Replacing Malev – Easier Said than Done

On 14-02-2012, in Airline corner, by steve

When Malev Hungarian Airlines ceased operations two weeks ago, leaving thousands of passengers stranded and tens of thousands ticket holders uncertain about the value of their reservations, people in Hungarian aviation were stunned. Emotions ran high and the political parties, typically, were blaming each other for the demise of the 66 years old national carrier.

From the reactions one would have thought that Malev was the first airline ever to fail… But then for its people, most of whom have never worked for another airline, this was indeed a tragedy of biblical proportions.

Quite apart from the personal tragedies such a failure entails, the economic impact is also substantial. This is all the more serious because of the shaky situation Hungary is currently in.

Budapest Ferihegy Airport lost 40 % of its traffic, the loss of incoming and outgoing tourists is a serious blow to the industry and connecting passengers coming from further East and South will no longer pass via Budapest reducing the regional importance of the airport. Malev was operating several thin routes to localities in neighboring countries which attracted businesses to Budapest with a view to serving them from the Hungarian capital with its great air connections. This attraction is also gone now.

Malev’s failure was not totally unexpected. The company has been losing money for many years and it went through several owners, coming out of each status change in a poorer state. The last owner, with more than 90 % of the shares in its hands, was the Hungarian government which, in the end, let the carrier sink.

Ryanair was the first airline to react and came with well defined plans to at least partially fill the void left by the national airline. Others, among them Lufthansa, Brussels Airlines and British Airways have announced that they will have additional flights and also use bigger aircraft, to pick up the slack. At the same time, American Airlines, Delta and Hainan Airlines announced that they were cutting back service in response to Malev’s disappearance.

In other words, the aviation industry was reacting to an event the likes of which we have seen many times before when great names like Sabena, Swissair, Pan Am, Spanair and so on flew west, out of existence.

Of course talk about resurrecting Malev, or creating a new airline to take its place, has surfaced with nearly as much force as the tears mourning the defunct company.

But what kind of airline should be created, what formula would ensure that the new enterprise became profitable where its predecessor has failed? For some reason, low-cost carriers have a bad image among Hungarians and this was evidenced clearly in the reception Ryanair got with its, admittedly rather aggressive, appearance on the scene.

Would investors agree to finance a second low-cost company operating out of Budapest (WizzAir being the current incumbent) or would they prefer a legacy airline in view of the low-cost image problem?

Of course, creating a new airline and calling it a legacy carrier is an anachronism in itself. It is very likely that only a combination of “legacy” characteristics and the best features of the low-cost operation could make a sufficiently novel and efficient little airline that would have a chance of survival. Brussels Airlines with its mix and match approach to service could be a good example to follow.

A true, new legacy hub carrier, even if the costs are kept in check, is likely to be dead in the water. It is not for nothing that the industry’s greatest names have all consolidated into just three big conglomerates (Lufthansa, Air France-KLM, International Airlines Group) in Europe and those outside are left struggling. These conglomerates are not the same as the big airline alliances (SkyTeam, Oneworld, Star), which are world-wide but member companies in a given conglomerate all belong to the same alliance. A new Hungarian airline might, in time, be able to meet the entry threshold of one of the alliances (Malev was a member in Oneworld) but this is not enough to save the day. None of the conglomerates is in a buying mood right now and whether they would want to gobble up a new Hungarian company is doubtful to begin with. As is the willingness of the Hungarians to sell their resurrected or recreated baby.

That the low-cost formula works is evident from the financial results of Ryanair and EasyJet. Hate them or love them, they are both profitable and are expected to exceed their earlier, already impressive, profit guidance. At the same time, rising fuel prices cast a doubt over their longer term prospects. Fuel hedging is effective but you can only avoid so much of the rising price, at some point in the future it catches up with you.

Another imponderable on the low cost scene is the almost incredible aircraft purchase by Norwegian Air Shuttle announced on 26 January this year. Figure this: 22 Boeing 737NG, 100 Boeing 737MAX, 100 Airbus A320 NEO. 222 aircraft in all and the industry, at least for now, have no clue what the Norwegians are up to. True, Scandinavian Airlines, SAS, is struggling to survive and hence another player up North would have a field day if they were to disappear. But some experts suspect that this many aircraft may point more in the direction of a European, rather than just Scandinavian, player’s plans.

Low cost, legacy or the combination of both plus some more ingredients, those dreaming to set up a new Hungarian airline have their task cut out form them. One thing is sure: national feelings and pride will not be sufficient to realize this dream. Only an airline with really novel ideas and service has a chance to survive and even for that, you need very deep pockets.

The old adage that you can become a millionaire the fastest if you start out as a billionaire and then create an airline is truer than ever.

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