Emirates Airlines tipped as mysterious investor behind Hungary's new carrier Sólyom

Could Emirates Airlines be that mysterious investor from Dubai?

Sólyom Hungarian Airways held its first official press conference last week, announcing that it had signed a deal with two strategic investors. As a minority owner it named a tourism company registered in Oman, adding that another unnamed Dubai-based company is providing the necessary funding for the launch planned for August.

Gazdasági Radio learned from industry experts that this mysterious investor could be Emirates. There are three main air traffic hubs in the Middle East, in Dubai, Doha and Abu Dhabi. All three have their own airline, carrying 10-40 million passengers annually, mostly transit passengers. The largest carrier in the region is Emirates, based in Dubai, operating 200 aircraft. The other large airline is Etihad Airways that has recently bought a nearly 30% stake in Air Berlin.

Middle Eastern airlines spreading their wings

Airlines in the Middle East have embarked on an active expansion scheme and previously Qatar Airways and Etihad both were looking into ways to enter the European market. Etihad is expected to be given the go-ahead to buy a 49% stake in Serbia’s loss-making flag carrier JAT Airways in August - a partnership deal is to be signed tomorrow - and it is also getting closer to gaining a foothold in the Indian market.

India's foreign investment regulator has given its approval to a USD 379 million deal that will see Etihad buy a 24% stake in Jet Airways. It is the first foreign investment in India's airline sector since ownership restrictions were eased last year. It seems to be the turn for Emirates Airlines to make a move in this direction.

What are the plans?

Sólyom Airways plans its launch for next month a deal with a leasing company has already been signed for six aircraft and the first Boeing 737-500 aircraft will be delivered on 18 August. That is when the airline will start its operation. The carrier expects to run a fleet of 50 aircraft by 2017, 20 of which should be regional, 20 narrow-body and 10 wide-body aircraft. Depending on the size of its fleet management expect a 700-1,000-strong headcount for this year that should be boosted to 1,400-2,000 in 2014. They expect to fly to 31 countries by the end of this year, to 51 by 2014 and to 55 countries with 96 destinations by 2017, CEO József Vágó told the press conference. The company further expects to be transporting three million passengers next year, and by 2017, the airline’s 50 aircraft is projected to be carrying eight million - but no budgeting details were made public.

“We give it a year"

Although this looks very much like the title of a recent and very entertaining romantic comedy this is actually the damning headline of an article by local weekly HVG citing an analysis done by local Capitol Consulting Group (CCG). The company not only said Vágó’s estimates were almost impossible to meet, it believes the “Hungarian Hawk" will make “massive losses" very quickly and be facing a “huge crash" in 2017.

Even figuring in an 80% capacity rate on all planned flights, Sólyom’s calculations appear to fall apart when calculating the industry-standard measure of “block hours," defined as “The time from the moment the aircraft door closes at departure of a revenue flight until the moment the aircraft door opens at the arrival gate following its landing."

Sólyom is to fly Boeing 737-500 aircraft, which boast 110 seats (12 business and 98 economy class).

Assuming Sólyom operates at the no-frills airline average of eight block hours per day per aircraft (the low-budget leader worldwide is US-based Southwest Airlines at an average of 13 block hours), this would mean four flights per day for each Solyóm aircraft, with Western European cities an average of two hours’ flight distance from Budapest. Therefore, calculated the CCG analysts, Sólyom could manage transport of just 2.2 million passengers in 2014, based on the airline’s own estimation of its fleet size. Against the carrier’s own estimate for eight million passengers annually by 2050 CCG projects no more than 6.5 m by then.

The weekly also highlighted that teaming up with another international carrier, a move Sólyom is not planning do, could bring up to 20% growth in passenger base.

Further estimates say that at average prices of EUR 200 to EUR 400 per round-trip ticket and figuring in the makeup of Sólyom’s fleet to account for standard passenger and business-class passengers, revenue of HUF 26.2 billion could be earned (HUF 5.2 bn from business class and HUF 21 bn from economy class). According to CCG estimates, however, cost of operations is expected at present at HUF 30.2 bn per year (HUF 14.4 bn worth of direct and HUF 15.8 bn indirect costs).

Based on the estimated costs and revenues Sólyom Airways could expect - even under the most upbeat scenarios - to incur HUF 4 billion losses in its first year of operation which would go even higher if it remains in business. By 2017 its losses are estimated to swell to HUF 33 bn and in five years it is looking at a loss of HUF 93 bn, according to the best case scenario of CCG.

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