Malev Shuts as Euro Crisis Claims Second Airline

By Zoltan Simon - Feb 3, 2012 9:42 PM GMT+0700

Malev Zrt. (MALEV), the state-owned Hungarian airline founded in 1946, ceased flying after the government withdrew financing, becoming the second victim of European austerity measures in a week after the collapse of Spanair SA.

Malev, which has debts of 60 billion forint ($270 million), halted flights at 6 a.m. local time, with police guarding its ticket booth at Budapest’s main Liszt Ferenc airport as hundreds of passengers milled around seeking to rebook or get a refund.

“What we fretted about the most and what we’ve done the most to avert has come to pass,” Chief Executive Officer Lorant Limburger said in a statement, adding that Malev’s cash-flow became “untenable” after service providers “lost faith” and a European Commission ruling hindered further state support.

Governments are becoming reluctant to prop up airlines as Europe’s debt crisis forces the region’s deepest cost cuts in a generation. Barcelona-based Spanair ceased flying Jan. 27 after failed bid talks prompted Catalonia to halt funding, and Sweden, Ireland, Portugal, Poland and the Czech Republic are also seeking to reduce state support for carriers.

Ryanair Ramp-up

“Grounding Malev is painful,” Hungarian Prime Minister Viktor Orban said today after the airline’s board ordered it to fold. “We’ve tried to push it along and keep it flying as long as we could, but this is the end. We can’t keep this going on without the risk of losing the aircraft that are abroad.”

While a profitable flag carrier should be part of Hungary’s “national economy,” a replacement will be set up only with the backing of private money, Orban said on MR1 radio, and given the economic crisis, “investors aren’t bustling on the market.”

Chris Tarry, an independent analyst in London, said Hungary needs to decide whether it can count on carriers such as Ryanair Holdings Plc (RYA) to provide transport links vital to the economy.

“There’s a lot of competition in Budapest, but if you rely on a non-local carrier they can always take their aircraft away,” said Tarry, who has covered airlines for almost 30 years.

Ryanair said today it will bring forward plans to serve Budapest from March to Feb. 17 and make the city a base for four Boeing Co. (BA) 737 jets and 2,000 workers, not just a destination, serving 31 routes, versus a prior target of five, to target 2 million people a year. Malev had 3.2 million customers in 2011.

‘Catastrophe’

Passengers and staff at Liszt Ferenc airport, which changed its name from Ferihegy last year to honor composer Franz Liszt, said the collapse of Malev would damage Hungary’s reputation and might affect people’s willingness to visit or do business there.

“This is a catastrophe,” said Hajnalka Gundert, a 37-year- old nurse who had aimed to fly to London, where she’s moving for a better-paid job in a nursing home, one of 7,200 people with a Malev ticket for today. The carrier’s demise is “one more sign that we need to leave to have a better future,” she said.

Spanair became the first scheduled mainline European carrier to collapse since the last recession after Qatar Airways Ltd., the No. 2 Middle Eastern carrier, halted bid talks and the Catalonia government indicated it would no longer supply funds.

The airline, founded in 1986, was Spain’s fourth-biggest by passenger numbers, carrying almost 13 million in 2011. Cirrus Airlines, an operator of regional aircraft based in Saabruecken, Germany, ceased flights on Jan. 23, according to its website.

Commission Blow

Budapest-based Malev, a member of the Oneworld airline alliance that includes British Airways, reported a loss of 24.6 billion forint in 2010, the latest year for which results are available, little changed from its deficit in 2009.

The company’s plight worsened on Jan. 9 when the European Commission ruled that it should return the equivalent of $390 million in “unlawful aid” paid by the government from 2007 to 2010, saying it would have struggled to raise cash from a private investor. Malev borrowed 5 billion forint in December and received 8.5 billion forint in budget funds in August.

The collapse comes as Hungary seeks to revive bailout talks with the International Monetary Fund and European Union to quell investor concern about its ability to service the highest debt level among the trading bloc’s eastern members. Orban, the premier, sought aid in November as the forint fell to a record low and the country’s credit grade was cut to junk at Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.

Forint Impact

Malev was among Hungary’s top 30 earners of export revenue, getting the majority of sales abroad, a white paper from Dec. 5 said. It served 45 cities and contributed 40 percent of revenue at Liszt Ferenc, in which Hochtief AG (HOT) has a 50 percent stake.

The grounding may force the state to pay about 1.5 billion euros ($2 billion) as a one-off obligation to the airport’s operators, according to the paper, which cited a privatization contract. The payment could “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,” said Akos Kuti, an analyst at Equilor Befektetesi Zrt. in Budapest.

Malev’s bankruptcy trustee will announce job cuts shortly, the MTI news service said, without citing anyone. The collapse may cut the number of visitors flying to Budapest by 50 percent, threatening tourism jobs, Akos Niklai, vice president of the Hungarian Hotel and Restaurant Association, said by telephone.

Malev was already effectively operating in bankruptcy protection, having been declared a “strategically important company” on Jan. 30, shielding it from creditors.

Wizz Boost

Earnings have been squeezed by rivals including Budapest- based budget operator Wizz Air Ltd., which is offering stranded passengers one-way “discounted” flights for 9,900 forint, or $45, and will invest 25 billion forint to expand capacity. EasyJet Plc (EZJ), Europe’s second-biggest discount carrier, which serves Hungary from London, Paris and Berlin, offered a 60-euro ($79) rescue fee, and Air Berlin Plc (AB1), the No. 3, announced a 49- euro rescue and will commence daily Berlin-Budapest flights.

Today’s grounding ends a two-decade search for a viable partner since Malev was transformed into a joint stock company in 1992 following the collapse of communism.

The last recession led to the failure of a takeover by Russian entrepreneur Boris Abramovich, and Hungary was compelled to renationalize Malev, taking a 95 percent stake in 2010. As recently as this week, Chairman Janos Berenyi said it was “not impossible” that talks with Hainan Airlines Co. parent HNA Group could be revived. The Chinese company said yesterday it was “willing to restart negotiations on a possible bid.”

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Balazs Penz at bpenz@bloomberg.net