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Malev changes strategy: Hub rather than niche
By Andreas Spaeth
Within a period of less than six years Malév has experienced an astonishing journey through time: from the retirement of the last Russian Tupolev Tu-154 in 2001, the difficult role of being too small a niche carrier desperately looking for an investor in ever new rounds of privatisation, through to its new status as a member of one of the biggest global airline alliances which has finally found a strategic purchaser from Russia. On 23 February 2007 Boris Abramovich, owner or majority shareholder of five Russian airlines which are just in the process of uniting into the new company AiRUnion, purchased a 99.9 percent stake in Malév from the Hungarian state. This marked the end of a privatisation saga that had been going on intermittently since 1991 and had been replete with disasters.
On 1 April 2007 Malév finally joined oneworld, on the same day as JAL and Royal Jordanian. “After 18 months of preparation, it is a great pleasure to welcome one of the best east European airlines as a new member,” said oneworld Managing Partner John McCulloch during the joining ceremony at Budapest airport at the end of March. The advent of the Hungarians will have the effect of expanding the combined route network of the oneworld airlines by a further ten destinations, all of them in eastern Europe, and also by two states, Montenegro and Macedonia. Moreover, Malév is the last national airline of a former Eastern bloc state to be joining an alliance after LOT (Star Alliance) and CSA (Skyteam). It is also the smallest of the three and the financially weakest. However, this could now change as the new owner is injecting fresh capital as well as new perspectives. “In 2008 we will be restored to profit and already in 2007 we expect to halve our losses,” the then CEO of Malév, Janos Gönci, promised in the spring. The reasons he named as his main grounds for optimism were firstly the alliance membership, which should boost the airline's revenues by around €12 million in both 2007 and 2008, and secondly new routes to Russia in partnership with AiRUnion.
“Up to now a lot of people have thought of Budapest only as a regional aviation hub,” says Boris Abramovich, who, incidentally, is not related to the much more well-known Russian billionaire and London football club owner, Roman Abramovich. “Malév is now part of an east-west axis which will transform Budapest virtually overnight into a hub airport.” Abramovich's avowed business goal is to increase the airline's passenger volume over the next few years by between 10 and 15 percent per year, starting from three million passengers in 2006. According to Janos Gönci, Malév was sold for “virtually nothing”, but what was important was that its accumulated debts were taken over and its equity was raised by €50 million over two years, while in addition bank guarantees were provided for a further €32 million.. Altogether, Abramovich's investment in Malév through Abramovich's Air Bridge holding company comes to €102 million.
Boris Abramovich comes from Krasnoyarsk in Siberia, where in 1995 he founded Sibaviatrans Airlines and in 1998 also became the chief executive at Kras Air when this airline faced insolvency. He subsequently founded AiRUnion as a holding company and the biggest airline alliance in Russia. Its members are Kras Air and Samara Airlines, in each of which Abramovich holds a 40 percent stake, along with Domodedovo Airlines (in which he owns 48.6 percent), Omskavia (70 percent) and Sibaviatrans (100 percent). At the beginning of May President Putin personally gave his formal approval for the merger of all these companies under the new name of AiRUnion, which should be completed within six months and in which the Russian government wants to hold at least 45 percent of the shares. Up to now the AiRUnion airlines have flown to 68 destinations at home and abroad from four Russian hubs, and in 2006 the total number of passengers rose by eleven percent to 3.7 million – so there is plenty of potential. Abramovich is now looking westwards in search of achieving synergies on both sides for his equity holdings.
“The main reason why I invested in a carrier in the European Union is that I want to feed in passengers in both directions,” Abramovich told FLUG REVUE in Budapest. “The integration of AiRUnion allows us to develop westwards. Malév on the other hand needs new markets in the east, and the biggest market opportunity is to be found in routes between western Europe and Russia and the Far East via Hungary.” Above all, the Russian air transport market is booming: “In 2006 over 20 million Russians travelled to holiday destinations abroad, and the number of Russian visitors to Hungary was up by 30 percent compared with the previous year.”
However, the big question is now how exactly Malév and AiRUnion will share out these potentially lucrative traffic streams, especially as in Moscow Malév still flies to the inefficient Sheremetyevo airport, whereas AiRUnion is based in the modern Domodedovo. To make matters even more complicated, Malév still has a code sharing agreement with AiRUnion competitor Aeroflot.
“Losing this codeshare and the associated traffic would be dangerous for us,” warned ex-Malév CEO Janos Gönci in an interview with FLUG REVUE. Gönci wants to increase the frequency of flights between Budapest and Moscow from the present two per day. At the same time he pointed out that the exchange of traffic could also take place elsewhere, for example, in Jekaterinburg in the Sverdlovsk region near the Ural, to which Malév started its own flights at the end of April. Another option would be Samara, a hub of Kras Air, although the Hungarians have not themselves flown there up to now.
Boris Abramovich shies away from radical solutions. “We don't want to simply cut off Malév's relations with Aeroflot and shatter the present system, we want to proceed step-by-step. Changing the airport Malév uses in Moscow is not a priority, but the move will take place,” Abramovich believes. But no one, either in Budapest or Russia, is able or willing at the moment to explain convincingly exactly what form the system of cooperation will take in the future, and there seemed to be considerable strategic differences between the Malév CEO and the new owner of the airline some months ago. This resulted in Gönci's replacement in July by the Englishman Lloyd Paxton, formerly in the BA management team and more recently the successful CEO of Air Astana in Kazakhstan. But evidently airline veteran Paxton was not happy with the new power relationship at Malév either, since he resigned “for personal reasons” after only two months at the end of September. He was succeeded as CEO by Vice Chairman of the Board Peter Leonov.
Surprisingly, AiRUnion also wants to join forces with Austrian Airlines (FLUG REVUE 7/2007) and forge an alliance for eastern and central Europe. The Austrians are among Malév's major competitors, especially through low-cost airlines Wizz Air, founded by an earlier Malév CEO, József Váradi, and SkyEurope.
At least the new owner holds out the prospect of new aircraft for Malév in the medium term. “I would order the Boeing 787 immediately if I could,” enthused ex-CEO Gönci, who still sits on the Malév supervisory board and was responsible for acquiring the biggest long-haul aircraft, a Boeing 767-300ER with 229 seats, leased from ILFC, only in the middle of April. Malév had previously operated the 767 back in the early 1990s when the long-haul fleet had to be reduced to only two Boeing 767-200ER's.
The Hungarians currently fly regular services to Toronto, New York and Bangkok and they also operate charter flights between Budapest and Japan. “We want to limit the number of aircraft types in our fleet,” explained Janos Gönci, “We will try to sell our four Canadair jets, but we don't want to reduce our overall capacity”. To fill capacity gaps on regional routes, Saab 340 and Saab 2000 turboprops are already being flown for Malév by Carpatair of Romania in a wet leasing arrangement. As Malév's 18 Boeing 737NG's are still very new, the average age of the entire fleet is about five years. And, as a new member of a globe-spanning alliance, it is anything but certain that the Hungarians will keep their own, comparatively tiny long-haul operations.
From FLUG REVUE 12/2007
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