NAC in a fix over aircraft procurement

A committee chaired by former Governor Dipendra Bahadur Chhetri suggested three months ago that Nepal Airlines Corporation (NAC) sell its shares in Soaltee Hotel Ltd to procure new aircraft.

However, the NAC management couldn’t reach a decision on whether to sell its shares in Soaltee Hotel to procure aircraft. As a result, it formed another committee. The new study committee, led by former Captain KB Limbu, suggested that NAC sell its shares in Soaltee Hotel only as a last resort measure.

NAC is in a difficult situation of having to sell its property to buy aircraft. It has called for bids for the procurement of small aircraft for STOL operation and leased two narrow-body aircraft for its international flights. However, NAC doesn’t have resources to make the procurement or take the aircraft on lease. Nor has it found lenders to finance aircraft procurement. The national flag carrier, which is seeing its market share in the domestic and international markets dwindle gradually, has a loan liability of over Rs 48bn.

While its existing aircraft are not operating to full capacity, it has also not found any takers for the Chinese aircraft that it has been trying to get rid off. Experts say NAC could go bankrupt at any time if the situation persists any longer.

What’s in Limbu’s report?

NAC owns 10,333,699 units of shares in Soaltee Hotel Ltd. The market value of shares is worth around Rs 4.6bn. The NAC management is planning to buy new aircraft by selling these shares. However, the Limbu-led government has prescribed share sale to finance aircraft procurement as the third option to finance aircraft procurement.

The committee has said that NAC should first explore the possibility of taking concessional loans from financial institutions. Second, it has suggested that the management request the government to make additional equity investments. The third alternative prescribed by the committee is mobilizing internal resources to procure aircraft. The committee has said that the management could sell NAC’s shares in Soaltee Hotel Ltd if it has no other alternatives.

Limbu said the committee hasn’t encouraged the NAC management to sell its shares in Soaltee Hotel. “Since the share prices are increasing, NAC stands to make more profits from the shares,” Limbu said.

NAC is getting other benefits from the hotel as a shareholder. It is getting special discounts on room tariffs and airline catering. “NAC could get these discounts as long as it has shares in Soaltee Hotel,” he added.

The government holds 51 percent equity in NAC against the investment of Rs 320m. The committee has suggested that the government increase its equity investment in NAC.

According to the audit report of 2018/19, NAC has total assets of Rs 54bn while its liability is worth around Rs 47bn.

The Limbu-led committee is the fourth study panel that NAC has formed. The previous three panels have suggested that NAC management put grounded aircraft into operation and optimize the operation of all aircraft, according to Limbu.

NAC is paying an average interest of 10 percent on its accumulated loans of Rs 48.03bn. Study panels have suggested that NAC explore the possibility of getting concessional loans to gradually reduce its loan liabilities.

NAC has a long-term loan of Rs 47bn that it took to finance procurement of four jets for international flights. It would take NAC at least 10 years to clear this loan if it sets aside Rs 5bn annually for loan repayment. NAC’s total revenue was Rs 16bn in 2021/22, while its total operating expenses were more or less similar. NAC has been failing to service its long-term loans taken to finance procurement for two narrow-body and two wide-body jets.

Plan to wet-lease narrow-body jets

NAC has launched a global tender to take two narrow-body jets on wet lease. However, the Limbu-led committee has suggested that NAC should rather procure aircraft on installments than take aircraft on a wet lease.

In its 10-year (2021-2030) business plan, NAC has set a target of adding aircraft for domestic and international flights by 2022, maintain a 70:30 equity and credit ratio, hire technical staff and construct a commercial building on its land in Sinamangal on BOOT. However, it has just begun the process of procuring and leasing aircraft. Aircraft are being grounded for a long time due to a lack of timely recruitment of technical workforce.

Shrinking market share

Until the mid-1990s, NAC used to fly to 39 domestic destinations. It is currently flying to only 19 destinations. Likewise, NAC was operating flights to 13 international destinations in the mid-1990s; it is now flying to only nine destinations.

NAC has four aircraft for international flights. These aircraft can fly for 56 hours daily. However, they have been flying for only 10-11 hours at present. This speaks volume about the weakness of the incumbent management.

While NAC’s two wide-body aircraft are logging losses, two narrow-body jets are making profit. It has already grounded the Boeing 757 and six small Chinese aircraft—two MA 60 and four Harbin Y12 aircraft. Although the Chinese aircraft have been grounded, NAC is still paying maintenance and parking fees and bank interest rates for these aircraft. According to NAC, it is spending Rs 283.1m for the MA 60s and Rs 197.8m for Y12 aircraft annually. This figure excludes pay and perks of pilots.

Although the domestic aviation market is worth around Rs 20bn, NAC is generating a business of only around Rs 120m.

Grounded aircraft

NAC’s Twin Otter with 9N-ABX call sign has been grounded since 2012. Although NAC has set aside Rs 200m to bring the aircraft into operation, the NAC management is failing to repair it.

It has already been six months since Tourism Minister Sudan Kirati issued a directive to bring the aircraft into operation at the earliest. However, it is still uncertain when the aircraft will be airborne.

NAC mobilized revenue of Rs 2.19bn from its international flights in the months of May and June last year. According to NAC’s official publication ‘Shwet Bhairav’, the aircraft operated at only 50 percent of their capacity in those months. NAC incurs a loss of Rs 10m if its aircraft are grounded for a day. However, NAC hasn’t been able to press all four aircraft into operation all the time.

What next for Chinese planes?

NAC has put five Chinese aircraft—two MA 60s and three Y12s—on sale. However, it hasn’t been able to find buyers for these planes.

NAC procured six Chinese aircraft to increase its share in the domestic market. Of these six aircraft, China provided one MA 60 and one Y12 on grant, while the remaining four were purchased on a government-to-government agreement. China also provided concessional loans for aircraft procurement. NAC still owes about Rs 4bn to the Chinese lenders.

NAC has been stating that the Chinese aircraft are inoperable due to a lack of trained pilots, high training costs for pilots, non-availability of instructor pilots, and high insurance fees, among other factors.