Ground Realities

In 1991, when the Government announced its plan to privatise airline services, there was a sudden rush for licences. Just about anybody with some paid-up capital and a few leased aircraft was entitled to apply and become a private operator. Most of them took their chance and seemed to be making money—and in the process opened up domestic aviation to multifarious possibilities, giving the consumer more options than ever before. In 1996, the scenario has undergone a dramatic change. Two of the big private operators are practically grounded and, with a few honourable exceptions, the future is bleak for most others.

The result: five years since the inception of the Open Sky policy, Indian Airlines (IA) is the most-preferred airline. The reason: there are very few private airlines operating, and aviation analysts view foreign tie-ups as a major reason for the downfall of private airlines. Add to it a prevaricating Government policy on aviation proving that bureaucrats have little idea of how to run an airline, which remains a capital-intensive, high-risk venture.

East West Airlines’ problems began with its leasing tie-ups with western companies. Then, late last year, its managing director Thakiyudeen Wahid was killed in a shootout in Mumbai. Its leasing company, a Swedish outfit called Kolding Ltd, refused to keep its commitment of giving them two aircraft. Instead, East West claims that Kolding is sitting on its $1.75 million and has even refused to return it. The upshot: extended litigation at the Queen’s Court which shows no signs of ending.

And when East West bought three 737-200s from a US-based dry leasing company, PLM, it turned out that the planes were not as sound. But by that time, East West had sunk in $14 million as lease money. "We were assured that the planes were sound. Later, we found out that every ‘D’ check on each plane would cost us something in the region of $2 million each," says Kapil Kaul, vice-president (marketing) of East West, which ceased operations since August this year.

When they wound up operations, East West was regarded as a profitable venture with the oldest and largest fleet of private aeroplanes. And a restructuring study of the airlines carried out by Price Waterhouse had concluded that even an additional aircraft would have helped boost its fortunes.

Kaul is cautiously optimistic. According to him, if a consortium of foreign banks listens to its appeal for funds, East West’s plan to lease out six aeroplanes in 1997 would auger well. "We could put the airlines back on the rails," says Kaul. The moot point now is whether foreign institutions would bankroll a company which has closed shop.

Modiluft’s story is similar. After German partner Lufthansa pulled out of a "strategic alliance" with Modiluft in May, things seem to have reached a point of no return. The once-successful airlines stopped operations from Delhi and runs a flight from Mumbai. Most of its pilots have left, as have its technical and engineering staff.

On November 4, it received another jolt with Lufthansa initiating legal proceedings against it. The action includes recovering three Boeing 737-200 aircraft leased to Modiluft. According to one source, "litigation was unavoidable when after the termination of existing contracts earlier this year, the best efforts by Lufthansa failed to produce proposals resulting in the return of three Boeing 737-200s." The litigation started in the Mumbai High Court on October 31, 1996. Clearly, the battlelines are sharply divided. Because after the split, Modiluft had also threatened legal action against Lufthansa, seeking damages for loss of goodwill. On July 10, Modiluft said it would seek $100 million in damages from Lufthansa. In addition, they planned to file an injunction for the return of aircraft on the plea that they had paid all its rental payments to Lufthansa.

Not surprisingly, the business of aviation is not conducive to litigation. Modiluft has at present only one of its fleet of six Boeing 737 aircraft flying. Three are undergoing maintenance checks, one has an engine problem and the fourth is grounded over labour problems.

Says aviation analyst Brij Bhardwaj: "Private airlines in India can never be successful unless a really big player like Tata-Singapore airlines enters the market with a very solid market base. You have to buy aircraft, not just lease them." He has a point. Most of the lease agreements, for instance, signed between private airlines and their foreign partners were done at a time when the leasing industry was in recession. The rates, according to Bhardwaj, were pretty low then. Now, it is boom time and in the last three or four years, it has gone up by 100 per cent. The fact that the Government has disallowed import of aviation turbine fuel (ATF) and has not made it cheaper has not helped. In fact, oil firms hiked ATF prices last week, though it keeps out domestic carriers from its purview for the time being. Fuel is one area which afflicts all airlines and the decision on ATF seems to have been called by the Petroleum and not the Civil Aviation Ministry. Former aviation minister Ghulam Nabi Azad had cited the lack of infrastructure as the reason for disallowing import of more aircraft: "There is little parking space at airports, so there is no point in importing aircraft." Later, the Government changed its policy to "import aircraft on a case-by-case basis" but today there is no clear policy on this issue.

PRIVATE airlines’ grouse that pricing has effected its working is being taken with a pinch of salt by the Government. Says Director General of Civil Aviation H.S. Khola: "We have allowed all private airliners to put up their own fares. There is no interference from the government." But can private airliners have a higher tariff than Indian Airlines?

Since 1991, air fares in the country have doubled. Kesani Chandrashekhar, former managing director of Modiluft and now chairman of TransIndia airlines, recently wrote in a newspaper column: "In a service industry, a more favourable pricing mechanism than this cannot be expected." According to him, input costs of operating a Boeing 737-200, which is still the most widely used aircraft by private airliners, makes interesting reading. He says operating lease payments and insurance premia of the aircraft constitute 12 per cent; aircraft maintenance costs 11 per cent of expenses and both have gone up by 4 to 6 per cent in the last five years; fuel costs, which accounts for 37 per cent, has gone up by 10 per cent. Landing, navigation and parking charges, which account for 7 per cent, have gone up by about 5 per cent per annum. (See chart)

 Not surprisingly, private airlines are in a soup—and the decline seems to have set in rather quickly. When Pervez Damania, for instance, sold out to Madras-based NEPC, the southern airliner was the rising star.

 Now, even NEPC appears to be struggling. When it bought Damania airlines in 1995, with the acquisition came a 51 per cent stake in Damania Shipping, which Damania wanted to keep with himself. However, Damania has not paid NEPC for the shipping stake, and the whole transaction of transferring the equity from Damania airways to Damania Shipping was kept pending. In the meanwhile, the Damanias have reportedly entered into an agreement with the Earnest group, which is being opposed by NEPC on the ground that they had no right to sell equity held by it. According to well-placed sources, it is making NEPC, under a severe cash crunch, jittery. Coupled with it is the fact that Damania has been telling Bombay-based scribes he would like to get back into the airlines business. And the usual problem: NEPC has a court case pending by leasing company PLM for non-payment of dues. Not just that. Taj caterers have refused to supply food to NEPC for non-payment of dues.

Already, there is a serious move afoot within the Civil Aviation Ministry to stop issuing licences to private operators. "Lobbies are already active," admits a source. If that becomes a reality, however, Jet Airways would be the gainer—and dominate over the private airline industry.