Report

If the recent developments to make headway in the ailing airline industry as a professional service operator of the day are any indications, Necon Air for the first time initiated consolidating airlines service by strategically coming up with ‘operational merge’ with two other airlines- Sangri-La Air and Karnali Air. It is but natural that Nepalese aviation industry that comprises more number of players (15 private airlines) than in India, with little operational efficiency, need to have large fleet of aircraft rather than flying with very few aircraft. The reason why the merge or consolidation was initiated is actually to tackle the threat to their survival as they are already in dire straits and that was further aggravated by the latest terror attacks on USA. This merge, however, has left the identity of all three airlines untouched.

Nepalese airline industry that is basically pro-tourist operated both for their survival and profit making, was sustaining other local flights through cross subsidy. However, the ailing industry drastically slowed down along with the entire tourism industry, making matters worse. This consolidation which Narayan Singh Pun, Executive Chairman of Necon Air, who recently took over the leadership of the company joining his own Karnali Air to Necon, termed ‘operational merge’ could be another reason to justify the need to go jointly to all airlines as per their area of expertise. Necon has a good experience of flying in the trunk route and mountain flights while Sangri-La has expertise on remote flights. Business now is divided- Sangri-La will fly with its four Twin Otter, that were doing very good business before operating its Beechcraft. And Necon will fly adding with Sangri-La’s two Beechcraft and its own two ATR-42 planes.

Necon, the country’s oldest surviving private sector airline since 10 years, has now two ATR-42 aircraft in operation and has a plan to add two medium size Boeing or Airbus by September 2002 for international service while Pun’s Karnali Air is in helicopter service with six VZ, Ecureuil and VK. Likewise, Sangri-La had four Twin Otters and two Beechcraft in service but the recent operational merge consolidated Necon with Sangri-La’s two Beechcraft.

This development seems to have another indication- reduction of high overhead as well as variable cost against very small size of fleet service at operation in the airlines business. Necon, despite its operating loss of Rs 79.46 million in the year 1999/2000 as against Rs. 31.7 million in the year 1998/99, is said to have ‘350 experienced manpower’ at present, in Pun’s words. Likewise, Sangri-La’s condition, which is not asymmetric with Necon, has 250 manpower and Karnali Air having 80 manpower to pay. This merge, Pun believes, will provide ‘operational flexibility’ and that the same staff are able to hold both/all airlines’ responsibility rather than setting a separate unit of manpower to run every branch office for each airline. This would substantially reduce operational as well as overhead costs by reducing manpower, if frictional unemployment is kept aside!

The present trend of consolidating airline services, which some prefer to term ‘desperate step’ in the case of Necon, is directly associated with the country’s airline business. The airline industry that was already in stress due to the decline of tourism industry is still affected by recent high insurance premium, increasing fuel price, high landing, parking and route navigation charge and increasing dollar price for spare parts.

Another factor responsible for the operational loss of private airlines is fare structure that the government ‘impracticably fixed’ for the local passengers in the local flights which is ‘not sufficient enough’ to sustain the airline business, air industrialists say. That means, local passengers are being cross subsidized from the tourist fare. For example, a tourist pays $ 91 (Rs. 6734) for Kathmandu - Lukla flight while a Nepali pays only Rs. 2000. Or a foreigner pays $ 61 (Rs. 4514) for Kathmandu – Pokhara flight while a Nepali pays only Rs. 1200. This is economically irrational which however seems rational if compared to the purchasing power of the people. In such a situation drastic decline in the tourism industry has badly affected the airline business.

And again, if this consolidation deal has any further indications, it opens a new door of similar developments not only in airline business but also in other sectors of the economy. The benefit is, reduction of cost and quantitative and qualitative improvement in the production. One tangible development in this front is the birth of SYS (Sangri-La, Yeti and Skyline) alliance, a possible consolidation of these three remote air service operators. Other such expectations will not be unexpected in insurance and banking sectors.

But if anything is left in restoring airline industry is a big question- who will drill the government’s head to fill up the timely demand of Merger and Acquisition Act?

"Incentive package needed to save airline industry"

Nepalese airline industry which is directly related to the national economy is now in serious straits. There seemed a quantitative growth of airline business in the recent days but a bitter fact is that all airlines are facing similar kinds of constraints. Increasing global sales premium, taxes on spare parts coupled with the increasing dollar price and hiking fuel price have made the business to that traits problematic. Considering the situation, Necon made a headway of consolidation of air business through operational merge.

But Necon is steadily getting loss, reports say. How do you find its status?

I have already remarked that the airline business is in dire straits. And the status of Necon so far is concerned, it is the oldest surviving private sector airline and the leader in the industry. Its survival is directly connected not with the health of airline industry but also with the country’s development endeavor. The financial status of Necon is not encouraging as it was already dragged on loss and this loss was even more than what I was informed of before. But still I see a good prospect to lead Necon run in profit within not much long time. The real problem that I find in Necon is the higher operational cost against small income generation. Keeping this fact in mind, as the Executive Chairman of Necon, I headed for the operational merge to reduce this cost taking share of Sangri-La (two Beechcraft for the trunk and mountain flight where Necon Air has expertise). Again we have pledged the government to come up with an incentive package to save the airline business from the present problem.

We have a plan to develop Necon as a ‘regional airline’ in South Asia which is also an objective of the recent consolidation. We are going to add two medium size Boeing or Airbus by Sept. 2002 extending the new regional destinations in South Asia and China. In this phase, we would fly to Banglore, Dhaka, Kolkatta, Delhi, Mumbai, Karachi, Yangoon and Lhasa. Likewise by Sept. 2003 we will further extend Necon to other international destinations. In the second phase Necon has a plan to fly to Europe, Singapore, Tokyo, and Australia.

Considering the airline industry as a strong agent for national integration and infrastructural development, the government should come up with an incentive package to save this sector. Airline business is now constrained by numbers of factors; taxes on spare parts coupled with the increasing dollar price, hiking fuel price and unreasonable fare structure. It is high time for the government did something. Recently the US government provided some 5 billion dollar subsidy and promised to advance about 30 billion dollar, subsidized long term loan and also edged out the insurance burden for immediate revival of their airlines industries.

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Operational Merge : Need of the Hour

"Incentive package needed to save airline industry"