CIVIL AVIATION MARKET BRIEF - Hungary

October, 2005

Summary

Budapest Airport Inc., which manages Ferihegy Airport, is in the process
of being privatized. The State Privatization and Assets Holding Co. will
keep a stake of 25 % plus one share. Budapest Ferihegy Airport has two
terminals. The construction of a third terminal, with a projected
completion date of 2009, has been in the preparatory phase for the past
few years. However, ultimately the new airport management company
selected in the privatization will decide on the construction of a new
terminal, as well as a multifunctional parking facility and a new cargo
base.

In 2003, MALEV signed the leasing of 18 "Next Generation 737" aircraft
from Boeing, and also bought four Bombardier CRJ-200s. MALEV's fleet
should need no other immediate updates for some time to come.

Most of the regional airports are former Soviet and Hungarian military
airports. The ownership rights have been transferred by the state to the
municipalities of towns located near the airports. EU funding for
Hungarian regional airports is not available and the municipalities have
limited funds to develop these airports.

Two companies, Aeroplex Central Europe and Lufthansa Technik AG, provide
aircraft maintenance services. Aeroplex Central Europe, owned entirely
by MALEV, performs transit checks, pre-departure checks and heavy-duty
maintenance for MALEV on both U.S.-registered aircraft and non-U.S.
aircraft. MALEV has established a joint venture with Lufthansa Technik
AG to carry out D-checks on Boeing 737s for Lufthansa airlines in
Ferihegy Airport.

A. AIRLINES AND AIRCRAFT PROCUREMENT

MALEV, the Hungarian national airline, has about 3,200 employees and
carried 2.6 million passengers on its scheduled flights in 2004, which
represents a 9.1 percent year-on-year increase in the number of
passengers. Together with charter flights, the total number of
passengers flying MALEV was close to 3 million.

MALEV launched its wholly owned regional carrier "MALEV Express" in July
2002. Its regional flights are operated under a MALEV code. Destinations
include Bologna, Venice (Italy), Timisoara (Romania), Belgrade (Serbia),
Odessa (Ukraine), Pristina (Kosovo), Krakow (Poland), Geneva
(Switzerland) and Ljubljana (Slovenia). Cost-saving measures include the
integration of MALEV Express into the parent company in 2005.

In its effort to become a regional carrier, MALEV is facing competition
from the Austrian, Czech and Polish airlines and from many new low-cost
airlines. Germanwings (25% owned by Lufthansa) started daily flights
from Cologne to Budapest in the spring of 2003. After the EU accession
of Hungary on May 1, 2004, further low-cost airlines started operations
from Budapest. These include Air Berlin, SkyEurope, EasyJet, Wizz Air,
Norvegian Air, Sterling and Jet 2. In 2005, there are already ten
low-cost airlines, including newcomers EuJet and Fly Nordic, flying to
and from Budapest.

**MALEV structure and privatization:** The Hungarian State Privatization
and Assets Holding Company (APV Rt.) owns 97% of MALEV, but the current
privatization law requires a reduction of state ownership to 25%, with a
50% plus one vote majority remaining under Hungarian ownership. After
two unsuccessful privatization tenders, a third one was announced in
April, 2005 for a 99.95 % stake of MALEV's shares. However, this tender,
too, was canceled, in August, 2005, after no bidders were deemed
suitable.

MALEV has signed many strategic alliance agreements, for example with
KLM (October 2001), Northwest Airlines (November 2001) and Air Europa of
Spain (May 2002). MALEV also signed a code share agreement with the
Hainan Airlines of China, to operate weekly three flights starting
August 2004. MALEV signed a letter of intent with the Oneworld alliance
in May, 2005. The carrier expects to become a full member of the
alliance by the summer of 2006. MALEV has not cancelled its agreement
with the SkyTeam alliance. Delta Airlines announced on October 18, 2005
that it would open weekly five direct flights from New-York Kennedy
Airport to Budapest from May, 2006.

The new management of MALEV, appointed in February 2005, worked out a
strategy to stem losses in 2005 and become profitable by 2006. MALEV
operating losses will likely be around HUF 1.8 billion (USD 8.86
million) this year. To cut losses, the company sold its fuel division to
Budapest Airport in October, 2005 and plans to cut its workforce by 10
percent.

**Aircraft Procurement:** MALEV's fleet consists of 20 Boeings (two
company-owned B-767-200ERs and 18 leased "Next Generation" 737s), five
Fokker-70s and four company-owned Bombardier CRJ-200s. News reports have
suggested that MALEV, which is heavily in debt, is contemplating the
sale of its company-owned aircraft, and will opt for new leases instead.

