Saturday, August 31, 2013

Will Sólyom Hungarian Airways become the new Malév or not?

The first two aircraft of Sólyom Hungarian Airways will return to Hungary by the end of this week, but the new carrier’s destinations remain confidential. CEO József Vágó has only revealed in an interview with local news portal on Friday that the routes of the country’s collapsed national airline Malév were found largely acceptable and that they were thinking destinations in the Balkans too. He also said the identity of the mysterious Middle Eastern investor behind Sólyom (Falcon) could be revealed already next month. What seems certain at this juncture, Vágó said, is that the airline could keep going on "laughing" for one or two years even with losses.

Where will the falcon fly?

The first leased aircraft of Sólyom Hungarian Airways - a Boeing B 737-500 type aircraft with code HA-SHA - arrived to Budapest on 18 August. A few hours later, though, it left again for Bournemouth (UK) for parts. The carrier leased six (23-year-old) aircraft of the above type from the Bournemouth-based European Aviation so far and plans to operate a fleet of 12 birds by the end of this year, Boeing and Airbus types too. Initially the planes will have 110 seats, but talks are in progress with Airbus on 180-seat aircaft too.

Although Vágó would not reveal their business plan, he did divulge that they have found the now defunct Malév’s routes and schedules largely appropriate for Sólyom too therefore their destinations and transit offers would be similar. Sólyom will fly to destinations that were not available before, which means Balkan States could be added to the offered routes again. Long-haul flights will be key in the business plan. Management expect 40% of the passengers to be generated by transit traffic which number could go up to70% by 2017 when long-haul flights kick in.
Let’s assume that these flights could be operated profitably. When Malév collapsed all the airlines - including low-cost/low-fare airlines - present in Budapest capitalized on the carrier’s demise and grabbed whatever routes they could. Hence the question: how come that those who have keeping a very close eye on the markets and are flexible enough to take up destinations just for the sake of trying whether it works or not had chosen to stay away from some of Malév’s former destinations. Also, in order to reach economies of scale at long-haul flights a carrier needs a large fleet, many routes and lots of passengers. It was exactly the lack of these that killed every effort by Malév to profit from long-haul flights.

This is how Sólyom could become profitable...

Vágó said Malév had been operating fundamentally well and its collapse had been brought about by financial reasons; more precisely by its massive debts and the huge interest burden on these loans, whereas operations and sales were profitable.
This is an interesting remark considering that Malév has not been profitable at an operating level for a long long time.

Vágó promises Sólyom’s cost level to be 64% below Malév’s bills, while giving higher salary to pilots than the former national carrier. The airline plans to achieve that goal by insourcing everything it possibly can, using book keeping and payroll services, for instance, as holding services which may be deducted from the tax and savings are also to be achieved on a minimal office staff.
Staff-related expenditures tend to have a small weight in the cost structure of airlines. Take a look at the rivals, Lufthansa for instance, whose staff-related costs were only 14% of total costs last year. So if this is the big plan to achieve lower costs than Malév, Sólyom’s management would need to think again and come up with a little more effective method. Material costs (which include fuel and the lease of aircraft) had a two-thirds weight at the German carrier in 2012. This is an area where Sólyom could aim to save bigger bucks. Vágó says it is possible despite the mixed fleet, citing the following factors.

The smaller aircraft help achieve better cost efficiency by having smaller regulatory fees and duties on them and a 110-seat plane could be operated profitably even at an 80-90% load factor. Vágó added that although the aircraft are indeed old but they have been refurbished and they are in a better shape than those flying out of Hungary currently. Not to mention that courtesy of the highly favourable lease deals they may be replaced.
An 80-90% load factor is definitely a good one and only the most successful discount airlines can show for such numbers. Malév had load factors of around 70% even in its best years. If the charter flights, however, are filled up by Sólyom’s partner travel agencies the situation could be different than at the carriers flying on scheduled routes.

Who is behind Sólyom?

Vágó noted about the mysterius Middle Eastern investor of Sólyom that one of them is a well-known bank in the United Arab Emirates and the other is a strategic investor based in Oman. Both will reveal their identity, he added. The financial background for a 50-strong fleet is already ensured and even if the airline has no revenues whatsoever for three months, keeping up operations for one or two years will still be a breeze, the CEO said.

Sólyom is receiving no subsidy from the state whatsoever, Vágó stressed, adding that the state is currently in a wait-and-see mode, as after Malév’s collapse it has no intention to get behind an airline that has any chance of going down. Vágó believes, however, that the level of confidence will slowly reach a point where Sólyom must be considered a priority national economy investment since it will create a HUF 20 billion annual market for local suppliers.
Last time we checked direct state subsidy was illegal in the European Union, so Vágó should not be expecting to receive state capital any time soon. That was exactly what closed the door on Malév last year when the European Commission ruled that the airline received unlawful state aid and there was no way the state could give the ailing carrier another capital injection. So some caution with regard to allowances and aid is warranted without a doubt.

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