State aid granted to struggling Hungarian flag carrier Malev was today branded illegal by the European Commission, which has ordered Hungary to recover nearly Ft100 billion ($406 million) from the airline.

The EC opened an in-depth investigation into Malev in December 2010 and today concluded that financing granted to the carrier between 2007 and 2010 did not comply with European Union state aid rules because Malev, "given its consistently difficult financial situation, would have been unable to secure such financing on the market on the terms conceded by Hungary, nor possibly any financing at all".

It added that Malev had failed to demonstrate how it could become viable again under its current business model, which "contained no evidence that a private source would be contributing to the cost of restructuring".

In addition, the business plan "contained no compensatory measures to minimise the competition distortions brought about by the significant state support", noted the EC.

The funds that will now have to be recovered from Malev by the Hungarian government include a €76 million ($97 million) loan which was taken over in 2007, a tax and social debt deferral amounting to Ft13.8 billion and two capital increases of Ft25.4 billion in February 2010 and Ft5.7 billion in September 2010.

Hungary's government last month rejected suggestions that Malev was close to bankruptcy, noting that the ministry of national development was conducting "advanced negotiations with several financially-stable strategic investors".

However, this was before the airline was ordered to pay back the unlawful state aid.

Malev chairman Janos Berenyi today said the EC ruling would have no impact on the day-to-day running of the airline because the carrier did not face an immediate payment liability.

"The Hungarian government has informed Malev management and the general public that it remains committed to maintaining the national carrier. Accordingly, Malev management and all staff members are carrying out their work as usual, and they are working on sustaining into 2012 the improvements in results recorded in the past few months," said Berenyi.

He added that Malev expects "significantly improved operational results in 2012".

Malev was renationalised in 2010, three years after its privatisation. The carrier was sold to Russian-backed AirBridge in 2007 in a privatisation process which the Hungarian government last month described as "one blunder after another".

Source: Air Transport Intelligence news