**MALEV's Fleet Modernization** **Program**

  ----------------------- ----------------------- -----------------------
  Type of aircraft        Fleet 2004              Target 2005

  Boeing B-767-200ER      2                       2

  Boeing B-737-300        5                       0

  Boeing B-737-400        4                       0

  Boeing B-737-500        0                       0

  Boeing B-737-600        5                       6

  Boeing B-737-700        4                       7

  Boeing B-737-800        3                       5

  Fokker-70               6                       2

  Bombardier CRJ-200      4                       4

  Total number of planes  33                      26
  ----------------------- ----------------------- -----------------------

#### **B. AIRPORTS**

Hungary has ambitious plans to serve as a regional hub for air travel to
the Balkans and Eastern Europe. There are also plans to develop some of
the secondary airports to attract investors to establish their
manufacturing facility in Hungary close to an operating airport and to
increase tourism at the same time.

**Budapest Ferihegy Airport**:

Although the Air Traffic and Airport Administration (LRI) previously
managed Ferihegy Airport, LRI was split up into two separate companies
on January 1, 2002. One is Hungarocontrol
(http://www.hungarocontrol.hu/), supervised by the Ministry of Economic
Affairs and Transport, responsible for managing air traffic control, and
BUDAPEST AIRPORT INC. (www.bud.hu), responsible for the management of
Ferihegy International Airport. In January 2003, it was decided that
BUDAPEST AIRPORT INC., owned by the State Privatization and Holding
Co./APV Rt., would be privatized, with a 25 percent plus one stake to
remain under state control. The tender for the sale of a 75 percent
minus one vote stake was issued in June, 2005. Five bidders, comprising
British Airport Authority, Macquarie Airports (Australia), Hochtief of
Germany, Fraport of Germany and Copenhagen Airports, were short-listed.
However, the tender was withdrawn after a court's decision agreed with
the Budapest Airport Workers' Council that it was not sufficiently
consulted in advance about the sale. APV plans to issue a new tender in
October, inviting the short-listed companies to make their final bid in
November, and hopes to conclude the deal is before the end of the year.
News accounts have speculated that the winning bid may come from BAA,
which is reportedly willing to pay more than EUR 2 billion.

Ferihegy Airport has two terminals. Terminal 1 was originally used for
general aviation, cargo and charter flights. With the onset of \-- and
increased traffic flow from \-- low cost airlines, the refurbishment of
Terminal 1 has become an urgent need. Reconstruction works were
completed in September 2005 and now Terminal 1 is capable of receiving
2-2.5 million passengers a year. Terminal 2A-B is capable of handling
5-5.5 million passengers annually. In 2004, Ferihegy International
Airport received 6.46 million passengers, nearly 30 % more than in
previous year, with low-cost passenger traffic totaling some 1 million,
up tenfold from 2003. The growth in passenger numbers at Ferihegy far
exceeds the European average. Ferihegy Airport predicts a 17 % rise in
the number of passengers for 2005, while the annual growth forecast for
Europe is 5 %. Cargo traffic to Budapest grew by 20.3 % to some 80,000
tons in 2004, and Budapest managed to surpass Prague as a cargo
destination. Based on preliminary data, in 2005 the number of passengers
using Ferihegy may reach 7.7 million (including 1.7 million using
low-cost airlines). In light of the steady traffic growth (10 million
passengers by 2008/2009), Budapest Airport has been planning for some
time to build Terminal 2C. The completion of the new terminal, planned
by 2009, would add an additional capacity of about 5 million passengers.
Both the construction of the new terminal, as well as a multi-functional
parking facility and new cargo base, are on hold until the privatization
process is completed.

**Regional Airports:**

The development of regional airports would encourage and facilitate
industrial investment and tourism in Hungary. The government is
committed to supporting the development of Debrecen, Sarmellek,
Nyiregyhaza and Szeged Airports.

**Debrecen Airport:** Debrecen Airport is owned by the City of Debrecen
(population 207,000, the second largest city in Hungary) and operated by
Debrecen Airport Co. Ltd. The airport, a former Soviet military
airfield, is the largest in Eastern Hungary, with two 2,500 meter-long
concrete runways. An Instrument Landing System (ILS) Cat I and a runway
lighting system were installed in 2003. Further developments, including
the installation of an international passenger and luggage handling
system, the procurement of seven fire trucks and a de-icing vehicle,
have helped facilitate increased traffic (14,476 passengers in 2004),
via charter and scheduled flights to Munich and Bremen.

