Hungary takes Malev under its wing

By bne IntelliNews January 31, 2012

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With speculation mounting that Malev Hungarian Airlines could fold any day, Budapest has declared the troubled flag carrier a "strategically important firm," protecting it from bankruptcy claims. The move suggests that while cash-strapped governments across CEE are looking to pull back on funding airlines, Hungary is heading the other way.

Malev has been struggling for years to find a partner that can help it streamline operations and clamber out of a financial black hole, but numerous attempts have been bungled. Now, a ruling from the EU has the airline teetering on the edge, and the Hungarian government - blocked from pumping in any more cash - moved on January 30 to protect it from creditors.

Since the European Commission ordered Malev to repay hundreds of millions of dollars of illegal state aid in December, it has been racing against time to find a new saviour. Reports in mid-January suggested low-cost Spanish airline Vueling was interested, but the Spaniards denied it on January 30, according to Magyar Hrlap. Late last year, reports said China's Hainan Airlines and Czech Travel Service had pulled out of talks.

The failed attempts to find a buyer earlier leaves Malev facing a new problem: competition for investment from bigger and healthier national carriers in the region. The collapse of Spain's Spanair on January 28, after the Catalonia government announced it would no longer supply it with cash following a pullout by Qatar Air from takeover talks, has only illustrated the deepening urgency for national carriers to find a privatisation partner.

Within Central Europe, Poland's LOT and Czech Airlines are now also keen to find new owners as the crisis pushes their respective governments to pull back on propping up their loss-making operations. Reports suggest Turkish Airlines is keen on LOT - and perhaps even both - but there are few other interested parties. Meanwhile, Gulf state airlines such as Qatar are being offered a range of airlines from across Europe - Ireland's Aer Lingus or Scandinavian SAS, for example.

Broken wings?

However, in classic fashion, Hungary looks to be heading in the opposite direction from its Central Europe peers, albeit Malev's situation is far more perilous. With the airline's finances set to become "untenable" by the end of the month, a "liquidity plan" is being drawn up, CEO Lorant Limburger told MTI. Government commissioner Gyula Budai admitted on January 25 that the airline faced an imminent threat of shutdown.

The straw that broke the camel's back was the insistence by the EC that Malev must pay back up to HUF100bn (€339m) it received through government subsidies in 2007-10. Brussels said the airline would not have been able to obtain the same terms from the market - "nor possibly any financing at all" from any private investor "given its consistently difficult financial situation" - and that the support therefore contravenes EU law.

With Malev close to collapse, Hungary has moved to protect its assets with a view to resurrecting the airline it seems. The decree signed by Prime Minister Viktor Orban on January 30 prevents creditors from launching bankruptcy proceedings against the airline. It also allows a government body to run any liquidation procedure started against the company and handle its assets, reports Reuters.

The Hungarian Development Ministry told the newswire: "Taking advantage of its option granted by law and in line with its previously announced intent of operating a Budapest-based airline, the government declared Malev a strategically important firm".

The airline has been limping from month to month on state aid, and borrowed HUF5bn in December from the government following an HUF8.5bn capital injection in August. Whilst Budapest can protect the airline's assets for the time being, it's unclear in the wake of the EC ruling how it can fund - either legally or fiscally - a resurrection. As discussed, finding a new investor looks equally challenging.

However, neither is allowing Brussels to effectively shoot the flag carrier from the sky a realistic option. With Orban's government already in a spot between the EU and International Monetary Fund - from whom it has asked for a loan package - on one side, and growing nationalist support in the country on the other, it would be hard pressed to allow Malev to go under on the back of an EC stipulation on funding. "The existence (of Malev) is a basic factor in foreign investment decisions and it contributes to strengthening the regional role of the country," the development ministry said in December. "With a view to all this, the government considers that it is definitely necessary to have a Budapest-based national carrier running and will make fast decisions in this spirit in the near future."

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