I am pleased to present the annual report of Lauda Air Luftfahrt AG for the fiscal year 1995/96.
In spite of the difficult economic climate in Austria, Lauda Air was able to continue with its policy of expansion due to excellent cost structures and more efficient utilisation of the fleet. Growth was maintained on the one hand by an additional frequency on our longhaul services to Bangkok and Sydney respectively, and on the other with further expansion of the Lauda European Network. Some new services were added to our European operation, with a flight to Frankfurt ex Salzburg and the introduction of Vienna-Sofia and Salzburg-Rome routes. Since May 1996 Lauda Air has also been serving the European routes to Rome, Milan and Nice in cooperation with Austrian Airlines.
The profitability of our charter operation was further increased with the completion of our restructuring programme, and our executive charter business was reinforced by the lease of a 12-seater Falcon 20 for the Lauda Executive operation.
In a further development of our service concept, this year saw the test phase of a "Flying Chefs" service on our longhaul flights to Miami. The installation of in-seat telephones in Amadeus Class and the high standards of quality in our inflight service enabled us to maintain a high level of customer satisfaction. These developments, together with measures taken to reduce unit costs and raise productivity, were carried through by the outstanding commitment and motivation of our workforce, enabling us to close the 1995/96 financial year with the positive result of 66.5 m ATS, the Company's highest ever annual profit after taxes.
As you all know, we are striving towards a far-reaching cooperation within the Austrian airline industry. The course has already been set by our principal shareholders. This rapprochement of the Austrian national carriers is not only desirable on a national economic level in terms of provision of a comprehensive range of air transport services; it will also strengthen the economic position of all the parties involved.
We shall once again be proposing payment of a dividend on the capital you have invested. May I take this opportunity to extend my thanks for the confidence you have placed in us.
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In the year under review sales revenues increased by 29.3% (previous year 14.4%) to 3,456.6 m ATS (previous year 2,67 m). This growth can be attributed primarily to expansion in the scheduled business, where revenues rose by 38.7% (previous year 38%) to 2,230.6 m ATS (previous year 1,61 m). Following the previous year's phase of consolidation, charter revenues increased during the year under review by approx. 16.7% (previous year -12%) to 1,143.6 m ATS (previous year 980.2 m). In the scheduled business the results were to some extent attributable to a small increase in capacity on the routes served by our 50-seater Canadair Regional Jets, and the effects of additional capacity leased in the previous year becoming visible in an annual context for the first time. There were no increases in charter capacity, however, and thus primarily the figures are a reflection of more efficient utilisation of the fleet. The predominance of scheduled traffic over charter traffic once again increased slightly according to plan, with the ratio now standing at 66:34 (previous year 62:38).
In the year under review the difficult economic situation in Europe, and in Austria in particular, was evident. The collapse of an important tour operator, rising unemployment and an unfavourable climate for investors combined with government spending cuts to exert an adverse effect on the travel market. Many tour operators began to offer price reductions for early bookings in the charter sector, which meant increased pressure on yields for the airlines.
Despite these difficult circumstances the Company pursued an aggressive policy of expansion, based primarily on consistently excellent cost structures in relation to competitors and more efficient utilisation of available fleet capacity. As a result the Company was able to achieve a far higher rate of growth than the average achieved by the airline sector in Austria as a whole during the same period.
Interest rates remained favourable, though there was some tension on the foreign exchange markets. The favourable interest rate situation allowed further refinancing of Company debts and corresponding improvements in cost structure during the year under review. Tax-privileged investment reserves were released and reallocated where possible.
The Company's result for the year under review amounted to 66.5 m ATS (previous year 47.5 m ATS).
The cash flow of the Company from operating activities (calculated according to IAS 7) fell to 36.7 m ATS (previous year 233.1 m ATS). This decline is largely attributable to changes in receivables which were not settled until after the balance sheet date. As a result of this decrease in cash flow the Company's effective debt, which had been drastically reduced in the previous year, rose again to 6.5 years in the year under review.
The number of flight hours also rose again during the year under review, with a total of 48,149 hours flown (previous year 38,559 hours, increase of +24.9%).
The silent partnership was terminated at the end of January 1996, thus reducing the share capital by the amount of 194.25 m ATS. The subscribed capital of the Company remained unchanged in the year under review. The subscribed capital is distributed as follows:
The number of passengers carried on scheduled services totalled 710,992 (previous year 485,459), representing a rise of +46.5%. Several factors contributed to this increase. Firstly, the frequencies to Australia and Bangkok were increased by 50%, with one additional flight per week each introduced at the start of the 1995/96 Winter Schedule. Secondly, the European operation was reviewed and restructured, and the Lauda European Network expanded.
In the first half of the year under review, considerable difficulties were experienced in realising market absorption of the increased route capacity. Market penetration was successfully achieved by the third quarter, however, particularly in the longhaul sector. One of our Bangkok rotations was subsequently extended to Saigon (Ho Chi Minh City), whereby the low break-even threshold was reached after a short start-up phase.
Sales revenues in our scheduled business rose by 38.7% to 2,230.6 m ATS (previous year 1,607.7 m ATS) in 1995/6. This development further increased the predominance of scheduled over charter traffic.
In the year under review our continued search for further opportunities for cooperation resulted in the expansion of our existing logistical cooperation with Austrian Airlines into the production and marketing side of the business. We are now operating flights to Rome, Milan and Nice with Austrian Airlines, and the great success of these joint services has paved the way for investigation of further areas in which we could work together.
Unfortunately we were unable to fully extend this cooperation into the Eastern European region. We introduced our service to Sofia in Summer 1996, but this has so far remained our only destination in Eastern Europe.
