Tim Gosling in Prague -

When Hungarian flag carrier Malev was grounded on February 3, it became the fourth European airline to meet such a fate in 2012. The Visegrad region's remaining national carriers - Polish LOT Airlines and CSA Czech Airlines - are now facing an urgent search for investors at a time when those investors are hunting for bargains.

Malev's fate was sealed when a January ruling from the European Commission ordered the return of previous state subsidies. The Polish and Czech flag carriers are unlikely to find similar state dollops of cash as the respective governments roll out austerity measures in the face of the debt crisis, while at the same time the airlines, which have been making losses for years, can expect an even tougher environment in 2012 as the recovery in the region stalls.

Jan Prochazka from the Prague-based brokerage Cyrrus says that although LOT and CSA should be in better shape than their Hungarian peer thanks to better economics fundamentals in their respective countries, the pair have little choice but to search for an investor to take them under the wing. "Find an investor or shut the door," he says. "There is no possibility for restructuring or any other alternative strategy - particularly for CSA."

Adrian Furgalski of the Polish transport consultancy TOR is a little more bullish over LOT, suggesting that its situation is not so bad that it has to be "saved" (LOT is expected to cut a 2010 loss of €22m in half in 2011). However, he also admits that in the face of "the growing importance of low-cost carriers, the increasing strength of the three European airline alliances and the unstable condition of the sector," LOT definitely needs a strategic investor. "In this context," he says, "national carrier is too grand a name for such a small airline."

Simply put, there are still too many airlines, despite the grounding of Italy's Air Alps, the Czech Connect Airlines and Spain's Spanair already this year, meaning all of Europe's second-tier legacy airlines are at risk. "It is quite difficult to see how they will be viable in the long term," Geoff van Klaveren of Deutsche Bank told the FT in early February.

Everything must go - one way or another

In fact, both LOT and CSA have effectively been up for grabs for some years now without finding any takers, and the search is now looking a lot tougher.

While several sovereign-powered airlines from east of the EU are known to be shopping for distressed assets as the debt crisis bites, their numbers are dwarfed by the array of targets. That pitches LOT and CSA against the likes of SAS - in which all three Scandinavian countries hold a stake - Ireland's Aer Lingus, Slovenia's Adria Airways, Romania's Tarom and TAP Portugal, to name but a few. All of them will have been in touch with the leading candidates for an acquisition: Qatar Airways, Etihad Airways, Emirates and Turkish Airlines, who are interested in feeding traffic to long-haul hubs that they're busy establishing at home.

However, there appears to be little to choose between them for potential buyers, which suggests it will prove a war of attrition, with the eastern suitors waiting until the asking price hits the floor. For instance, Akbar Al Baker, CEO of Qatar, said on January 26, after pulling out of deals for both SAS and Spanair over pricing, that the company would continue to look for opportunities. "We will be interested in an airline with potential," he told Bloomberg, "but restricted in growth due to financial constraints." LOT is reported to have turned down four offers in 2011.

Whilst Prochazka suggests that the licenses, hubs and traffic serving CEE could see one of the European alliances tempted by the Czech or Polish carriers, Sky Team et al are not in the same position to throw much cash around right now. That said, similar links enjoyed by TAP Portugal to the Latin American market are fuelling speculation that BA is sniffing around.

In such a competitive environment, both the Czech and Polish flag carriers claim to be in talks with interested, but often unnamed, parties. While speculation that Korean Air and even Air France-KLM are talking to CSA looks unlikely to have much substance, LOT's flirtations with Turkish Airlines appear much more promising. Turkish chairman Hamdi Topcu told the press in late January: "Many airlines have proposed partnerships with us. We have decided on LOT Airlines after analysing [the offers]. The official negotiations will start as soon as possible."

Understandably, the Polish government, which holds 93% in LOT, is in a hurry to tie down its catch, and has said it wants to wrap up the deal by the end of the year, although a timetable for discussions has not yet been set.

That haste is because this looks increasingly like a race to the death. The Hungarian government began talking about starting up a new flag carrier even before Malev crashed to earth, but the conventional wisdom nowadays is that they're a luxury that few European states can afford.

Prochazka sees the chances of a new Hungarian national airline as slim, arguing that "Budapest Airport and the skies above it will soon be too full of competitors." Indeed, low-cost carriers Wizz Air and Ryanair announced expanded services and routes for Hungary the same day Malev went down. A report from airline news provider CAPA says Hungary will follow the Slovak model, which has been predominantly served by low-cost carriers ever since short-lived national carrier Slovak Airlines went out of business in 2007.

Aviation experts note that low-cost carriers accounted for just 24% of Hungary's capacity when Malev was around, but that figure shot up to 40% on February 3, and is set to keep rising. That leaves many Central Europeans with an unpalatable but growing risk that they will be left with only a budget airline as their effective national carrier.

Despite the regular claims that a flag carrier is vital for driving investment and such like, Prochazka says it's mainly just a matter of pride. "The correlation between GDP and passenger numbers at a country's main airport is strong, but there are other airlines which can play that role in Prague," he says.