What happened to MALÉV? - updated with the restructuring plan

The European Commission ordered Hungary to have MALÉV, the Hungarian national airlines, to pay back about 350-400 million Euros in illegal state aid. Here is the press release. The Hungarian economic weekly HVG (the original article is only available for subscribers but here you can browse articles about the events)stated that Hungary has do calculate the amount to be repaid (which duty is explicitly in the decision) and to define how the state aid has to be paid back. This aspect will be important later. Also it has to be remarked that if the company is wound up and its assets are transferred or sold at market value.
The decision is dated 9th January 2012 and must be implemented within four months. The 3rd February MALÉV ceased operations, leaving passengers stranded on airports all over the world as not just the flights were cancelled but code-sharing partners also did not take MALÉV passengers and no tickets for other airlines issued by MALÉV were accepted any more. Further information on the last days and implications can be found on the Wikipedia page of MALÉV
Some interesting developments preceded this collapse: the company was declared the company an “organization of strategic importance” which means that a state body has to manage liquidation and the rights of the creditors are substantially limited. MALÉV asked for bankruptcy protection and these two events led the creditors to stop financing (including the lessor of most of its aircraft requesting their blocking, in some cases on airports abroad).
The decision was preceded by a letter to Hungary . This gave the possibility to the Hungarian government to justify the state subsidies by showing how and when MALÉV was a company in difficulties (which would have justified a one-off aid only) and present a restructuring plan (this latter could have saved the situation).
The decision can be attacked in court ( in the case of the Budapest Power Plant , Hungary won such a case).
The Hungarian government was defying the European Commission in several cases (about media law, the new Constitution and its accompanying acts, the pay of the president of the Hungarian National Bank) but did not even hint on trying this now (remember the interpretation of HVG that Hungary can define the way and timing of repayment).
But was or is there any chance?

To start with, MALÉV had a business model, whether good or not, part of which it pursued since the seventies: it enabled travel from the West to the Middle East by having passengers change in Budapest. The schedule of its flights to the Middle East was adapted to this (start from Budapest after the flights from the West arrived). Of course in the times of cold war, an “eastern” airline had a better position in the eyes of Soviet-friendly or “non-aligned” Arab countries, but the model also worked with Cyprus, strictly committed to Western-Europe already then. It was a member of an alliance and had code-sharing agreements and for a while enabled even good connections to the Americas. It employed a significant number of Hungarian sub-contractors and gave about 50% of the traffic on Budapest Airport (see the Wikipedia article referred to above).

Its profitability was, however, shaky, due to its strong links to the Hungarian state – it was not run really as a business. This is why state subsidies were needed to keep it afloat.

In 2003, the new socialist government sacked Mr Váradi its former CEO who established Wizzair , a cheap airline, using a lot of MALÉV staff. MALÉV since tried to compete with cheap airlines, in some cases its prices were lower that Wizzair’s to a more remote airport in the same city. Wizzair was one of those companies who called the attention of the European Commission to the state aid to MALÉV (there was at least one other company and of course this state aid would not have remained hidden anyway).

Another surprising fact:
The company which directly caused MALÉV’s demise (by initiating the liquidation proceedings) is not a supplier of MALÉV but has bought debts of the company and is linked to the organisation which is the receiver of MALÉV now. (If creditors do not agree to the protection – “chapter 11” by American terminology -, then the proceedings are transformed into liquidation.)

Beyond the state aid, MALÉV was first privatised and then re-nationalised. The reason for re-nationalisation was that the Russian owner, who seemed to be an appropriate professional investor familiar with the airline industry, did not prove to be useful professionally and its share was acquired by an also Russian bank. Any further re-structuring was hindered by this ownership as this bank also was a huge creditor of the company. So the credits had to be repaid and/or securities given and the bank’s share re-purchased. This happened in 2010, in the last months of the outgoing socialist government of Gordon Bajnai . The government secured the agreement of FIDESZ, due to win the next elections in April 2010. They also prepared a restructuring plan but FIDESZ refused to co-operate further in formulating this plan and without them neither further details could be fixed, nor negotiations with prospective partners could be started as it was clear that this government will have no say any more when the actions will really materialise.
Nothing was done even since and now it seems to be too late – the leased aircraft is away, new players occupied the best landing slots in the airports etc.

Some speculation: what could have been the solution? The easiest (followed by Alitalia and Olympic Airways ) could have been to have a new company take over the assets, slots and contracts of MALÉV (see above: at market value – maybe that was the problem as this would not have enabled a cheap takeover by a “friendly” investor) and leave the old company with its debts, including the repayment of state aid. The restructuring of the company by re-scheduling debt and streamlining it would have been a more difficult option and only if the EC had accepted that in this case state aid was not illegal. What is however quite clear: considering and publicising that the government will take an option - at least delaying repayment of state aid - could have enabled a soft landing, without leaving “the people” (the favourite term of the governing party) sitting on airports, sub-contractors and the airport suddenly without revenue. Companies under normal liquidation normally operate and this enables a much better sale of their assets and saving also their name. This is due to the fact that in liquidation, the first priority is to pay so-called “liquidation costs” which include the operating expenses accrued during liquidation and thus the company is able to get supplies for its daily operation. This was the case in much more difficult cases, like steel mills, dairy companies etc. before.

The government commissioner responsible for exploring and prosecuting “the previous government’s sins” declared publicly, that the state also has an obligation amounting to billions of forints to the owner of Budapest Airport (to whom the state sold it). He mentioned a strange term which raised suspicion immediately (but not in him): senior and also junior debtors have to be paid. These latter terms are namely used in bankruptcy and liquidation proceedings. After the privatisation contracts have been published recently, it turned out that it is true what the previous minister of finance, Péter Oszkó already hinted: This has to be done only when the airport itself goes bankrupt due to loss of traffic from MALÉV. And as other airlines (among them Ryanair, an arch-rival of Wizzair, but this is another story) crowd in to occupy slots, this seems to be improbable.

Péter Oszkó had a lot of things to explain and most if his communication about the re-nationalisation and the restructuring plans occurred through sms-es so no proofs. He is now member of the board of the holding company of Wizzair. This latter position he gained about a year after he ceased to deal with MALÉV.

The responsible minister for national development recently answered to a question of MALÉV in Parliament: “I am only in office since the 23rd December, I cannot take responsibility for this affair”.

European Council - tasks for growth and jobs

Too much has been written about the financial stability pact (about budget discipline) and commentators are usually disappointed about the result achieved on the European Council the 30th January in further points concentrating on growth and jobs which were also on the agenda. J. M. D. Barroso, the president of the European Commission, published his presentation on the European Council and also his other materials (you have to go down the page as there are only newer items on it).
The presentation contains a series of important data and observations. I would call the attention to the balance data on page 3 and youth unemployment rates on page 8. The first one clearly shows that the 2011 surplus of Hungary is just transitional while youth unemployment in Hungary is in the mid-range of Europe.
It is worth looking at the nice chart on page 5. Hungary has red marks in the following areas in this chart:
Fiscal consolidation (interestingly long term sustainability is not red)
Fiscal framework
Taxation (I assume mainly collection of taxes and fighting tax evasion)
Active labour market policy
Labour market participation (the activity rate in Hungary is disastrous)
Business environment and SMEs (in spite of government rhetoric)
Public services and cohesion policy.
It is clear, given the dominance of big European players on the banking market that there is no red area in financial stability (although I doubt that the housing market in Hungary would be healthy but this is also caused by the perturbations due to the big foreign exchange housing debt and the fairly confuse measures trying to handle that.