Hungarian flag carrier to bridge East and West

By bne IntelliNews October 17, 2007

Robert Smyth in Budapest -

Hungary's Russian-backed flag carrier Malev is hoping cash in on Budapest's boast of being the East-West nexus and the surging demand for business travel across the region. With fresh investment funds in the bank the company hopes to IPO by the end of the year, providing it can turn a profit by December.

AirBridge, which bought Malev from the Hungarian state earlier this year, pledged €30m to straighten out the struggling company.

"After this, however, the company has to work effectively and generate a profit. The combined effort and work of the three owners guarantees the necessary financial resources," Peter Leonov, CEO of Malev and a board member of AirBridge told bne.

Malev spokesperson Krisztina Nemeth moves quickly to point out that AirBridge is not a Russian company. AirBridge Zrt. is in fact a Hungarian registered closed shareholding in which Hungarian owners by Magdolna Költ_ and Kálmán Kiss hold just over 50%, with the rest owned by Russian Boris Abramovich, CEO of Russia's KrasAir.

While fellow bidders complained that Malev's losses were even bigger than the company first admitted to at the start of the privatization negotiations, Malev's new owners still think they got a good deal.

"We knew the size of Malév's losses and how much would be required for the stabilization at the time we started negotiating, and are willing to guarantee this. We decided on making our offer in the light of this and in the knowledge of the company's internal and external reserves, and we are now continuing the work," said Leonov.

However, things are not going smoothly. Abramovich brought in an experienced Brit, Lloyd Paxton, who was supposed to steer the company back to profit. But after only two months in the cockpit, Paxton has bailed for, "personal reasons."

Leonov, a Russian who speaks the notoriously difficult Hungarian language, has been forced to take over the day to day management of the company.

Hungarian business portal reported that Paxton had been fired for a lack of action and a subsequent delay in getting Malev's recovery strategy off the ground. However, even before Leonov took over in September it appeared that the company, which had operating losses of Ft 10.8bn (€43.1m) and a pre-tax losses of Ft 10.5bn (€41.9m), might have already turned the corner. Results for the end of the first half of this year came in some 40% better than the corresponding period in 2006.

Leonov and Malev have vowed to continue the reshaping project, know as reMAke, started by Paxton. The programme will reduce costs and raise revenues. Leonov has given himself until the end of 2008 to put the loss-making airline back in the black by cutting costs by 7% over the next two years.

At the moment AirBridge and the owners of AirBridge are propping the company up with capital injections. One option the mangement team are looking at is raising even more money with an IPO.

"We are planning to float the company on the stock exchange at a later date in order to guarantee its continued development. Not only the current owners of Malév, but also new shareholders of the listed company will profit from this," Leonov said.

While Malev has been hard hit by competition from the budget airlines and not yet taken full advantage of the surge in demand for premium business travel, Leonov says the company is still in a strong position.

"Malév's real competitors are not the low-cost airlines, since they operate in a completely different market segment. We can only be pleased that they too contribute to the expansion of flying as a convenient and rapid form of transport," he said.

There is still a niche for higher-cost airlines. Bigger blue chip carriers are performing strongly, gaining higher revenue from being "pan European" and beyond, says ABN AMRO analyst Andrew Lobbenberg.

"Short haul carriers are struggling against the major blue chips, mid-size networks are not strong enough to utilize assets," he said.

For its part, Malév primarily concentrates on transit and business travelers to whom it, "already provides and will continue to offer a competitive, quality product," asserted Leonov.

He adds that membership of the oneworld airline alliance, which includes the likes of British Airways, Qantas Airways, American Airlines, Iberia, Finnair and Cathay Pacific, has resulted in a considerable increase in the number of premium passengers and revenues.

"Only in the past four months compared to the same period of last year premium passenger numbers have grown by some 77%. This is the greatest value and benefit of oneworld membership for Malev," he says.

Malev is also building a partnership with the AirUnion Alliance, which will fly Russian travelers to the EU and beyond, as well as bringing foreign travelers into Russia. Boris Abramovich's twin brother is the chairman of the AirUnion alliance.

"AirUnion represents a new market and new route network - the Russian and CIS markets - both for Malev and for the oneworld alliance," said Leonov.

Trust Bank analyst Yevgeny Sago noted that Air Union, and the Russian regional carrier Krasair, do not have international routes, while Aeroflot and Transaero went international in the 90s and the partnership is a win-win situation for all involved.

"They want to make a bridge into Europe enabling passengers to reach any city in Europe through Budapest. All concerned can increase passenger turnover significantly," he said.

Before his departure, Paxton said his approach will revolve around utilizing Malev's assets better, which includes one of the youngest fleets in Europe.

"I don't think we'll necessarily be chopping routes on mass," he told bne. "We're probably going to have to live with the long haul we've got and might have to take some losses on it but once we've turned the corner we'll probably grow the long haul when we've got a bit more money to invest," said Paxton, who feels long haul is strategically important.

"If we did stop long haul it would be very difficult to restart it and it would send a certain message out. We have to either go more for long haul or stop it altogether, we're trying to be half pregnant at the moment which is not really a successful position to be in."

Leonov feels he has every reason to be optimistic now that Malev is a member of oneworld, which is emerging as the world's leading air alliance.

"Malev also has an extensive and established route network throughout Eastern Europe, one of the fastest growing regions for aviation in the world, and the opening provided by the change of ownership brings Russia, one of the markets with the greatest potential in the world, into the company's sights."

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