Beleaguered Hungarian state carrier Malev will be driven to bankruptcy if it is forced to repay nearly Ft100 billion ($440 million) in state aid, but the country's government insists that a national airline is justified and is working on a successor to maintain air links.

The European Commission is investigating the operator's compliance with state aid regulations, following the granting of substantial loans and support to the airline during 2007-10.

In a newly-published detailed white paper on Malev's catastrophic financial situation, Hungary's ministry of national development said it is searching for strategic investors to help Malev, or be prepared to assist with creating a new carrier if it fails.

"It is in the fundamental interest of the Hungarian economy to be accessible by air," said the ministry. "For lack of a national airline centred in Budapest, our economy would suffer an irreparable loss already in the medium term."

Negotiations have been held this year with "several" interested parties, it said, including China's Hainan - which subsequently backed out - and "significant" European aviation participants, which the ministry declined to identify.

The white paper is scathing about the poor management of Malev, pointing out that the airline has had around 20 general managers in the space of the last two decades, and that choices of leadership were frequently based on political loyalty rather than an ability to run the carrier.

"In the overwhelming majority of cases the appointed persons had no experience whatsoever in aviation business management," the ministry said.

Its paper highlights the "lack of a long-term plan" to deal with the carrier's financing and points out that several valuable assets - including its fuel-supply business, slots at London Heathrow, and hotel activities - were sold, depriving the company of "practically all of its wealth".

The ministry harshly criticises several "narrow-minded and prodigal" decisions over the course of the last 10 years, particularly centred on Malev's fleet strategy and its ill-fated and "irresponsible" privatisation.

"Although in the short run the contractual conditions [for the lease of aircraft] might have seemed to be advantageous, they impose heavy costs on the company up to this very date," it said.

It said expensive maintenance visits, which often fall simultaneously, combined with "disadvantageous" contractual conditions and "insufficient" reserves for servicing, have created a reserve deficit of $120 million.

Malev acquired a batch of Bombardier CRJ200s but the ministry said there was "no co-ordination" between this transaction and the leasing of the carrier's Boeing 737s, with the result that the fleet composition was "unsuitable".

Following privatisation, while under the ownership of Russian-backed AirBridge, Malev also acquired second-hand Bombardier Q400s to replace the CRJs and Fokker regional jets. But the CRJs had to be sold below cost price, said the ministry - one remains unsold - and the Fokkers underwent an expensive overhaul before return. It added that the technical condition of the Q400s was "uncertain" when purchased.

Malev's cancellation of long-haul flights was a "necessary" decision, but one that was nevertheless "rash and inconsiderate", the ministry said, not least because the last long-haul Boeing 767 is still waiting for sale, along with the CRJ.

The privatisation itself was "one blunder after another" by the then-government, the ministry claims, with failure to carry out necessary checks on investors and fix suitable conditions.

It claims the buyer practically did not invest any capital of its own, and that Malev effectively "purchased itself under a Russian umbrella". The ministry is damning about the course taken to privatise Malev, and the "drastic deterioration and destruction" of the company's business under private ownership, while the decision to renationalise the carrier - to avoid the "inconvenience" of liquidation - has placed a heavy burden on the country's budget.

Source: Air Transport Intelligence news