Feb. 1 (Bloomberg) — Hungarian national airline Malev Zrt., weighed down by debts of 60 billion forint ($268 million), has until the end of the week to submit a survival plan that could include a Chinese takeover, or face being grounded.

Malev aims to sustain liquidity and continue flying through an orderly bankruptcy that would allow it to be restructured or a successor established, said Chairman Janos Berenyi, who reckons there are potential buyers for the carrier and that a bid from Hainan Airlines Co. is “not impossible.” If the plan is rejected by its state owner, the company could fold, he said.

European governments are becoming reluctant to prop up airlines as the debt crisis forces austerity programs in other parts of the economy. Barcelona-based Spanair SA ceased flying Jan. 27 after failed bid talks prompted Catalonia to halt funding, and Sweden, Ireland, Portugal, Poland and the Czech Republic are also seeking to reduce state support for carriers.

“It’s a bad start to the year, and we will see more,” said Paul Sheridan, head of risk analysis at London-based aviation consultant Ascend. “Small airlines are always most at risk, and it’s usually this time of year, with lower passenger numbers and yields resulting in poor cash-flow. A lot of airlines have had losses since 2007, with maybe a brief interruption in 2010.”

Hungary is making preparations to assist passengers who might be left stranded should Malev cease operations, reserving 2 billion forint for use in a “worst case scenario,” the Development Ministry said last night in a statement.

‘Smooth Transition’

Malev’s financial situation is untenable, with room for maneuver “extremely limited,” and the government is unable to help much because of European Union competition rules, Berenyi said at a press briefing yesterday. The company “can’t continue in this form” and the aim now is simply to guarantee that there’s still a Budapest-based carrier, he added.

Malev is already effectively operating in bankruptcy protection, having been declared a “strategically important company” on Jan. 30, a status that shields it from creditors.

“The question is how we can find a smooth transition until a new national carrier is established,” Berenyi said. “In this situation, money runs out very fast. Funds that would normally last a month may be depleted in a few days if the airports start asking for fees in advance. If we can avoid these unexpected costs we can continue flying. If not, anything could happen.”

Malev, founded in 1946, is working with the government on how best to survive through the transition, and must present a liquidity plan by Jan. 3, the chairman said.

Investor Search

A member of the Oneworld airline alliance that includes London-based British Airways, Malev reported a loss of 24.6 billion forint in 2010, the latest year for which it has published results, little changed from its deficit in 2009.

Low-cost rivals including Wizz Air Ltd., also based in Budapest, have squeezed earnings, and competition will increase as Ryanair Holdings Plc, Europe’s biggest discount operator, resumes flights from the city this spring after an 18-month gap.

A failure would end a two-decade search for a viable partner since the airline was transformed into a joint stock company in 1992 following the collapse of communism. Hungary has most recently been seeking a buyer for Malev after taking a 95 percent stake in 2010 to replace Russian bank Vnesheconombank as controlling shareholder when a previous privatization failed.

Plane Guarantee

The government said Dec. 5 it was in “advanced” talks with potential European investors after Hainan Air quit earlier negotiations, and Czech charter operator Travel Service AS said on Aug. 2 it had submitted a letter of intent for a purchase. Vueling Airlines SA, Spain’s second-biggest carrier, said yesterday it has no interest in Malev after Hungarian paper Nepszabadsag said Jan. 27 that it was considering an investment.

Malev’s plight worsened Jan. 9 when the European Commission ruled that it should return the equivalent of $390 million in “unlawful aid” paid by the government from 2007 to 2010, saying it would have struggled to raise cash from a private investor.

The EC verdict reduced Hungary options for helping Malev, according to the airline, which still relies on aid, borrowing 5 billion forint in December and receiving 8.5 billion forint in budget funds in August, according to a government document.

American International Group Inc.’s Los Angeles-based ILFC Holdings Inc. leasing unit has agreed to carry on providing planes, Malev has said. The carrier operates 18 Boeing Co. 737s, 17 of them from ILFC, according to Ascend, and also has six Embraer SA and Bombardier Inc. turboprops.

Credit Crunch

The first investor in Malev, Italian carrier Alitalia SpA, was forced to surrender its stake in 1997 following an EC aid inquiry, and talks later took place with most major European airlines, including British Airways, Air France and Lufthansa.

The airline was finally unloaded at the seventh attempt, resulting in its second privatization in 2007, with Russian entrepreneur Boris Abramovich, owner of OAO KrasAir, taking a stake via a partnership, AirBridge, with Hungarian investors, just as the credit crunch precipitated a collapse in air travel.

The economic crisis led to the unravelling of the takeover of Malev as Ambramovich’s own Russian network collapsed, leading to his replacement by Vnesheconombank, with Hungary subsequently compelled to renationalize the carrier.

Spanair became the first scheduled European airline to collapse since the last recession after Qatar Airways Ltd., the second-biggest Middle Eastern carrier, halted bid talks and the Catalonia government indicated it would no longer supply funds.

The airline, founded in 1986, and Spain’s fourth-biggest by passenger numbers, carrying almost 13 million in 2011 from 15 Spanish airports using a fleet of Airbus SAS A320 series jets.

–With assistance from Steve Rothwell in London and Manuel Baigorri in Madrid. Editors: Chris Jasper, Chad Thomas.

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net; Chad Thomas at cthomas16@bloomberg.net