Bankruptcy of Malev Hungarian Airline - Research Paper Example

Bankruptcy of Malev Hungarian Airline (Effects of Bankruptcy to its Hub Airport and Other Airports) Student’s Name: Instructor’s Name: Course Code: Date of Submission: Executive summary The purpose of this research was to investigate into the bankruptcy of Malév Hungarian Airlines and then report on the effects of its bankruptcy to its hub airport which is Budapest and other airports. Malév Hungarian Airlines which has been in the aviation industry for 66 years stopped its operations on 3rd February 2012 citing financial constraints. The company could not continue to operate after the European Commission had recommended the funding of the airline be stopped and prompted to pay its outstanding debts of £250m. The company was also in trouble following its inability to pay their suppliers even after requests had been made by the suppliers something that led to holding of its aircrafts overseas. The bankruptcy of the airline company was a major blow to its hub airport which is Budapest and other airports. The airport suffered 40% loss in its revenue that was collected from the company operations as service charge. This prompted for revising business plans for the airport so as to help the business adapt to new situation. This is the situation expected in other major airports and in particular in Europe since some of the flights were rerouted so as to cover the market unattended in Hungary. This led to the decline in the revenues where the airlines used to operate previously. It is from these findings that it is recommended restructuring of the airline business should involve all stakeholders so as not make wrong decisions with regard to nationalization or privatization of the business. Your address: Date: Recipient address: Dear Sir/Madam As one of your students, I am pleased to inform you that that I have completed the work assigned to me with regard to researching and reporting on the bankruptcy of Malev Hungarian Airline and establish the effects of company bankruptcy to its hub airport which is Budapest and other airports. The research has tackled major issues which include the company overview, its bankruptcy scenario and the effects it’s expected to have both to its major hub airport and other airports and thereafter a specific recommendation on what should be done to avoid the situation with other airlines. It is therefore my humble request to you accept my submission for consideration by you. Thanks and look forward to hearing from you with regard to my submission. Yours Sincerely Signature: Name: Introduction Bankruptcy is the major problem that is facing different organizations today. This problem could be attributed to a number of factors which can be from internal or external. Internal factors may be as a result of poor governance which allows for poor malpractices like frauds, corruption and resource mismanagement. On the other hand, external forces that may contribute to bankruptcy among organizations may include change in the final environment where competition becomes even stiff thus reducing significantly the existing market shares which in turn affect the company’s returns and revenues and consequently inability to sustain their businesses. Global recession and financial crisis and latest being the Euro Zone. Some of the global companies that have undergone bankrupt include General Motors, Enron Inc., HIH Insurance, United Airlines and now Malév Hungarian Airlines. Bankruptcy is becoming a major issue for the majority of the investors and in particular in those industries that are hit by financial crisis and global economic recession like finance and insurance because of the fear that enormous resources will be lost (Zoltan 2012). This therefore calls for the need to address issues that may lead to bankruptcy so as to avoid such situations where the whole industry is affected by the fall of one of the major companies in the industry. Purpose of the research It is now clear and understandable to the investors, the industry and other major stakeholders that Malév Hungarian Airlines has run bankrupt and put under receivership. It is from this perspective that this research is intended to study in detail the fall of Malév Hungarian Airlines and report on how its bankruptcy can affect its hub airport and other airports. This is important in showing how the financial difficulties of the company will affect its local airport and other airports. Company overview Malév Hungarian Airlines before its fall in 2012 was the national airline for the Republic of Hungary. The company was also the country’s second largest airline company after the homegrown company LCC Wizz Air. The airline’s major airport was Budapest Ferihegy International Airport, which is a base where the company used to schedule its operations and services to various destinations which covered most parts of Europe and other parts of Middle East. Malév Hungarian Airlines was also a member of the Oneworld Alliance. In February 2010 is when Malév Hungarian Airlines was nationalized with the state owning 95% of the company’s equity and consequently becoming the major shareholder thus prompting the Airbridge which was the former major shareholder in the company with 49% to reduce its shareholding to 5%. After the company seemed to make major losses, its operations were put on hold on 3rd February 2012 to making more losses and rescue investors money. By the time the company was being put under receivership, it owned 22 aircrafts with 2600 workforce (Zoltan 2012). Bankruptcy overview Hungary’s major airline Malev ceased its operations on 3rd February 2012. This is after two of its aircrafts were seized the time when Ryanair and Budget Carriers announced new routes for their aircrafts to Budapest. Appendix 1 below is a photo showing stranded strangers at Budapest as the company stopped its operations. The airline