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Business Plan Report for Hungarian Airlines

Experiment Findings · February 2020

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 Business Plan Report for
Hungarian Airlines

Air Transport Market Analysis and Forecasting

Shalini Levens
s257812
10 February 2020
Contents
MARKET ANALYSIS 3
DEMAND PROFILE: ...................................................................................................................................................... 3
THE AVIATION ENVIRONMENT ....................................................................................................................................... 4
AIRLINE TYPE .............................................................................................................................................................. 9

ROUTE ANALYSIS 9
TOP 3 ROUTES: ........................................................................................................................................................... 9
DEMAND BY THE GRAVITY MODEL .................................................................................................................................. 9

FLEET ANALYSIS 11

AIRLINE ONLINE SIMULATION RESULTS 13

QSI VALUE ............................................................................................................................................................... 13
FINANCIAL RESULTS ................................................................................................................................................... 13
MARKETING AND BRANDING....................................................................................................................................... 17

FINAL PROPOSAL TO INVESTORS 17

REFERENCES 18

2
Market Analysis
Demand profile:
Air travel demand can first be assessed by the GDP growth of a country. An increase in GDP
tends to increase disposable income which is habitually used for luxurious goods, including
holiday travel. Furthermore, GDP growth may also increase international business travel to
further stimulate economic growth (Doy, 2020).
Hungary has a positive and stable economy which is mainly because of the increasing industrial
production in automobile and electronics and in services such as tourism and financial
amenities (Hungarian central statistical office, 2020).
Figure 1 illustrates the forecast of the Hungarian GDP rate and shows that we can expect a
continuous growth which could positively influence the demand for air travel by Hungarians.

Figure 1 Forecasted GDP growth in Hungary (OECD 2019)

Tourism contributes to GDP because of the Hungarian diaspora which leads to travel by and for
family, relatives and friends. Hungary is well known for its mineral spas, architecture and history
of arts and musicians that additionally stimulates tourism (Hungarian Central Statistical Office,
2020).
Another factor that could influence the demand is that Hungary has one of the highest tax
wedges in Europe, resulting in the reduction of the marginal benefit of working which might lead
to workers working fewer hours than they would if no tax was imposed. (MarketLine, 2019). This
could indicate that more leisure time could lead to leisure travel.

Per contra, Hungary has a good surface transport system; there are plans to further expand the
motorways connecting to Western Europe (Beni, 2020) and the Hungarian international railway
transport system is becoming more popular for Northern and Western European destinations.
The passenger kilometre has surpassed the 2018 records of passengers transported in 2019
(MAV group, 2020). An increase of new car registrations has also been recorded, which comes
to no surprise as Hungary has an attractive location to commute by car to neighbouring
countries (Hungarian central statistical office, 2020). On average, the most important industrial
factories in Europe have an estimated driving distance of 8 hours to Budapest (Budapest
Airport, 2020).

3
Figure 2 Budapest’s proximity to European industrial locations (Budapest Ferenc Liszt International Airport, 2020)

The rising environmental concerns and flight shaming can also influence Hungarians to choose
the railway system for European destinations, especially since the government has recently
ordered new electric trains which are perceived as environmentally friendly (Erdo-Bonyar,
2020).
In addition, the statistical office recorded that figures for interurban air travel (assuming this is
inter-European travel) is very low compared to other transport methods.

The aviation environment

Until 2012, Malév Hungarian Airlines used to be the national carrier of Hungary, offering
scheduled services to 50 destinations to Europe and the Middle East. The airline had an
alliance with Oneworld a leading position on five Central and Eastern European destinations
that were not offered by other Oneworld members (Business traveller). Malév underwent a
financial collapse and the government was unable to further fund the airline due to a ban by the
European Commission (BBC, 2012). The abrupt reason for the collapse was the demand for
upfront payments by the airline’s suppliers (BBC, 2012). Sólyom Hungarian Airways hoped to
become the next national full-service airline after Malév but failed to commence its operations
due to mismanagement and lack of funding (Cirium, 2013). After this, the market became
dominated by low-cost carriers.

4
Figure 3 Airline types in Hungary (CAPA,2020)

Wizz Air and Ryanair are the largest low-cost carrier in Central and Eastern Europe offering
low-cost fares to a variety of European destinations. (CAPA, 2020). These airlines use
Budapest Ferenc Liszt International Airport as their main hub, which is the largest international
airport in Hungary (CAPA,2019). Lufthansa and LOT Polish Airlines are dominating as full-
service carriers and are contributing to the market by offering a network feed through their hubs.
The capacity of seats currently offered shows that Western Europe is the most popular region
for travel from and to Hungary. UK, Germany, Italy and Spain are the current top routes (CAPA,
2019).