### FlyBalaton Airport, Sarmellek: FlyBalaton Airport at Sarmellek is owned by neighboring cities and operated by Cape Clear Aviation, owned by Irish investors. In addition to Budapest and Debrecen Airports, Fly Balaton is certified as the third international airport in Hungary, receiving 21,000 passengers a year. It has a 2,500 meter-long and 60-meter wide concrete runway. RyanAir continues negotiations with FlyBalaton Airport to start flights to Sarmellek, if the necessary investments are completed. Infrastructure developments including ICAO Cat I precision approach lighting system, Precision Approach Path Indicator, Simple Approach Lighting System, Approach Path Indicator, runway and taxiway lights etc. perimeter fence, and a new terminal building will be completed by the end of 2005.

**Gyor-Per Airport** has completed a EUR 4 million airport-development
project, including a 1,450-meter concrete runway, taxiways and a
lighting system. The EU, which provided EUR 2.4 million, and Audi, which
has a plant in Gyor and provided EUR 900,000, were the main investors.
AUDI operates a daily flight between Gyor, in northwest Hungary, and its
headquarters in Germany. The airport plans to build a new terminal and
cargo base in 2005.

**Pecs-Pogany Airport**: Pecs-Pogany Airport (owned by Pecs-Pogany
municipalities) is located 125 miles from Budapest in southwestern
Hungary. The building of a 1,500 m concrete runway, taxiways, and apron
has been completed from municipal and regional funds. Phase two of the
project will include installation of landing lights and radio
navigational aids.

**Szeged-Airport:** The airport, in southeast Hungary, is owned by
Szeged municipality and managed by Szeged Transportation Company, owned
by the municipality. Runway and taxiways constructions will be completed
by April, 2006. Developments funded by the state and municipality will
also include the construction of a fuel station, and lighting system.

**Taszar Military Airbase***:* The U.S. military no longer uses this
airbase, and the conversion of the airport into a dual use airport has
been already started. Construction of a civil terminal at the Taszar
military airbase was completed 2003. The airbase has two 2,500-meter
runways.

**Alba Airport:** Former military base Borgond Airport, owned 50 percent
by Szekesfehervar municipality (60 km from Budapest) and 50 percent by
the London-based operator PlanStation Group, will open in 2008 and is
planning on having over 1.8 million passengers a year. The airport will
have a 22,400 meter long runway.

# **C. AIRCRAFT MAINTENANCE SERVICES AND FACILITIES**

Focusing primarily on commercial aircraft, Aeroplex of Central Europe
Ltd. is a well-equipped service center, approved by European Joint
Aviation Authorities. It offers its capabilities in maintenance and
major modification of aircraft structures and systems. Aeroplex
specializes in performing heavy and light maintenance checks on Boeing
737 all series, B767s and Fokker 70s, for aircraft operators. Aeroplex's
FAA certification currently covers line services on the above referred
aircraft types plus the Airbus 300-600 series. The U.S. operator
reference of the company is UPS. As an aircraft heavy maintenance
facility, Aeroplex requires a wide variety of parts and materials to
support maintenance activity. More than 90 % of required aircraft
materials are purchased outside of Hungary. Parts must be
Boeing-certified. Aeroplex employs 413 people. After concluding two
major deals with Air Europa (Spain) and Air Berlin (Germany) to overhaul
their fleets, Aeroplex expects to be in the black this year.

In March 2000, MALEV and Lufthansa Technik AG established a
Budapest-based joint venture to carry out the intensive "D-checks" on
Boeing 737s and Airbus A 320s, which require teardown and scientific
testing of component structures. It operates in two hangars rented from
LRI (now Budapest Airport) and has invested EUR 17 million. Lufthansa
Technik AG holds 85% of the joint venture firm, the rest is held by
MALEV. The Company performs work for Lufthansa, and also offers its
services to other carriers. It signed a five-year contract with Austrian
Airlines to carry out D-checks for five Airbus 321-100/200 and six
Airbus 320-200 aircraft. Lufthansa Technik Budapest Ltd. performed the
first maintenance check of Airbus A320s in February 2002. The company
employs 340 people and completes the overhaul of more than 20 aircraft
annually.

**Key Contacts**:

U.S. Embassy

> U.S. Commercial Service
>
> Patricia Gonzalez, Commercial Counselor
>
> e-mail:
> [patricia.gonzalez@mail.doc.gov](mailto:patricia.Gonzalez@mail.doc.gov)
>
> Andrea Imrik, Commercial Specialist
>
> e-mail: <andrea.imrik@mail> doc.gov
>
> Bank Center Granite Tower
>
> Szabadsag ter 7.
>
> H-1054 Budapest
>
> Tel: (36 1) 475 4090, or 475-4234 Fax: (36 1) 475 4676

Website: [www.buyusa.gov/hungary](http://www.buyusa.gov/hungary)
[www.export.gov](http://www.export.gov/)