was grounded when it was established that the company was incurring about €550m liabilities that could not be sustained. Different sources had shown that the situation in the airline firm had started becoming hot when the suppliers had started asking for the advance payments which the company was not able to meet. On the other hand, two of the company aircrafts had been held and stopped from taking off from two different destinations which are Dublin and Tel Aviv, something that prompted to grounding of the company business. Immediately after the grounding, serious effects could be felt. For instance, it is presented that the company officials were very much worried of the company customers and passengers who were stranded in different destinations. The grounding of the company operations immediately affected 7,200 passengers among them was 3,500 from Hungary and 3,700 from abroad. This was a major blow financially both for the company and the customers who expected to have their flights the same day the company operations were grounded on 3rd February 2012. The company was grounded when it had just been announced by the company chairman Janos Berenyi that the company was about undertake comprehensive restructuring and that it could help the company attract an external investor who could help the company sustain itself. It is however, argued that the company grounding process had been started one month earlier when the European Commission which had requested Budapest to withdraw its financial aid to the company and in state confront the company repay the £250m that it had received as aid for the period of ten years starting 2007 through to 2010. Various sources had indicated that behind the company failure were two major forces namely operating environment that had become so tough for the company as a result of the Euro Zone financial crisis and the country’s prime minister Victor Ornban who critics have said that his frequent muzzling with the judiciary and the media as well central bank contributed immensely to the company’s failure. It is from this regard that the country’s prime minister forced to account for what happened with the leadership of the airline company (BoardingArea 2012). Effect of bankruptcy Budapest Airport The fall of Malév Hungarian Airlines was not only a major blow to the government of Hungary but also the Country’s largest airport, Budapest. Over 1.5 million customers travelled with the company and that 40% of the airport’s revenue was as a result of the operations of Malev. This was a major blow to the airport as it is expected that the operations of the airport will not be adequate as ought to because of lack of revenue. However, this is a short-term problem as will be seen later since different airline companies will be coming to take advantage of the market that had previously been served by Malev. The airport was privatized in 2007 and was owned by five investors by the time the airline company was collapsing and that the airport is estimated to be worth $3 billion of its bills. With this regard, it was expected that the fall of Malev could greatly cost the investors a lot of revenue (The guardian 2012). In a December White Paper, it was by the government that the Airline’s loss and collapse which used to spend over €50m in a year in air services charges and on property fees, could greatly harm the operations of Budapest airport which is the largest and busiest airport in the country. This is because the revenues collected by the air services charges could significantly drop. According to Mihaly Hardy who is the spokesman of the airport, was once quoted to have said that if the situation could persist and the revenues continues to drop, then the management of the airport could consider revising its business plans so as to revise its contractual obligations as one of reducing operational costs for the airport and live within expected limits. This because even though some other airline companies are expected to come into the market, it is estimated that without the Malev, still, about 22 to 23 routes will remain unattended and this may have a long-term effects in terms of revenues to the airport (The guardian 2012). Other airports In Southeast Europe, travelers have fewer choices to travelling and are in most cases forced to pay much more than the normal fare and this scenario is expected to worsen as the fall of Malev comes into play. According to Brajshori (2012), Malev was the main competitor for Lufthansa Group is the most common airline in the region and that is viewed to be a bit expensive as opposed to Malev. However, with the fall of Malev the fare hike is being witnessed by major other airline companies operating in the region (Brajshori 2012). What this is likely to cause in the European economy in particular is increased competition in terms of price which in the long-run may have adverse effects on the small airline companies that have not established and that have debts to pay. Inability to compete in the industry by small line companies may lead to collapse of more other airline companies. If this scenario goes uncontrolled, it is expected that collapsing of more airline companies will enhance the current financial crisis that is hitting Europe. In other airports, the scenario presented at Budapest where revenues are dropping and revising of business plans are being considered as options to help sustain the operations in the airport, is likely to be reflected. Malev’s case can be used as a reflection of what is happening in Europe as a result of the financial crisis. This is the problem that is facing many different airline companies and airports as well because the poor performance of the industry. According to the Spokesman for the International Air Transport (IATA), an association that represents over 240 major airlines, Malev being one of them, Chris Goater in The Associated Press, he