NAC asks govt to clarify restructuring proposal

KATHMANDU, MAR 13

Nepal Airlines Corporation (NAC) has said that the government should be clear about the modality to be adopted when inducting foreign partners in response to the proposals submitted by Lufthansa Consulting and German Aviation Capital to help it make a turnaround.

The Ministry of Culture, Tourism and Civil Aviation had asked the national flag carrier for its opinion after the two companies expressed interest in providing consultancy and management services to improve its performance and enhance operational efficiency.

Lufthansa Consulting is an international aviation consultant for airlines and is an independent subsidiary of the Lufthansa Group. Similarly, German Aviation Capital is an aircraft leasing company based in Frankfurt.

The NAC board passed the management’s decision on Wednesday and the ministry will be notified soon, said an airline official.

However, NAC officials are confused as the Tourism Ministry thinks the German firms are proposing a strategic partnership while they see it as a management consultancy deal.

“As the proposal is not for a strategic partner but is totally about a management contract or consultancy services, we have asked the government to be clear on the modality first,” said a board member of NAC.

Although NAC has not recommended any options regarding the modality, officials said a strategic partnership, management contract, outright sale or share divestment were the viable options.

The corporation has received two separate proposals from the German companies. Lufthansa Consulting has proposed providing services in three phases. In the first phase, it will conduct a gap analysis to identify the airline’s shortcomings. The gap analysis period will last a month and NAC will have to pay a fee of 295,000 euros for the service.

In the second phase, the company will take over NAC’s management. It will appoint its own people to the top management posts like chief executive officer, chief financial officer and chief marketing officer.

The second phase will last a year and it may be terminated if NAC thinks it is capable of handling things on its own. “However, the contract can be extended for two years. NAC will have to pay a fee amounting to 2 percent of its annual revenue,” said a NAC official. In the third phase, the German company will hand over the management to NAC.  

Meanwhile, German Aviation has proposed that if NAC signs an agreement with Lufthansa Consulting, it will help the airline lease four narrow-body jets within 35 days.

The two companies had submitted their proposals to the Prime Minister’s Office which forwarded them to the Tourism Minister.

Last April, the government had moved to restructure the ailing carrier by converting it into a public limited company or bringing a foreign strategic partner as it was being battered by fierce competition. NAC is wholly owned by the government.

Three options have been proposed for the divestment of shares in NAC. Under the first plan, NAC shares will be divided among the government, a strategic partner and the general public through an initial public offering.

The second alternative is to divide the shares between the government and a strategic partner. The third option is outright sale of the corporation.

As per a report, NAC’s assets have been valued at Rs 32 billion. This means that a potential strategic partner will have to invest at least half of that amount. An earlier valuation of Rs 16 billion was revised as NAC plans to purchase eight aircraft by 2015. It has already received three of the eight planes on order.

The government has been considering privatising NAC or bringing in a strategic partner for the last decade. In 2007, it had initiated a plan to hand over NAC’s management to a foreign strategic partner so that it could reform and rescue the troubled carrier. However, the plan fell apart.

In July 1970, the then Royal Nepal Airlines Corporation (RNAC) invited experts from Air France under a programme to improve management, and they handled most of the managerial positions until 1973. In 1972, RNAC acquired its first jet, a Boeing 727, in cooperation with Air France.

Presently, NAC holds a meagre 6.80 percent market share on international routes. It flew 213,837 travellers in 2013, up 6.39 percent.

It serves four international destinations.

NAC’s share in the domestic market stands at an even more miserable 1.33 percent. It flew 20,591 passengers in 2013, down 44.15 percent from the previous year.

Source: The Kathmandu Post