Cash-strapped Nepal Airlines struggles to stay afloat—and it is going deeper into debtThe cash flow problem in the state-owned airlines, however, started nine months ago when it inducted two brand new Airbus A330 jets into its fleet last year, as they largely remained under-utilised for months after failing to get enough routes to fly.
The Nepal Airlines Corporation says its cash flow has been depleting fast, prompting concerns about the future of the already beleaguered carrier.
About three weeks ago, the national flag carrier informed its line ministry—the Tourism Ministry—that it has less than Rs200 million cash reserves, including a sinking fund. A sinking fund is a fund a corporation forms by setting aside money for the gradual repayment of a debt. The corporation’s cash flow, however, is hardly enough to pay salary to its staff for two months.
“It’s true; we have been left with less than Rs200 million in cash,” confirmed Madan Kharel, executive director of the Nepal Airlines Corporation.
The cash flow problem in the state-owned airlines, however, started nine months ago when it inducted two brand new Airbus A330 jets into its fleet last year, as they largely remained under-utilised for months after failing to get enough routes to fly.
On top of poor income, the corporation started losing a big chunk of revenue from its ground handling service at the Tribhuvan International Airport after the Malaysia-based budget carrier Air Asia X suspended its Nepal services in October last year. The airlines then faced another major blow after India’s private carrier Jet Airways suspended all its flights, including in Nepal, last week.
Jet used to operate five daily flights from Kathmandu—three daily flight on Kathmandu-Delhi and two daily flights on Kathmandu-Mumbai sectors—helping the Nepal Airlines Corporation generate good revenue through ground handling.
It had been earning more than Rs3.5 billion annually from ground handling which has been the troubled national carrier’s “bread and butter”.
The cash-strapped corporation has now started defaulting on loans. This is the first time the airlines has defaulted on a debt payment even though it has a long history of poor financial performance in the past several years.
The airline has defaulted on a payment of principal and interest to two state-owned financial institutions. According to the airlines, it has defaulted two quarterly installments of Rs1.18 billion to the Employees Provident Fund and one quarterly installment of Rs730 million to the Citizens Investment Trust, the two state-owned lenders.
“If the poor cash flow problem continues, we will not be able to pay the next installments to the lenders,” said Madan Kharel, executive chairman of the Nepal Airlines Corporation.
A Tourism Ministry official said that the existing cash flow of Nepal Airlines is “too low” and it does not even have sufficient amount for emergency purposes.
“It’s a matter of grave concern and it could be indirectly reflected on its safety,” the official told the Post, requesting anonymity because he was not authorised to speak to the media. “Although the
Finance Ministry has dropped a hint that it would bail out the corporation through the budget of the next fiscal year, nothing has been finalised yet.”
But Kharel believes the Finance Ministry will help the corporation with a temporary bailout.
“The Finance Ministry plans to capitalise the principal and interest that we have defaulted. This is not a solution as lenders add the interest to the principal balance of the loans, and that again will generate interest,” he said. “The cash flow problem may recur in the near future also because our capacity and operation have also doubled.”
Kharel said that after the induction of two wide-body jets, the seat load factor has increased to 80 percent.
“We have been making income but that’s not good enough, as the competition is stiff. Fares cannot be hiked and fuel prices are increasing. Airlines are losing money in fare wars in an attempt to survive in the market,” he said.
According to him, operating the Airbus A330 jet is three times costlier than the Airbus A320. The corporation has two A320s.
“We have not been able to fly A330s on long routes like Japan and Europe, and it’s hampering our growth,” he said.
Kharel said that the demand on the Kathmandu-Delhi sector, after the withdrawal of Jet Airways, has opened a window of opportunity, but the Jet withdrawal has also caused revenue losses from the ground handling.
The carrier will be operating two flights a day on Kathmandu-Delhi sector from May 1. It is currently operating 11 flights a week.
“We have time and again told the Finance Ministry to come up with long-term bailout measures. And one option is to convert Rs20 billion of a loan of Nepal Airlines to government’s equity investment,” Kharel said.
Currently, the corporation’s loans from various institutions stand at Rs40 billion and this translates to Rs3.66 billion in interest annually.
“We have not asked the money for our operation expenses. But converting half of our loan into equity investment could put us into a comfortable position, as it will significantly reduce our annual interest burden,” said Kharel. “We will be able to pay rest of the installment and interest. We don’t have enough cash flow now. It’s tight but manageable for operations.”