Tom Gill BUDAPEST With a new chief executive and new investors on the horizon, things might be looking up for Malév

Ferenc Kovacs is cautiously confident. Appointed Malév's chief executive in October after 23 years with the company, he is well aware of the many false starts that the Hungarian flag carrier has made.

In common with its counterparts in central-Eastern Europe, he has seen modernisation and privatisation plans hatched almost as rapidly as they have faded into thin air. The brevity of the tenure of his predecessors - former chief executive Antal Pongracz lasted just one year while five of his nine-strong management team were replaced at the same time - is testimony to the carrier's lack of direction.

But if events elsewhere in the former Soviet bloc are anything to go by, this time Malév may finally be close to a new start. The sale of Polish flag carrier LOT late last year gave rise to a bidding war among Western European carriers. SAirGroup, which won through by apparently stumping up the most cash, is now integrating LOT into its European Qualiflyer alliance.

Malév, CSA Czech Airlines and Romania's Tarom are next for privatisation. All hope to find foreign investors before the end of the year. The Romanian Government aims to sell a 49% stake in Tarom to foreign investors and in February chose consultants SH&E and investment bank ABN-Amro as advisors to the sale. KLM and Lufthansa are said to be the front runners.

Bitter taste

Tarom is a newcomer to privatisation, but like the Czech flag carrier, Malév has tasted it in the past and found the flavour far too bitter. In 1993 Alitalia bought a 35% stake, but the state-owned Italian airline had serious problems closer to home and it left its new Hungarian asset to languish. In 1997 Alitalia, itself in the midst of a state rescue package, was obliged to offload its stake to two Hungarian banks which late last year sold it on to the Hungarian Government.

Budapest, back in full control of the airline, is undeterred. Following a study by SH&E. Kovacs says the government plans to sell 49% to foreign investors, 25% to local interests and to retain 26%.

Whoever buys into the carrier will have a host of problems to resolve. Malév has been in the red since 1997, when sales began to slip. Traffic growth fell from double digits, to 7% and then 1% in 1998. In 1999, the airline was hurt badly by the war in Kosovo, as tourists avoided a country too close to the conflict for comfort and trade in the region was disrupted. It was also hit by a 250% increase in fuel price, which was particularly painful because of its ageing gasoline-guzzling fleet. "Unfortunately we still operate Tupolev Tu-154s, which we wanted to replace last year," says Kovacs.

First-half 1999 results were positive at Ft1.2 billion ($5 million), but only because of a one-off gain from the sale of a stake in SITA spin-off company Equant. With stiffer competition from foreign carriers beginning to eat into Malév's share of traffic and put more pressure on already weak yields, something clearly will have to give.

Malév is, for example, heavily overmanned. "There are 2,700 people employed by Malév and only 22 aircraft -Êit is too much," says Gyorgy Weiner, secretary of the Hungarian pilots' association, Hunalpa. Kovacs agrees and intends to cut staff numbers as well as outsource non-core activities.

On the other hand, the airline does have some pluses which it plans to exploit more effectively. Some of Malév's Western frequent flyers say the service is as least as good as some leading Western European major airlines. Despite inefficiencies, costs are also relatively low. Hungarian pilots, for example, earn around a third of their counterparts in France and Germany, and the trend is downwards in real terms, with wages growing at just over half the rate of inflation, says Weiner.

Kovacs believes the airline's greatest asset is Budapest. The historical city is a big tourist attraction, while a heavy presence of foreign multinationals draws in higher-yielding business traffic - amounting to 13% of passenger numbers. Added to this is Budapest's position as a north-south, east-west crossroads for Europe and close proximity to major cities, including Vienna.

"We are geographically in the middle of Europe. Budapest could and should be a central/eastern European hub." Kovacs says that even if LOT develops Warsaw, the city's northern location would still allow Budapest to develop its own hub further south.

Bolstering Budapest

In a bid to bolster Budapest, last year the carrier added seven destinations - Toronto, Oslo, Dublin, Zagreb, Skopje, Sarajevo and Tripoli. Kovacs says these routes are already profitable and he wants to build on the current twice-weekly frequencies.

But a shortage of aircraft is holding Malév back, he says. Kovacs favours 70-seat turboprops for flights within 2h of Budapest and Boeing 737-300s and -400s for longer journeys. But Malév lacks the resources and financing a fleet renewal will part of the task of the strategic partners Malév is seeking.

Kovacs does not offer any clues as to which airline or alliance is favourite for taking equity in the carrier. "SH&E worked out the best solution out of the five global alliances. We are now gathering information about which alliances want to take a share in Malév and what benefit they will bring. The state property agency has until mid-summer to make a decision," he says.

Source: Airline Business