A little more than a year ago, Austrian Airlines was closer to shutdown than survival, but after some deep and very contentious cuts, it is en route to an operating profit this year.

“We think the worst is behind us,” says CEO Jaan Albrecht, the man behind the turnaround, who led the Star Alliance for 10 years before joining taking the helm at Austrian. When he arrived in Vienna in November 2011, he quickly realized that things were much worse at the airline than expected.

The previous management had just prepared a budget proposal projecting a €206 million ($280 million) loss in 2012. Albrecht recommended that the board of directors reject the plan—and they did. Then, he took a deep dive into the figures and structures, working on alternatives. Someone pulled out an old idea that had been overlooked because it seemed too daring: transferring aircraft and crews to regional subsidiary Tyrolean Airways, while shaving some legacy costs built up over decades as a state-owned company.

The transfer to Tyrolean, implemented in the summer of 2012, is the main reason Austrian is now in a much improved state. The airline reduced its surplus of senior pilots—close to 120 (most of them captains) left the airline with an opulent package of up to €580,000 each. More than 200 cabin crew also departed. For a relatively small airline, that translated into significant cost savings.

At the same time, Albrecht negotiated concessions from key suppliers, such as Vienna International Airport, informing them that Austrian owner Lufthansa would not fund further losses. Eventually, Austrian reported a €10 million operating loss for 2012— not the initially projected €206 million.

The transfer to Tyrolean has since been legally challenged, and Austrian's works council, which represents its unions, has won a court ruling. However, the two have been negotiating an out-of-court settlement for weeks, and Albrecht says, “I believe we will come to an agreement” that the council will drop the lawsuit in return for something that does not threaten the turn-around plan. Lufthansa ultimately supported the restructuring with another €160 million.

Now that the fundamental cost structure seems to be much better, Austrian must address two interconnected crucial issues, the business model and the fleet.

Forty percent of Austrian's long-haul traffic connects through Vienna; including short-haul passengers, the figure rises to 55%. While Albrecht does not want to reduce capacity, he is aware that Austrian needs to strengthen regional traffic to decrease dependency on expensive, lower-yield, one-stop flying. But it is not clear that this model will work, even if costs are low enough and Austrian has a good share of short-haul connections, as it operates out of a small hub in Europe against much bigger competitors.

This is where the fleet comes in. Austrian would like to retire its 24 Fokker 100/70s, since expensive heavy-maintenance checks are due in 2016 and 2017. It acquired parked ex-American Airlines Fokker 100s more than 10 years ago and has used them predominantly on niche routes from Vienna to Eastern Europe and Central Asia, one of Austrian's specialties. If it buys a larger model, it could only continue to fly routes with sufficient demand and might have to pull out of smaller markets.

Austrian sees three scenarios: quit the segment altogether and focus on traditional narrowbodies, introduce a new 100-seater while keeping its Bombardier Q400 as a smaller alternative for thinner routes, or discontinue operating aircraft with fewer than 100 seats. “It is not an easy question,” Albrecht says.

Aiming to simplify its fleet as part of its deep restructuring, Austrian retired its last Boeing 737 last year. It may opt for aircraft such as the Embraer 190 or 195 for the Central European flying. Given that the Fokkers will be retired in the next 3-4 years, the airline is under some time pressure.

Next in the line for replacement are six Boeing 767-300ERs that Austrian inherited from Lauda Air. They have just been refurbished with improved business-class seats, and the airline used part of the €160 million gift from Lufthansa to invest in a new premium cabin. The business case for the new cabin was based on an eight-year planning cycle according to which 767 operations are to continue until around 2020, when they will be well over 20 years old. Austrian plans to continue 777-200ER operations until 2025. It operates four of the type and is taking a fifth next summer to further expand long-haul capacity.

Austrian's future long-haul fleet will likely be a single type, either the Airbus A350-900 or Boeing 777-9X. Lufthansa has just placed a large order for both types and plans for its subsidiary to take some of the options in the contract.

Albrecht says Austrian would like to catch up on missed opportunities in the long-haul arena. “In the past, Austrian went from crisis to crisis and did not have the resources to look at long-haul expansion,” he explains. It is beginning to do this with the relaunch in May of Vienna-Chicago services for which the airline says it is pleased with the initial bookings.

Austrian Airlines at a Glance
First Half
2013 2012
Revenues €977 million €1.03 billion
Operating Loss €35 million €55 million
Passengers 5.28 million 5.44 million
Load factor 75.7% 74%
No. of aircraft 77 77
Source: Austrian Airlines