National 5 (Spotlight Weekly)

Broken Wings

With the indefinite suspension of flights, Necon Air is on the verge of declaring bankruptcy

By KESHAB POUDEL

The closure of Necon Air last week has sent shock waves across the financial and aviation sectors, as more than half a dozen private banks' millions of rupees have gone down the drain. Thousands of public shareholders, too, have lost money, along with the Civil Aviation Authority of Nepal (CAAN) and the Nepal Oil Corporation (NOC).

The airline had stopped depositing money at the Employee Provident Fund six months ago, raising concerns about its economic health. Although not unexpected, the collapse of the carrier has sent a bad message across the wider economic sector.

Necon Air : Grounded

"There were clear indications that the airlines was on the verge of collapse, since it had started borrowing money from banks to pay our monthly salaries," said an employee. "But we had not expected the closure to be announced at such short notice."

The hopes raised by the government's open-sky policy in 1993 have come crashing down. Necon Air is not the first airline to go bankrupt. More than half a dozen carriers preceded it. Another private airline is said to be on the verge of folding. Interestingly, investors are still coming to the aviation sector. A few months ago, Sita Air started operations with two Dornier aircraft.

Whatever the financial position of a carrier, nobody appears able to predict when it might close. In the first five years, airlines enjoy tax exemption and have to pay very little money in the form of other charges. After five years, the airlines go into the tax net.

The closure of Necon and other airlines gave the message that operating airlines requires technical, financial and other capabilities. Despite professional management in the early stages, Necon Air, too, ended up flouting the principles of sound business.

When the tourism industry was at its peak, the airline had three old Avros and two Cessnas, which were economically affordable. When the tourism industry started going downhill, the airline leased two modern but expensive ATR-42s.

Over the last decade, billions of rupees have been lost as airlines folded. Most of the bankrupt airlines had secured money from private banks. Necon Air, heavily in debt, was grounded after a meeting of private banks denied further loans. Necon, however, has gone down with huge amounts of public money as well. As the airline was initially promoted by well-known figures like late Anup Sumsher J.B. Rana, Dibyamani Rajbhandari and experienced and senior pilots of the Royal Nepal Airlines and other business houses with an aim to establish it as an international carrier, many common Nepalese bought shares when the firm was floated to the public.

The crash of the Necon Air has sent shock waves in the share market also. Along with the debt to the private commercial banks, the airlines has to pay Rs.20 million to the CAAN in landing and grounding charges and Rs.20 million rupees to the NOC.

"Some private commercial banks will have to face severe economic crisis following the collapse of Necon Air. We are taking very keen interest in how many banks have affected by Necon Air's collapse," said a senior official the Nepal Rastra Bank. "We are not satisfied with the performance of some of the private banks."

Following Necon Air's grounding of its ATR-42 aircraft, all the first three private airlines are now part of history. Necon Air's two ATR-42 aircraft were grounded after the cycle of aircraft was completed. Although the engines still have over 1,000 hours' life, they need to go for maintenance to enhance the aircraft cycle.

Necon Air survived more than a decade in a competitive market, but its future was economically questioned when it introduced ATR-42, replacing its own old-version Avros a few years ago. "Had Necon continued to fly its own old Avro aircraft, it would not have had to close," said an aviation expert. "It leased sophisticated and expensive aircraft when the volume of foreign passengers was on the decline."

The cumulative shocks of the Royal Palace massacre, September 11 terrorist attacks in New York and Washington and upsurge of Maoist violence lowered the number of tourists arriving in the country. Almost all airlines have lost a fair number of tourists. Necon's foreign currency earning routes like mountain flights and Pokhara witnessed a sharp decline in foreigners.

Aviation experts blame faulty management for the carrier's woes. Since aircraft like ATR-42 need to use combing the cycle and engine hours, operators wasted the cycle not to make money but to collect running capital.

By operating on the shortest route likes in Simara, Necon's ATR-42 plane wasted its cycle accumulating very nominal profits. Had it flied on long route, the aircraft would have made more money.

"I declared a couple of years ago that the collapse of Necon was inevitable, but nobody listened to me. Some banks continued to offer loans knowing that the carrier would not survive," said a promoter of a private airline. "Another airline will soon announce closure."

Necon Air's fall has raised the wider question of whether the operation of private airlines is really feasible in Nepal. Despite the difficulties, some private airlines have been doing good business. Nobody knows for certain when the next private carrier will announce bankruptcy.

If things go unchanged, Nepal's overcrowded sky will turn empty, leaving some private airlines and the RNAC in the domestic sectors. The closure of Necon Air has already put pressure on routes like Biratnagar and Nepalgunj.

In the last 10 years, Nepal's private airlines were operated on an experimental basis, exploiting public money. Now only professional airlines with efficient management can expect to survive.