The Sordid Story Behind The Death Of Hungary's National Airline

Photo: shyb

While few Hungarians will bemoan the loss of a national airline that squandered pots of taxpayer money, they will be watching anxiously to make sure the state won’t be left with a €2.5bn bill from the new owner of Budapest’s airport. Happily, budget airlines that are managing to succeed where Malev failed appear willing to step in, though there are worries the government may try to put a new Malev back in the sky. 

The situation came to a head on February 3 when Malev failed in its bid to overcome a chronic cash shortage and ceased operating after two of its planes were embarrassingly seized by creditors in Israel and Ireland due to non-payment of debts. The seeds of Malev’s collapse were sown back at the start of January when the European Commission ruled that the Hungarian government had illegally provided state aid to the company between 2007 and when it was renationalized in 2010, according to Peter Attard Montalto of Nomura. He noted that the amount to be repaid was around HUF65bn, which is larger than Malev’s entire revenues for 2010. 

The Hungarian government, an oddly nationalistic bunch led by Prime Minister Viktor Orban, had already moved on January 30 to declare the troubled flag carrier a “strategically important firm,” protecting it from bankruptcy claims. But the government could face other problems related to the privatization contract of Budapest’s sole airport, Liszt Ferenc International Airport, when the government sold a 75% stake to BAA paid for £1.255bn. Subsequently, Spanish firm Ferrovial acquired BAA and sold on the airport to Hochtief for €1.9bn. 

Claims and counter claims 

Although the details of the contract were never made public, government commissioner Gyula Budai confirmed Wednesday, February 7 what many had feared – the bankruptcy of Malev, which accounted for 40% of annual turnover at the airport, has triggered a compensation clause in Hochtief’s operating contract that placed financial commitments of nearly HUF800bn (€2.75bn) on the government. “This is an existing contract, which puts such an obligation on the Hungarian state,” Budai was quoted by newswires as saying. “This contract lives from the moment that Malev’s liquidation started.” 

Such a figure would spell disaster for the government’s ongoing battle to tame the budget deficit (it’s equivalent to nearly 1.5 times the government’s 2012 budget deficit target in cash terms), as well as cause further headaches with the International Monetary Fund and European Commission, which have already bailed out Hungary once in 2008 and may have to do so again. “While the story is still developing, it would add to the overhang coming from EU/IMF talks and may result in short-term weakening of the forint and a decline in share prices, too,” reckons Equilor. 

Though Budai declined to comment on whether Hochtief had already initiated a compensation claim, the Development Ministry told Bloomberg on February 8 that Hungary will liquidate Malev in the “near future” and is seeking a compromise with Budapest Airport on the compensation payments. 

Janos Samu, an analyst at Budapest-based ConCorde Securities, tells bne that the government certainly won’t stand idly by watch things evolve. “Triggering the option would mean, according to the scarce information we have about the deal, that the government would have to buy back the airport at the privatisation price. That price was huge, we estimate the airport would be worth a third of that value today, so such a deal would be very negative for the Hungarian taxpayer,” says Samu. 

Well grounded 

Perhaps flying to the rescue are the budget airlines. Just hours after the grounding of Malev, Ryanair announced 31 new flights from Budapest, bringing forward its re-entry into Budapest. Wizz Air also pledged a HUF25bn expansion programme, including 10 new routes and two new Budapest-based aircraft. “The government has got to help new carriers fill the space,” argues Samu. “The likes of Ryanair reacting quickly to build a hub might save the government from repurchasing.” 

Few believe the government will have much egg on its face as a result of Malev’s closure, nor suffer a direct loss of credibility due to the loss of its flag carrier. “I don’t believe many Hungarians regard Malev as a national treasure that should have been saved at all costs,” says Samu. “The whole story of sticking with a national airline was based more on emotional reasons than on commonsense. There was no rational reason to continue pouring money into it, as the company simply could not transform itself.” 

Pity, then, that there’s so much speculation about a new debt-free airline rising out of the ashes to become Hungary’s new national airline. The rumours were given weight by comments from Antal Rogan, head of parliament’s economic committee, who said on local TV channel ATV that there is more than a 50% chance of a new airline being created, with Malev’s existing management at the helm. 

According to Bloomberg, PM Viktor Orban said on local radio station MR1 that Hungary should have a profitable airline, albeit one funded by private money. Nevertheless, speculation continues to mount that the government is planning to invest in a new airline. “There is talk that the government might have another carrier waiting in the wings, but this would involve too much capital and the government just can’t afford it,” opines BudaCash’s Torok. He adds that predominantly Hungarian Wizz Air could fill the void left by the exit of Malev. Its CEO, Jozsef Varadi, even came from Malev. 

The cost of starting a state-owned national carrier as a fresh greenfield investment would cost as much as HUF00bn over the next two years and so is simply unaffordable, according to Normura’s Attard Montalto. Worse, any new flag carrier would be coming into a more crowded market, making profitability harder to achieve. “Our worry is that, like in the Mol situation [in which the government bought the stake owned by Russia’s Surgutneftegas], the need for ‘economic nationalism’ will translate into driving forward with a new flag carrier and that further steps of unorthodox policy will be required,” he says. 

Such unorthodox steps could include tier-three pension asset seizures and an extension of crisis taxes. “All this raises difficult questions about how the IMF and EU will treat the budget threat from these policy choices,” says Attard Montalto.

This post originally appeared at Business New Europe.

NOW WATCH: Briefing videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.