So, Malev is gone. Hungary’s state-owned flagship national airline shocked the nation – and thousands of newly stranded passengers – last Friday when it abruptly grounded its fleet and announced that it had gone bust.
The airline’s travails first reared their head last month, when the European Commission ruled that Hungary’s government had illegally given the company state aid over a three-year period until it was renationalised in 2010. Malev was ordered to repay HUF60 billion ($270 million), more than its 2010 earnings.
But until news of its demise on Friday morning, most analysts thought the government, which owns 95% of the carrier, would find a way to meet the payment and keep the carrier in the air. However, creditors and suppliers demanded immediate payment, which triggered a fatal liquidity event.
The government has since said that it plans to launch a new airline from Malev’s ashes.
But not everyone is convinced this is feasible. Peter Attard Montalto, an analyst at Nomura, raised a number of doubts in a research note today about the cost of any new airline venture:
| Key now is that the government intends to create a new (almost certainly state-owned) national carrier as a fresh green-field investment. The cost of this venture is likely to be substantial and ultimately unaffordable. Assuming a new company had some recourse to the assets of the liquidated company (with their transfer of ownership to the state liquidation receiver); it might well need some HUF30bn in assets (based on 2010 position) and HUF5bn or so in capital. However this ignores the likely need for cross subsidisation from the budget, either off or on balance sheet. One would hope that a new company would be run slightly more efficiently than the old one (or than other state owned transport companies) - and clearly there would be no public debt to start with. As such funding would be cheaper. However Malev required regular cash injections from the government, including HUF5bn in August, HUF4.2bn in November and HUF5bn in December. We doubt a new airline would be able to fund in the market in the short to medium run. |
The bottom line for Montalto is that the Hungarian state finances might now take another hit, which the state can ill afford. This could complicate the already-fraught discussions with the IMF and EUover a new $20 billion aid package.
| The government may be on the hook for as much as HUF500bn over the next two years. This is simply unaffordable under the current budget. Our worry is that, like in the MOL situation, the need for ‘economic nationalism' will translate into driving forwards with a new flag carrier and that further steps of unorthodox policy will be required - of which tier three pension asset seizures and extension of crisis taxes are the easiest options. All this raises difficult questions about how the IMF and EU will treat the budget threat from these policy choices. This may well form an additional segment of final conditionality agreement difficulties - along with the IMF and EUs objections to the running and subsidisation of the wider set of state owned companies. |
Fasten your seatbelts for the next instalment of Hungary’s ever more tumultuous saga.