is convinced that the European carriers this year are expected to lose over $600 million as compared with the expected global net profits for the airlines of $3.5 billion. The scenario is likely to become even worse in the industry as a whole if the eurozone crisis is to become an escalated banking crisis. For instance, one week before the operations of Malev were stopped, over 220 flights by Spanish airline Spanair had been cancelled citing lack of enough funds as major cause. This in the current situation means that the declining of the number of flights in major airports world over, is expected to mean that some of the airports are likely to experience major challenge. The cancellation of 220 flights by Spanish airline Spanair which affected over 22,000 passengers could have very serious challenges later. The Barcelona airport which was the major hub for the airline company was on the receiving end during this time. The airport that employed over 2,000 staff could consider restructuring its operations including its workforce something that could see reduction of its staff to maintain so as to reduce operational costs to match with revenues generated (Associated press 2012). Since the collapse of Malev Airline in February this year, different companies have come to penetrate the Hungarian airline market. The first airline companies to penetrate the market were Wizz Air and Ryanair. The penetration by these companies has helped to fill the void left by Malev Airline by around 80%. By the start of June, nearly almost all point-to-point traffic had been recovered. Other airline companies from different parts of Europe were closing in into the market. This kind of situation has a resulted into a situation whereby different airlines are trying to establish their own bases in different airports. Low-cost airline companies are also expected to play a very significant role in the development and management of different airports. This is because with the competition, fare prices are likely to go down as different companies will be trying to compete for the available market. This will definitely reduce the company revenues and consequently reduced revenues in form of service charges for various airports. On the same line, the flights to some markets are likely to reduce as some airbuses will be assigned new routes and destinations. This will have direct impact on the airports that used to receive revenues from the diverted routes to different airports. Finally, during the collapse of Malev, it was noted that investors were the people on the receiving end when the airline company ran bankrupt. However, with the fear that the investors were losing their investment, this therefore is considered to cause a lot of tension across the industry as speculation is expected to run that the industry is not suitable to invest in given the prevailing economic conditions. Conclusion This research was intended at investigating into the effects of the bankruptcy of Malév Hungarian Airlines to Budapest airport and other airports. This analysis has briefly tackled issues related to the company and the overview of bankruptcy in the company. This study has established that the bankruptcy of Malév Hungarian Airlines was a major blow not only to the economy of Hungary but also the Budapest Airport which was the major hub for the airline company. This is because the airline was the second largest airline company in the country and that it used to contribute about 40% of revenue to the airport. However, with bankruptcy the airport was suffered greatly as revenue was lacking to support daily operations something that greatly affected the investors and also led to consideration to revise the company business plans so as to live within a manageable budget. On the other hand, in other airports, this research has established that the failure by Malev Hungarian Airline has also influence the operations of other companies from various aspects which include competition, speculation of the performance of the industry and restructuring of the airports to accommodate new changes in the industry. Recommendation This research has established that bankruptcy is a major challenge for any of the global companies today. This is because a number of forces such corporate governance, global recession and financial crisis have continued to mount so much pressure for the businesses to surrender. It is with this regard that this study proposes that restructuring of the business should involved key stakeholders so as to avoid making rush decisions like privatization or nationalization which could have diverse effects on the leadership of the business. References Associated Press. (2012). Fox news: Hungary's national airline ceases operations, retrieved on 22nd November 2012, available at: http://www.foxnews.com/world/2012/02/03/hungarys-national-airline-ceases-operations/ BoardingArea. (2012). Wild about travel, retrieved on 22nd November 2012, available at: http://boardingarea.com/blogs/wildabouttravel/2012/02/11/malev-malaise/ Brajshori, M. (2012). Southeast European Times: Hungarian airline's bankruptcy causes ripple effects in Southeast Europe, retrieved on 21st November 2012, available at: http://setimes.com/cocoon/setimes/xhtml/en_GB/features/setimes/features/2012/02/23/fe ature-03 The guardian. (2012). Hungary's airline Malev grounded: Bankrupt Hungarian flag-carrier Malev grounds fleet after two aeroplanes seized, as Ryanair and other budget carriers announce new routes to Budapest, retrieved on 22nd November 2012, available at: http://www.guardian.co.uk/business/2012/feb/03/hungary-malev-bankruptcy-airline- grounded Zoltan, S. (2012). Malev Airline Stops Services After 66 Years as Hungary Moves to Cut Losses, retrieved on 22nd November 2012, available at: http://www.bloomberg.com/news/2012-02-03/malev-stops-flying-after-66-years-as- hungary-cuts-its-losses.html Appendix 1 Read More