The A-H Empire's destiny first of all was tied to its army, as long as it existed the Empire stood. Please also note, that the various nationalist groupings creating the new states on the ruins of the Empire, were very marginal until very late in OTL WWI and only could take over because of the power vacuum creted by the collapse of the army.
So, a deceisive victory on the Italian front would restore military prestige and thus in theory that of the Empire. Its my understanding that most of the subject peoples stayed loyal because the Empire was the best option that they had. With chaos developing on the eastern and northern frontiers, a cowed Serbia and Rumania this would probably still be viewed as being the case.
Upon coming to power Karl allowed the Reichsrat to reopen The Czech and South Slav deputies were favourable to a viable federalisation scheme that would allow them self determination.
Yeah, thats what I meant. With Germany economcially and politcially so dominant, and with A-H maybe in need fo an intervention now and then, it woudl de facto be vasallised anyways, but for a change it would be a loyal vasall. Theres absoutely no reason to give that up.
Very true, the Empire's economy is empire wide and inter-linked, a break up would cause significant economic dislocation in the successor states. A stronger centralised dependant state would offer stability on Germany's southern border, and will make Germany's economic plans easier to implement.
In the long run I think the Hungarian question probably is going to be the tough one. In order to please the Hungarians they had in 1867 been given "partner-status" and in that context were given hegemony over a number of Slavic peoples. That is not going to last forever, but reform into a more federal status will meet tough opposition from the Hungarians. I could see a civil war some time in the 20th century - Hungary vs. the rest - which the Hungarians are likely to loose. Perhaps a rump Hungarian independent state is the result, and the rest going on in a "Federal Monarchy".
This is the big problem to a smooth transition as I see it. The Hungarians used the Ausgleich to wring as many concessions as possible out of Austria and they generally got what they wanted. The Ausgleich renewal was due in 1927 and I suspect that the Hungarians would be bitterly opposed to surrendering any of their powers, particularly as they ruled over quite a few minor nationalities and did not always treat them with any real care or interest.
As a sidepoint, does anyone know if the Entente recognition of the Czech and Polish forces as fully fledged Entente co-belligerents at the Rome Congress of Oppressed Nationalities in April 1918 actually amounted to anything within the empire's territory? I know there was a Czech Legion in Russia, but I can't seem to find anything on whether it had any effect before the general collapse of the army OTL.