Malév: Hungarian pride with a bitter end

The news itself have probably gotten to everyone already: last Friday the company went bankrupt (even though technically it didn’t, more on that later). As it’s customary in Hungary, the whole political spectrum went on to blame each other plus the EU for this unfortunate event. However I doubt that this came as a surprise to anyone but the most clueless. Sure, nobody (or rather, very few) have known the exact date, but almost everybody felt that the end is near. There were several signs, really, but the most significant was the EU ruling forcing Malév to repay HUF 70-100 bn.  ($300-400 mil./£ 200-300 mil.) worth of state subsidies and the Orbán government’s Monday regulation that turned Malév into a strategic company (which meant that the company can’t be forced into a bankruptcy, only a bankruptcy protection).

MalévAll in all the airline industry has never been profitable at all: in the last 50 years it has seen a steady inflow of start-ups and investors, yet its profitability has ranged from fairly profitable (at best) to being heavily in the red. Therefore airline companies even in the US have heavily relied on state subsidies and bailouts. The European airline industry has always been much more fragmented than the US, which aggravated the problems even more.

Ever since 1989, Malév bore the typical signs of state-owned giants: its opaque accounting left it with little public supervision (or rather none), the whole corporate structure was overcrowded, bureaucratic and inefficient, and its management has been replaced on a semi-annual basis, regardless of the government in power (it had 16 CEOs since 1990). Coupled with the additional pressure exerted by low-cost airlines, these were probably the most important factors that led to the company’s outright miserable performance: it has continuously failed to provide even an operating profit (i.e. positive earning before interest and taxes) let alone a net one in the last 10 years. So the company has to borrow more and more: in 2010 the company had to cough up HUF 3 bn. ($13.5 mil./£8.5 mil.) for the interests alone.

To make up for the lack of profit, the company has tried to sell most of its nonessential (but still valuable) assets. These included the pipeline connecting the airport to the Százhalombatta refinery, most of the usage and flying rights to the Heathrow airport, several buildings and real estate-related rights. Then in 2007 the MSZP-SZDSZ government has sold off Malév to Russian investors in a way that Malév was bought from the remaining assets of Malév. This was achieved by selling the company in a way that the new owner could immediately have Malév draw on the bank guarantees of a Russian bank and pay back all the capital injection invested in it by the Russian owner. Essentially Malév took on another loan and the new “investor” gained control of Malév at no cost. The remaining valuables of Malév were then predictably moved out of Malév. Three years later still under the MSZP government Malév, by then deprived of all assets and value was reprivatised, bought back by the state for HUF 32 bn. ($144 mil./£91 mil.). The combination of these two deals (the sale in 2007 and buying it back in 2010) under MSZP was the subject of criminal investigations because of the large net loss to Hungary when looking at the two combined. Combined with the previous problems mentioned above Malév was in severe trouble and it could only survive by state subsidies provided by the Gyurcsány and the Bajnai governments.

By 2012 the economic situation of Malév improved in that it was able to post an operating profit. However the EU ruled that the earlier state subsidies were illegal and issued a ruling forcing Malév to pay these back to the Hungarian state. This has not only cut off Malév from any future subsidies, but also burdened the company an additional debt so huge it didn’t have a chance to repay. Coupled with the company’s previous debts the sum was so large that Malév’s partners were no longer willing to lend it: the airports have started to demand cash before allowing any of the company’s aircraft to take off. Thus the company had to file for bankruptcy.

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One Response to Malév: Hungarian pride with a bitter end

  1. Pingback: Curse of the undead: Malév | Hungarian Digest

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