Austrian Air Should Rebuff Lufthansa, Official Says (Update2)

June 17 (Bloomberg) -- Austrian Airlines Group should reject any takeover bid by Deutsche Lufthansa AG to safeguard the country's air links with eastern Europe, Austrian Deputy Finance Minister Christoph Matznetter said.

The position may put Matznetter's Social Democratic Party at odds with its People's Party ally in Austria's governing coalition, as the two must agree on state asset sales. The government owns 43 percent of the Vienna Airport-based carrier, which has a market value of about 338 million euros ($523 million) and is the country's biggest airline.

Cologne, Germany-based Lufthansa has hubs in Frankfurt, Munich and Zurich. The route networks of the two companies are a good fit, Lufthansa Chief Executive Officer Wolfgang Mayrhuber told reporters in Frankfurt yesterday.

``Nobody can tell me Lufthansa would maintain four regional hubs in such geographic proximity,'' Matznetter, 49, said in an interview on June 12 in Vienna. ``It would make more sense for the country and the airline to pursue a profitable expansion strategy and remain independent.''

The government plans to decide on Austrian Airlines' future by the end of the year, according to Finance Minister and People's Party head Wilhelm Molterer. The minister said on June 10 that the carrier probably needs to join with a larger partner such as Lufthansa, Europe's second-biggest airline after Air France-KLM Group.

2007 Coalition Start

Austria's two biggest parties have ruled together since the beginning of 2007. While Chancellor Alfred Gusenbauer is a Social Democrat, the parties each have seven cabinet seats, making it more difficult for either to force approval of policies. The Social Democrats generally oppose the sale of state assets and the People's Party is in favor. The two parties must reach a unanimous decision on asset sales.

``I'm expecting there to be a political compromise regarding Austria Airlines' future,'' Paul Wessely, an analyst at Unicredit SpA in Vienna, said in a telephone interview today. Wessely expects the discussion on the company' strategy to continue into the first half of 2009. Unicredit has a ``hold'' recommendation on the carrier.

Stock Rises

Austrian Airlines rose 8 cents, or 2.1 percent, to 3.94 euros in Vienna trading today. That pared the stock's decline this year to 37 percent.

The carrier's route network in eastern Europe would be most at risk should any Lufthansa bid succeed, Matznetter said.

``If Austrian teamed up with Lufthansa, they would probably cancel a number of east European destinations and bring those passengers to Frankfurt or Munich,'' Matznetter said.

The Social Democrats would prefer a buyer likely to retain existing routes, he said, identifying Air France, Emirates or Qatar Airways as more acceptable.

Austrian Airlines said on June 9 that it's evaluating ``strategic partnerships.''

Lufthansa would look at Austrian Airlines should it be asked, and the smaller company has interesting routes, said Amelie Lorenz, a spokeswoman at the German carrier. She said Lufthansa had no comment to make about Matznetter's remarks.

Mayrhuber said yesterday that no talks have been held between Lufthansa and OIAG, the Austrian agency that manages state assets.

Economic Questions

A purchase of Austrian Airlines by Lufthansa might also hurt the country's economy as fewer people would travel via Vienna, Matznetter said.

``If Vienna no longer offers extensive connections, international companies would no longer choose Vienna as their regional headquarters,'' he said. ``That would have a negative effect for the entire Austrian economy.''

Raiffeisen Centrobank analyst Bernd Maurer, based in Vienna, said May 14 that Lufthansa, Air France and OAO Aeroflot of Russia are all prospective bidders for a stake in Austrian Airlines. Lufthansa purchased Swiss International for 465 million Swiss francs ($446 million) in June 2005.

To contact the reporter on this story: Matthias Wabl in Vienna at mwabl@bloomberg.net; Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net.

To contact the editor responsible for this story: David Merritt at dmerritt1@bloomberg.net