Figure 4 International seats by region from Hungary (CAPA,2020)

5
After Malév’s collapse, travellers benefitted from the attractive prices of low-cost carriers.
However, Bilotkach et al. showed that business travellers are not happy with the low-cost
carriers since they offer inconvenient schedules which are either too early in the morning or too
late. (Bilotkach et al, 2014). This information could be an opportunity for a full-service carrier.

Hungary has a stable political environment which is led by the conservative Fidesz party. It is
most likely that Hungary will retain its current position in the EU. Bilateral agreements and
investments are strong with both Russia and China. (IHS Market, 2019). Therefore, we can
conclude that the political environment appears attractive for air travel and bilateral agreements.

Figure 5 Seat capacity for Hungary by operating airlines (CAPA,2020)

Capacity is expected to grow which indicates that airlines see opportunities in the Hungarian
market (CAPA,2020). Budapest’s international airport confirms this by sharing the forecast of an
increase in passenger growth. As mentioned earlier, this could be because of the expected rise
in GDP and the demand for leisure and business travel.

6
Figure 6 Seat capacity Hungarian market (CAPA,2020)

Figure 7 Passenger forecast (Budapest Ferenc Liszt International Airport, 2020)

Offering cargo services could be an opportunity in the market as capacity is forecasted to

increase to at least 6 million kg for 2020. A reason for this could be the exports of valuable
goods such as electronics. Only full-service carriers operating to Hungary offer cargo services.

7
Figure 8 Cargo capacity in Hungary (CAPA,2020)

To conclude the above, the next figures show a SWOT analysis and outlook for the Hungarian
aviation environment.

Strenghts Weaknesses
- Positive GDP and passengers' growth
- No national carrier to feed networks
- Attractive location in central Europe - Surface transport to neighbouring
European exceeds air travel
- Capable nternational airport in operation
- Competing with Wizz Air and Ryanair
- Attractive for tourism flow
means high entry barriers for new airline

Establishment of new
airline in Hungary

Opportunities
- Demand for air travel and tourism in the future Threats
- Numerous unserved routes - Long haul international trains
- Demand for cargo as trade is expected to - Flight shaming
increase - Competition

8
 Market Outlook
•Increasing traffic volumes
•Increasing capacity to new destinations
Short
•Long haul ranges will become longer with new aircraft
>5 years •Constraints on aircraft movements in Europe due to
environmental concerns

•Low-cost market consolidations

Medium •Developments of underserved markets such as Africa
5-10 years and Latin America
•Increase of long haul low cost capacity
•More fuel efficient aircraft

•Unique aircraft design and new energy source

Long •Flying cars, disruptive travel patterns and infrastructure
10+ years •Space travel developments for general public

Airline type
The chosen airline will be a hybrid model. This would be based on operating on a low-cost
model while still offering a business class selection. The airline will additionally focus on a mixed
model of point to point routes and connecting destinations in Budapest, meaning that revenue
will be generated on both sector- and connecting fares. Becoming a low-cost point to point
airline would be irrational since competing with Wizz Air and Ryanair would lead to losses
because of their fares and route offerings.
Even though there is potential in offering cargo services, the airline will not offer cargo services
since it is complex and capital intensive as the airline needs an additional warehouse and
handling for cargo.

Route Analysis
Top 3 routes:
 Newark
 Haneda
 Leipzig

Newark could generate diaspora travel between New York and Budapest. The statistical office
reported that nearly 1% of the Hungarians in the USA live in New York (Hungarian central
statistical office, 2020). Furthermore, Atlantic routes seem to be the most profitable when having
an airline, due to the network reach and demand for travel to the USA. (Meurer,2020).

Haneda and Leipzig were chosen as they are both cities where industrial production is high.
Business traffic is therefore assumed to be in demand and attractive to connect with Budapest.

Demand by the Gravity model

To predict the passenger flow between Budapest and the 3 routes, the gravity model is used.
The calculation for this is:

9
 Figure 9 Gravity model calculation (Doy,2020)

The outcome will give the total passenger mode of all transport modes. To find the portion of air
travel we have estimated the constant for air travel by calculating the gravity model for current
routes to Budapest to Ferenc Liszt International Airport and comparing them to the actual
number of passengers travelled. The constant for air travel is around 9%. Other consultants
calculated the market share of Budapest’s airport with other European airports and reassured a
constant of 10%.

