Reforming NAC through strategic partnership

Lufthansa Group has been the cynosure for a few days now, for it has offered to partner with the currently state-run Nepal Airlines Corporation (NAC). On one hand, we have one of the largest carriers in Europe and on the other, there is a sick State Owned Enterprise that has been running on over a billion rupees worth of cumulative loss and if not for the Ground Handling Services (GHS) at Tribhuwan International Airport (TIA), would go on another millions of rupees worth of net loss every year. One of the first questions in a Nepalese’s head would be, “Why NAC?” Maybe the German group wants to create a new hub in South Asia. If so, why prefer Kathmandu over Delhi or Mumbai? Maybe it is all in the best interests of NAC, but should NAC be entertaining such unsolicited proposal (boycotting competitive bidding?) As per the information from the Ministry of Civil Aviation in Nepal, the matter is still pre-mature and we still do not have answers to lots of similar questions.

However, whether or not Nepal entertains this proposal from Lufthansa, this is very much the right time to talk about reforming NAC. Therefore, we will keep this discussion very specific and just focus on why NAC needs a strategic partner and what benefits can we derive from such a partnership.

Why a strategic partner?

Nepal Airlines Corporation is no more the same “national-pride” enterprise. As it stood only a couple of months ago, it came down from a fleet of 19 planes, serving 38 domestic and 10 international destinations in the mid 80s to a fleet of two Boeing 757s, serving 5 destinations and no operational twin otters for domestic service. Thanks to GHS, it brings in Rs. 2 billion annually for NAC. If it weren’t there, NAC very well faces a risk of bankruptcy. It bears heavy cumulative loss and unfunded liabilities. Complete government ownership means that all losses are borne by the government which is ultimately transferred to the taxpayers.

To add to this financial plight, there have been frequent cases of corruption, political intervention, nepotism, impunity, labor issue and operational inefficiency. As it stands today, Nepalese planes are banned in the European skies, which has greatly tarnished their reputation in the international arena.

Despite costly air-fares, insufficient Nepalese carriers and poor services, a great number of tourists fly in to Nepal every year. NAC has been unable to tap in on the prospects that these numbers offer. Now if you thought expanding the fleet again would do the trick in terms of tapping in, wait on just a second. Public Procurement Act (PPA), 2007 plays another nuisance in procurement of new planes and fleet expansion.

So what benefits will strategic partnership offer?

Interestingly, if done right, strategic partnership bears solutions to all problems we’ve just talked about; and even more benefits.

– Procurement decisions will be guided by the terms of agreement between NAC and its partner and not PPA, 2007. This will ease up procurement.

– Nepal can be transformed into an aviation hub from the current status of being a mere end-destination. This can increase traffic in the Nepalese skies. This will open up more employment opportunities as well.

– With business-driven partner, NAC will have a commercial orientation and will be directed towards a profit-driven modality.

– Code-sharing, which is a major practice in international aviation, will allow NAC to expand its service. It will one, market the services of NAC and two, generate additional revenue for NAC.

– Consumer benefits will also increase, due to greater network access and other benefits of strategic partnership like seamless travel via code-sharing, transferable priority status and more.

– NAC can acquire modern scientific technological and manual skill sets.

– With business-driven management, strategic partnership will also foster competition in the rural domestic destinations.

Of course, strategic partnership is not as easy in practice. There are important decisions to be made, in the process. What will the partnership look like? Maybe NAC board can play the role of a monitor while this partner takes care of the business side. Do we want a practicing airliner as a partner or just a management firm? How do we share risks and rewards? How much equity ownership do we hand-over? How do we deal with the employees that might have to be laid-off? These are some of the areas where Ministry of Culture, Tourism and Civil Aviation (MoCTCA) should take the lead and get the discussions going already.

To learn more about the costs and benefits of reforming NAC through strategic partnership, click here

Akash Shrestha

Akash Shrestha is a researcher at Samriddhi Foundation where his focus areas are investment laws, public enterprises and education.

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