Our policy of consolidation means that, after an appropriate start-up phase, routes which are not expected to achieve break-
even in the foreseeable future are withdrawn and replaced by others. This was the case with our Salzburg-Brussels services, for example, which were replaced by increased frequencies on the high-potential Salzburg-Frankfurt route and a new service from Salzburg to Rome.
In the year under review, the average seat load factor on our scheduled services was 65.0% (previous year 66.3%). This slight decline is primarily attributable to the start-up phase of the new routes in our network.
Scheduled traffic remained the main impetus of our growth, thus playing an essential role in the reduction of the Company's fixed costs. Unfortunately we are still faced by further increases in direct costs combined with declining yields. This problem can only be resolved by increased productivity, and our cooperation agreements with other airlines will be of assistance in this respect.
In the year under review 513,592 passengers were carried on our charter flights (previous year 450,340), representing an increase of +14.0%. The charter business has thus made an excellent recovery after the previous years phase of rigorous restructuring, and is now making the required contribution to the Companys profit margins. This encouraging development will enable us to give renewed emphasis to charter traffic as one of our core businesses for the future.
The "Lauda Executive" fleet was further expanded by the lease of a 12-seater Falcon 20 executive jet, which proved successful during its first six months of operation. We are now able to offer an ideal product range in the charter business travel sector.
In the year under review sales revenues in our charter business rose by 16.7% over the previous year to 1,413.6 m ATS (previous year 980.2 m ATS). This was achieved without any significant expansion in charter capacity.
In the year under review we were again able to accept numerous awards for our inflight service. Amongst the accolades were the "Golden Globo" for the best inflight menu on scheduled services, Gold Awards from Business Traveller magazine for "Quality of Cabin Crew" and "Quality of Inflight Food" and top places in the airline survey carried out by "Reisen" travel magazine.
This public recognition of our achievements has spurred us on to more new developments in our service concept. Our inflight service now includes in-seat telephones in Amadeus Class on all our longhaul flights and our team of "Flying Chefs", a special project developed in cooperation with Do & Co which is currently being tested on our Miami services. Additional steps are also being taken to improve our ground services, and several new projects are in progress in this area.
The total number of employees amounted to 1,144 at the beginning of the year under review, rising to 1,241 by the end of the year. In line with the expansion of our production activities, the new recruits were primarily flight attendants, pilots and technical staff. On average, 1,219 staff were employed by the Company in the year under review.
20.3 m ATS were spent on staff training in 1995/96, an in-crease of 43.2% over the previous year. Although production was increased in the year under re-view, the number of administrative staff remained largely constant. This enabled us to achieve a further rise in employee productivity (+9.3% over the previous year).
In an analysis carried out in the year under review by the economic journal "Trend", our employees achieved top ratings for motivation, commitment and expertise. These qualities play an essential role in the success of Lauda Air, and the maintenance of these standards is of high priority for the Company.
With an average aircraft age of 4.2 years, our operational fleet is one of the most modern in Europe.
Nevertheless, further modifications were carried out to our aircraft in the year under review to enable us to build upon this enviable position. In-seat telephones were installed in our Amadeus Class, and the refitting of the whole fleet in line with our new corporate design was completed. Modifications were also made to the engines of our Boeing 767 fleet with the aim of reducing fuel consumption and, consequently, exhaust emissions. Furthermore, the long-term operational reliability of our longhaul flights was rewarded by an increase of our ETOPS Rule authorisation to 180 minutes. This means that we are now able to carry out further streamlining of our longhaul routings.
In addition, a B767-300ER was assigned to Lauda Airs subsidiary in Italy, Lauda Air S.p.A.
Work is still in progress on our information systems, with the introduction of state-of-the-art network structures. The main system is based on client-server technology, and we are currently laying the groundwork for future internal EDP access via Internet browser (Intranet), using Internet structures. This represents a significant step forward in terms of productivity in EDP utilisation.
The basic systems are also being expanded in all sectors of the Company, from Accounting through Flight Operations to Technical Services. In the financial year 1995/96, 37.6 m ATS were invested in systems and equipment in relation to various EDP projects.
The current financial year is presenting us with new challenges. The start of the year saw us struggling with high US Dollar exchange rates and fuel prices and we are also seeing a decline in unit yields, as well as changes in the social and business environment. We are preparing to face these challenges by taking all possible measures to reduce unit costs and raise productivity, while consciously cultivating and building upon our relationships with customers and business partners.
We are also in the process of strengthening our sales organisation, and are working to establish an efficient international sales network based on worldwide cooperations. In the previous year we were very successful in this area, particularly in Asia and Australia. This year the emphasis will be placed on the establishment of similar cooperations in Europe.
The first three months of the year brought a significant growth in the number of passengers in comparison with the previous year. For us this is an indication that we are on the right path, and that we must strive to continue in the same direction.
While continuing to strengthen its internal structures, the Company will also be looking towards cooperation with other airlines and partnership in airline alliances. Very successful talks have already been held with Austrian Airlines to discuss the possibility of an AUA shareholding in Lauda Air. This would involve the transfer of shares from the current two main shareholders, making Lauda Air the link between two large airline alliances.
Another aim of the discussions is an "Austrian solution" for the national aviation industry. Such a cooperation would enable the Austrian carriers to coordinate their route networks, together providing a much improved range of airline services for the Austrian market.
After allocation of a profit reserve, the Executive Board proposes to distribute the profit for the year of ATS 33,600,000.00 as follows:
The bearers of participation certificates will receive a 4% preferential dividend payment, that is ATS 10,000,000.00, in accordance with § 21 para. 1 lit. c of the Articles of Association in conjunction with § 3 of the directives regarding participation certificates. All other shareholders and the holders of participation certificates will be paid a normal dividend of 4%, that is ATS 23,600,000.00, according to § 21 para. 1 lit. e of the Articles of Association.
Vienna, 28th February 1997