Current Routes – Gravity model vs Actual Air Travel

City Distance Population Total passengers (all Actual air travel Constant for
modes) 2019 air travel
Berlin 688 3,748,000 13,856,730 413626 0.0299
Sapporo 8469 1,952,000 47,627 205 0.0043
Vienna 214.17 18,890,000 720,697,032 109963 0.000152579
Istanbul 1068 15,070,000 23,121,116 382260 0.016532939
Amsterdam 1145 821,752 1,096,902 454181 0.41405794
K factor for routes 0.0930 (9%)

Expected demand for Top 3 routes by gravity calculation

City Distance BUD in KM Population Total passengers Annual Daily
(all modes) Demand Demand
Leipzig 644 560,472 2,364,941 183,750 503
Newark 7017 8,623,000 306,474 163,964 449
Tokyo 9049 9,273,000 198,179 535 1

10
Demand forecast by Airline Online gave us a positive assumption since the weekly demand per
quarter was more than 10.000 passengers for all three routes. An example of route Budapest-
Newark:

Figure 10 Demand Budapest-Newark (Airline online,2020)

Fleet Analysis
The Hungarian market is mostly operated by Airbus A320 aircraft. The terms that we look at for
choosing an aircraft were fuel efficiency, range potential, capacity and availability in the market.

Figure 11 Fleet assigned in Hungarian operations (CAPA,2020)

For the short-haul routes, the Airbus A220-300 fit best while the Boeing 787-800 was capable
for the long-haul routes. Our aircraft were leased because of the advantages in costs and
because we knew that we would operate for a test period of 2 years; buying an aircraft would
not be advantageous. Additionally, buying aircraft meant that we had to wait longer for our
aircraft to arrive.
When leasing the aircraft, we investigated aircraft with low flying hours so that less maintenance
and checks needed to be done compared to buying an older aircraft.
Both aircraft types are suitable to operate on all chosen airports.

11
The configuration of aircraft serving Hungary confirm that the Hungarian low-cost environment
is dominated by mostly economy class seats. Therefore, 4% of our short-haul seats were
designed for business class and 12% for long haul flights.

Figure 12 Airline configuration for the Hungarian market(CAPA,2020)

Our service levels were typical low-cost for economy class; passengers must pay for baggage,
meals and beverages. For business class, ancillaries were included. Our unique offerings were
laptop power and satellite internet on-board all aircraft for all classes. Business-class
additionally had video- and audio entertainment configured to meet the demands.

12
Airline Online Simulation Results
QSI value
Twenty-one new routes were newly introduced from Budapest during the simulation. The
Quality of service index (QSI) values of some routes was higher than others, which is mainly
because of the aircraft type (size of aircraft), non-stop flights and frequency (higher frequency
can expect a higher share).

QSI Values
3.50 3.15
3.00

2.50
1.89
2.00
1.63 1.56
1.47 1.42 1.42
1.50 1.14
0.98
1.00 0.82 0.79 0.73
0.64 0.63
0.51 0.47 0.44 0.42
0.50
0.04 0.04 0.04
-

The calculation used for the QSI value:

frequency (FRQ) x total seats x weighted time schedules

average fare

Avg
Total
Destination FRQ Fare Weighted time QSI
Seats
U$D schedules
Leipzig 35 125 $276 0.10 1.63
Newark
6 222 $2,522 0.08 0.04
Haneda 6 222 $3,001 0.08 0.04

For the chosen routes, Leipzig has the highest QSI value, which is because of the frequency
offered, even though Newark and Haneda have more seats available.

Financial results
The overall financial results were positive as the liquidated value of the airline was $855 million,
while the start-up budget was $500 million. This shows that investors can reassure that their
capital will have a positive return from the airline’s operations.

