The turmoil in the world's stock markets is finally starting to catch up with the airline industry. Tumbling share prices have forced the Austrian Government to delay plans to reduce its holdings in Austrian Airlines (AUA) with a Sch800 million ($68 million) capital increase.

The decision places a question mark against a series of high profile privatisations planned by state-owned European airlines in the coming months.

The collapse of airline shares has seen blue chip companies like British Airways and Lufthansa suffer huge falls in prices. Even the announcement of the oneworld alliance with American Airlines, Qantas and Cathay Pacific failed to revive a BA share price which fell from a 12-month high of 721p ($12) to just 360p on 30 September. Lufthansa has suffered a similar fate as its price has fallen to DM32 ($19) compared with a high of DM56 for the past 12 months.

Prospects for airline shares were further damaged by a warning from Dutch airline KLM, which admits that the "-impact of the economic downturn in Asia is extending globally, based on current booking volume of business, and yields are expected to fall below budget for the remainder of the year".

In the face of such a collapse in confidence, AUA, which has been in profit since 1994, says it has decided to hold off its privatisation move for the time being.

The issue may now take place next year, "depending on developments in the financial market", says the airline. AUA insists, however, that it is sticking to its 2003 target to achieve the full capital increase.

The company's supervisory board had recently approved a plan to increase the carrier's current capital of Sch2.6 billion by a share issue worth a further Sch1.3 billion. The Austrian Government, which now holds 51.9% of the airline, would not participate in the share issue, leading to a dilution of its holding in the airline.

The first stage was to be a Sch800 million capital boost scheduled for the fourth quarter of this year, which would have reduced the state's share in the airline to just under 40%. AUA's other shareholders include Austrian banks and insurance companies (15%), Swissair (10%), All Nippon Airlines (9%), and Air France (1.5%). The remaining 12.6% is held by other institutions and private shareholders.

The trend towards delay was amplified by Jersey European Airlines' decision to reconsider a flotation of up to 35% planned for later this year. A final decision is expected in the next few weeks. The privately held company, which has reported a 56% rise in pre-tax profits to £5.2 million, says it will float only if the market conditions are right.

Attention now will focus on the planned privatisation of two of Europe's largest state-owned airlines - Air France and Alitalia. Although the companies are acting as though it is business as usual, financial analysts reckon the continuing nervousness in financial markets will almost certainly delay the forthcoming privatisations of the two carriers.

Both are set for full or partial privatisations by early next year, but Chris Avery of London-based Paribas echoes the sentiments of analysts that the unravelling of share prices in the major airlines reflects a situation which he says makes it -"unlikely that market sentiment will be strong enough for privatisations early next year".

Alitalia was due to release to the market the remaining 66.7% held by government-owned IRI in November. Air France is to offer 20%of its capital to the stock market by early next year.

Source: Flight International