ANALYSIS: Budapest's new role in the shadow of Malev

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Budapest Ferenc Liszt International airport lost almost 40% of its traffic overnight on 3 February 2012, when flag carrier Malev Hungarian Airlines succumbed to its growing debt pile and ceased operations. One year later, despite a high-profile spat with second-largest customer Ryanair, the Hungarian capital's airport has stemmed the decline in annual footfall to a mere 5%.

Describing that modest drop as a "fantastic outcome", Kam Jandu, Budapest airport's executive director of aviation, now expects flat passenger numbers of 8.5 million for 2013. He then forecasts an annual compound growth rate of 4% from next year onwards, targeting 10 million passengers by 2017.

Without a national carrier to provide feeder traffic, however, the airport has been forced to shift away from its former hub-and-spoke model. Instead, it is experimenting with what Wizz Air chief executive József Váradi describes as a "new paradigm" for the beleaguered European aviation market.

"I think Budapest stands for something that is coming," Váradi said in his opening remarks at the Routes Europe conference in Budapest this month. "The European aviation industry is evolving. It is in the phase of transitioning. Paradigms of how airports and airlines used to be set up are changing, and Budapest is representing those changes."

The rapid influx of point-to-point, low-cost carriers (LCCs) - principally Wizz Air and Ryanair - has been the driving force behind this new approach. LCCs now account for 51% of traffic at Budapest airport, up from 26% before Malev's collapse. Unaligned traffic makes up 61% of the airport's operations today, compared with about 15% when Oneworld member Malev was still in business. Against the backdrop of Austrian Airlines' hub in Vienna and CSA's growing network in Prague, Jandu says Budapest has dropped its "romantic" notions of becoming central Europe's main hub.

Ryanair negotiations

But abandoning the hub model has exposed Budapest to the vagaries and tough negotiating strategies of Europe's strongest LCC. After an initial honeymoon period in early 2012 - when Ryanair unveiled a "rescue plan" for Hungary, basing five aircraft at the airport and adding 32 routes - chief executive Michael O'Leary promptly threatened to cut services, citing his familiar complaint about high airport charges. Ryanair withdrew two of its aircraft and axed ten routes in January 2013.

Jandu treads carefully when discussing the airport's "love-hate relationship" with Ryanair. He credits it with introducing cost-cutting innovations such as walk-on-walk-off facilities that improved Budapest's turnaround times. "We're grateful to them for that," he says. "They'll challenge our conventional thinking. But we're unequivocal about not giving them a special deal at the expense of anybody else. That would be discriminatory."

Ryanair's Budapest network in July 2013, with cancelled routes disconnected

Citing EU competition laws on airport pricing - a sensitive subject in Hungary, given Brussels' role in bringing down debt-ridden Malev - he says Ryanair's demand for an exclusive commercial agreement was a non-starter in Budapest. "Some airports in regions which desperately need it may bend over and make these kind of deals," he says. "But we're not in a position to do that as an EU capital city airport. So those discussions hit a wall, and they withdrew the two aircraft."

Ryanair has made it clear that there will be no further growth in 2013, Jandu confirms. But as the Irish carrier scaled back, homegrown LCC Wizz Air rapidly moved in. The Hungarian airline now has seven aircraft based at Budapest, and it is extending its reach beyond Europe with links to Azerbaijan, the United Arab Emirates and Israel.

Jandu admits that there was "excess capacity" on some routes last year, while Wizz Air and Ryanair duked it out to claim Malev's lost market share. He cites Barcelona as one destination that was being over-served, joking that Hungarians were travelling for "next to nothing" on the route. But with flat traffic predicted for this year, Jandu says both airlines are now consolidating their networks. "Our goal is to have complementary traffic," he affirms. "Not competing traffic."

Route white spots

Several "white spots" remain on the airport's European network, and efforts are under way to entice incumbents as well as new market entrants to fill the gaps. The airport is modifying its 50%-discount incentive scheme for carriers that target white spots, expanding it to include low-frequency routes as well as daily services. "We believe there's four or five airlines that will really jump on this," Jandu says, singling out Vueling as one interested party.

Budapest is also exploring ways to develop a "self-connecting mechanism" that would facilitate transfer traffic, Jandu says. LCCs are typically reluctant to take on liability for connections, with Wizz Air's Váradi explaining: "In principle we have nothing wrong with connecting. The only question is whose problem is the connection - the airline's or the customer's? As long as it's the customer's problem, we are fine with that."

Wizz Air's role in filling in white spots will likely continue to focus on eastern markets, aided by its proven ability to secure bilateral designations in Hungary. Váradi says he hopes to double the airline's presence outside Europe by 2015, delving further into the Commonwealth of Independent States, the Caucasus and the Middle East.

Wizz Air's Budapest network in December 2013

But further growth by Ryanair cannot be discounted. Despite O'Leary's antagonistic negotiating style - he previously called for his statue to be erected in Budapest's Heroes' Square - Jandu says there is "ongoing dialogue" with the carrier. Pointing to the opening of Ryanair's new bases in Morocco, he says the airport has already submitted a proposal to O'Leary's people for "three or four destinations that we know will work...Hungarians desperately want winter sunshine".

Full-service provision

Although 2012 was dominated by LCC expansion, Jandu is committed to growing the airport's full-service provision in tandem. Passengers travelling with both categories of airlines have access to the aesthetically appealing SkyCourt terminal building, he notes, adding: "I think that gives us a USP (unique selling point) in Europe in terms of an EU capital city airport. Very few airports can offer both of these [business models] from their capital's main airport."

Lufthansa, British Airways, Air France and Qatar Airways are among the full-service carriers serving the airport, and there are no plans to scale back legacy infrastructure such as premium lounges. But efforts to restore Budapest's Malev-era long-haul links have so far not been fulfilled.

American Airlines and Hainan Airlines axed their respective services to New York and Beijing shortly after the flag carrier's collapse, hastening the demise of the hub model. Despite high-profile efforts to restore its New York link, Jandu says Toronto is the most likely first long-haul addition. Talks are underway with Canada's Air Transat about a possible launch in summer 2014.

Notwithstanding progress in expanding the network, the loss of Malev has ultimately forced Budapest to adopt a more niche role within Europe. Váradi accepts that this will disappoint some Hungarians, but he makes no apologies for the pragmatism.

"If you just look around central and eastern Europe, you probably have around 20 airlines on sale right now. They are not on sale because they are great airlines. They are on sale because their management and governments have run out of ideas about what to do with them," he says. "I'm not trying to be negative here. I'm just trying to be realistic, because this is dictated by economic realities. We can decide to be at the forefront of the process, or we can keep lagging behind."