The planned sale of Malev to a group of investors affiliated to Russia's AirUnion has rekindled hopes that the stalled airline privatisation process in Eastern Europe may spring back to life.

The agreement to sell Hungary's state-owned flag carrier for HUF 200 million ($1 million) plus a cash injection of €50 million ($66 million) and repayment of some of the airline's HUF 32 billion of debt, is a case of seventh time lucky. There have been six failed attempts to sell Malev since the collapse of the Iron Curtain. The buyer, AirBridge, is affiliated to AirUnion, the Russian airline alliance led by KrasAir.

Another much mooted privatisation may also be in the offing, with CSA Czech Airlines saying it will draw up plans for a sale by the end of the year. The Polish government and creditors for the former Swissair have said they too are working towards an initial public offering for LOT Polish Airlines, although wrangling between the two sides has recently seen new chief executive Marek Mazur suspended after a row over his appointment.

All three carriers have put in less than stellar financial performances in recent years, face growing low-cost competition and limited opportunities in the long-haul market. Even so, some observers believe that there is investment potential.

"The attraction they offer is low labour costs," says aviation consultant and former Olympic Airways chairman Rigas Doganis, adding that unit costs on intra-European services are roughly halfway between the likes of easyJet and Europe's mainline carriers.

But Doganis notes that Eastern European carriers tend to be riddled with inefficiencies, suffer from frequent government interference and have poor marketing strategies. "The challenge is how to eradicate the inefficiencies, improve the marketing, and persuade governments to keep their hands off."

On the issue of long-haul services, Doganis states: "I would argue that they should cut back because it is increasingly difficult to compete with the major network carriers."

CSA seems to be taking steps in this direction, having recently wet-leased one of its four Airbus A310s to Air-India and dropped service to Dubai.

Emre Serpen, senior vice-president at consultancy SH&E, says: "Governments want to use privatisation to help raise capital and shift the burden of refinancing the airline needs to the private sector." He adds that privatisation "encourages" efficient operations and means airlines are more likely to be run by professionals rather than by political appointees who may or may not have experience in airline management.

Doganis argues that given the turnaround potential and rapidly growing markets in Eastern Europe, the larger European airlines should be interested in investing. "I'm surprised they haven't. I would have done that a long time ago," he says.

The history of airline investments in Eastern European carriers is a somewhat chequered one, however. Air France and Alitalia ended up selling back their stakes in CSA and Malev, respectively, in the 1990s.

Source: Airline Business