13
 Investor Value
Profit overall Liquidated Value Assets, Net cash
$139,665,721.96 $855,631,440.61 $855,631,440.61

RASK has been exceeding CASK until 2021q2 because there were no irregularities in that
period of time and the routes have been profitable due to decent on-time performance, demand
on the routes, average load factors of 89% and good utilisation of aircraft. Our routes and lower
fares than the market’s average have been the best performers in terms of connecting traffic
which was 50% of our revenue income. After Q2 operations to the USA had to be discontinued
because of political tensions which had an impact on the revenue. Additionally, Airbus A220-
300 aircraft had to be grounded after reported hairline cracks in the wing. This was a huge
impact on our operation as our whole short-haul fleet consisted of this aircraft type for operation
efficiency. Our fleet planners phased out all Airbus aircraft and switched to Boeing aircraft for
the short-haul routes. Our company was not that resilient to handle this operation and as a
result, an error occurred in the reservation system for the fares. As a result, there were no fares
set for a whole quarter which explains the heavy drop in revenue In 2021 Q4. Nonetheless, the
airline recovered for 2022Q1 as we had all hands on deck from all staff members.

A conclusion that we found was that demand seemed to be inelastic for long-haul flights. Short-
haul was also inelastic but less than long-haul.

Fuel expense, despite hedging and staff expenses, were the main expenses in our operation.
Marketing expenses were bearable because the revenue received from marketing operations
were very attractive. It appears that marketing on napkins are a profitable business in the

14
Hungarian market as this delivered us the most non-aeronautical revenue.

During the simulation, routes were added each quarter, an increase in QSI could be measured,
along with the distance flown and an increased connection of markets between Asia and
Europe.

15
 Strenghts:
- Route network and feeder hub betwen EU, USA
and Asia
Weaknesses
- Route Plovdiv is the only destination served by
our airline, compared to the market -Incapability to deal with major changes in
operations
- Strong marketing and branding position
- Not having a CEO who could take the ultimate
- Strong demand for routes and average load decision on the number of routes and connecting
factors of 80% fares. This could help in more structure and focus
- even though the routes and fleet changed, the for the whole team.
business plan and strategy remaind the same for
all quarters
- Attractive schedule times and frequency for
business travellers

Simulation results

Opportunities Threats
- New destinations and unserved routes from - Competition from LOT, Lufthansa and Wizz on
Budapest both long haul and short haul routes
- Cargo operations - Environmental concerns for flying
- Aircraft issues

16
Marketing and Branding

In the simulation, we operated as Hungarian Airlines, a simple and effective name for a new
network carrier. The name change was performed in the first quarter which was free of charge.

Final Proposal to Investors

Since the previous sections summed the actions that need to be taken with the explanations,
the final proposal can be listed as follows:

ROCI high because of increasing GDP and demand for

air travel

Choose routes of interest, namely diaspora routes and

trade flow routes

Research demand for frequency and time-schedules as this

could be an unique selling point for business travellers

Use cash wisely by leasing aircraft and investing in

costs that will increase revenues such as marketing
expenditures

Grow sustainable and adapt to market and

political changes and increase resilience

Move into Cargo operations when staff and

company is ready for the next expansion.

Keep strategy clear and concise, even after fleet

and route changes

Assign a CEO for the ultimate decision making,

taking workload and other factors in account

17
References
Anker, R. (2019). CEE growing twice as fast as western Europe; Wizz Air & Ryanair lead way.
[online] The ANKER Report 51 (11 Nov 2019). Available at:
https://img1.wsimg.com/blobby/go/f91e7ea1-3ed0-4ecd-a54c-
55cff9d5319a/downloads/The%20ANKER%20Report%2051%20(11%20Nov%202019).pdf?ver
=1580114090736 [Accessed 6 Feb. 2020]

BBC News. (2012). Hungarian airline Malev collapses. [online] Available at:
https://www.bbc.co.uk/news/business-16866872 [Accessed 4 Feb. 2020].

Beni, A. (2020). The highway connecting Hungary to Western Europe will have six lanes.
[online] Daily News Hungary. Available at: https://dailynewshungary.com/the-budapest-vienna-
highway-to-have-six-lanes/ [Accessed 1 Feb. 2020].

Bilotkach, V., Mueller, J. and Németh, A. (2014). Estimating the consumer welfare effects of de-
hubbing: The case of Malév Hungarian Airlines. Transportation Research Part E: Logistics and
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Budapest Airport. (2020). About us - bud.hu. [online] Available at:

https://www.bud.hu/en/budapest_airport/facts_about_bud/about_the_airport/about_us
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Centreforaviation.com. (2020). Hungary Country/Territory Profile | CAPA. [online] Available at:

https://centreforaviation.com/data/profiles/countries/hungary [Accessed 6 Feb. 2020]

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Mavcsoport.hu. (2019). Nemzetközi menetrend (International train schedules Hungary). [online]
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