUR –81.2m). Net cash flow from financing activities reached the figure of EUR 17.8m (2005: EUR –97.3m) in the report period. This rise was based first and foremost on the injection of capital facilitated by the capital increase.

Slight increase in unit costs
Due to the increase in fuel and personnel-related costs, the Austrian Airlines Group found itself unable to continue reducing its unit costs in the business year 2006, something it had succeeded in doing since 2001. Against this background, unit costs (total adjusted operating expenses in relation to ASK) increased year-on-year by 3.4% to 8.46 ct/ASK (2005: 8.18 ct/ASK). Employee productivity, on the other hand (measured in ATK/employee), improved slightly in the report period, primarily due to the Group’s restrictive staffing policy, rising by 0.5%.

Strong growth in traffic and market share gains
Chief Commercial Officer Dr. Josef E. Burger explained the Group’s strategic focus points: “In an effort to further our ‘first mover’ strategy, we incorporated six new destinations in Central and Eastern Europe and the Middle East into our route network during 2006. In addition to this, we became the first West European airline to enter into a cooperation agreement with Russian airline alliance AiR Union, significantly expanding our range of operation as a result. In streamlining our long-range network, we are concentrating on destinations in America and Asia that provide the prerequisites for reaching the profit zone. The extended and newly-adapted Business Class in our long-range Boeing 777 and Boeing 767 aircraft will make a real contribution to this.”

The scheduled segment experienced encouraging growth in the business year 2006. The main reason for this was a clear increase in business from medium-haul routes, which more than compensated for the effect of the reduction in the Group’s long-range capacities. The total number of available seat kilometers on scheduled services expanded by 5.3% in the report period, while demand (revenue passenger kilometers) increased disproportionately, rising by 5.6%. As a result, the load factor on scheduled services also increased marginally, by 0.2 percentage points, with an average for the year overall of 74.0%. Passenger volume grew by 9.4% to 9,095,752.

The Austrian Airlines Group significantly increased its routes departing from the Vienna hub in the report period. Primarily through its implementation of a new system for optimising the management of traffic flows, the Group succeeded in generating a greater increase in the number of local passengers than of transfer passengers. The share of total scheduled passenger volume of the Group attributable to transfer traffic over the year as a whole remained stable, however, at around 60%. To increase streams of transfer traffic, the Austrian Airlines Group now concentrates more strongly on secondary market destinations with medium-sized passenger volumes for which levels of competition are less intensive. The Group’s specialist role in this field enables it to develop its position in this highly attractive market segment especially effectively, and additional connecting flights were provided in secondary market destinations in summer 2006 as a result. Routes of this type now account for approximately 58% of transfer volume, followed by long-haul connections, which contribute around a quarter of transfer volume. Primary traffic, for which competition is more intensive, only accounts for some 16% of the total.

In an effort to realise sales and network synergies, the Austrian Airlines Group integrated responsibility for management of its long-haul charter traffic (with the exception of the Caribbean) into the scheduled segment at the beginning of the winter schedule 2005/06. This change in classification produced shifts in production from the charter to the scheduled services segment, which had a correspondent effect on revenue distribution. The Austrian Airlines Group increased total revenue from the scheduled services segment by 9.9% in 2006.

In the charter segment, the holiday flight activities of the Austrian Airlines Group are marketed to the public under the “Lauda Air – the Austrian way to holidays” brand. Just as in the scheduled services segment, the aircraft capacities of all the production companies of the Austrian Airlines Group are used in the charter segment. Overall, the Group operated 426 different routes in the charter segment in the past year, with available seat kilometer volume falling by 16.4% to 4,418m.
The Group was again able to market this increased production effectively in 2006. The number of passengers carried on charter services fell at a slower rate than the reduction in availability, decreasing by 3.6% to 1,738,916, with the passenger load factor improving to 77.2%.
Revenue in the charter segment fell slightly in the report period, by 0.2% to EUR 261.7m. Demand in the charter segment overall remained stable, however, despite challenging market conditions. The Group carried approximately the same number of passengers in medium-haul in 2006 as in the preceding year. The most important destinations were Greece, Spain, Turkey, Egypt and Portugal.

In the long-haul segment, by contrast, the number of passengers carried fell by around 62%. The main reason for this was the transfer of a number of destinations into the scheduled segment as described above. Popular holiday destinations such as Cuba and Mexico continued to be served over the winter, however. Due to the active adjustment of flight availability to match demand, operating revenue in the charter segment fell to EUR 272.2m, 1.0% down on the preceding year. EBIT in the segment improved, however, from –15.0m to EUR –10.6m.

Considered by geographical segment, the Austrian Airlines Group continued to expand its range of connections into the Central and Eastern European region during the report period within the framework of the Focus East strategy. With its new destinations of Iasi and Sibiu, the Group once again assumed a pioneering “first mover” role in the Central and Eastern European region. In addition to incorporating new destinations including Yekaterinburg, Donetsk and Ostrava into the network, the company continued to expand availability on its existing connections, increasing the number of flights on the Moscow route and availability to a range of other cities including the Ukrainian regional centres of Kharkov, Kiev and L’viv. The Group also expanded its availability to Ukraine with the relaunch of its own flights to Odessa.

The Austrian Airlines Group also reaffirmed its position as a “first mover” in the Middle East in 2006. The company became the first western carrier to serve the city of Erbil in Iraq, operating twiceweekly flights since 11 December 2006. The Group also expanded its product in this geographical segment on the routes to Tel Aviv, Dubai and Larnaca.

Dynamic continuation in fleet harmonisation
The Austrian Airlines Group took another important step towards harmonising its long-haul fleet in 2006 with the sale of its two four-engine Airbus A340-200 type jets. To offset this sale, a Boeing B777-200ER delivered at the beginning of 2007 was incorporated into the existing Boeing 777 fleet.
Due to the greater revenue potential and significantly lower seating costs of the new aircraft, the change is expected to produce a marked improvement in long-haul production costs. The Group also decided to sell the remainder of its long-haul Airbus fleet in 2007, with two A340-300 to be leased out long-term to Star Alliance partner Swiss in the second half-year. The Group’s four remaining Airbus A330-200 long-haul aircraft will also be removed from service with the fleet. In recent years, the Austrian Airlines Group has acquired a total of 15 value-for-money medium-haul jets of the Fokker 100 type. The Fokker 100 can be operated in a single fleet family with the Fokker 70, which already features in the fleet, and is distinguished by its state-of-the-art technology and high level of passenger comfort.

The Austrian Airlines Group began operating its seventh medium-haul aircraft of the type Airbus 319 in the report period. Since the A319 belongs to the A320 fleet family, all the models can be flown by a single corps of pilots. Two short-haul aircraft of the type Canadair CRJ-100 were removed from service with the Austrian Airlines Group fleet and sold in 2006. The company intends to dispose of its final short-haul jet of this sub-type in 2007. The Boeing 737-800 that also entered service in the
report period will primarily be used to provide charter services.