While Nepal Airlines Corporation is thinking of expanding its fleet

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Economy

News has recently surfaced that Nepal Airlines Corporation (NAC) is trying to find some Rs. 26 billion to add two wide-body jets to its existing fleet. Given it already owes Rs. 14 billion and all its assets have already been used up as collateral, the Ministry of Finance (MoF) looks like the most probable source of funding for these new jets for the NAC. The NAC thus is working on a sellable business plan to securequote these funds.

While it is pretty self explanatory that having more aircrafts on the fleet will help the NAC cater to more international destinations and expand the volume of its business, what is a more important question is ‘how is the NAC going to transform its management in light of all the expansions and its history of severe mismanagement and political interference?’ NAC cannot overlook the fact that it came down from a fleet of 19 planes in the mid 1980s and doing 21 international destinations only a decade ago to a fleet of only two operational planes and doing mere five international destinations in mid-2014. So, fleet expansion is definitely not the magic wand.

The operational inefficiencies, the political interferences and the managerial-level incompetence have rendered the NAC a failure as an enterprise. However, on the other hand, there are no domestic private airliners of a scale that renders them capable of bearing the load of all the international passengers coming into Nepal and competing with the big international players that fly to Nepal. With its scale and government backing, the NAC can be transformed into a company that can bear this load and tap in on all the financial prospects that these inbound international travelers bring along. It is in light of all these prospects and challenges that NAC needs a strategic partner to become a competitive airliner in the market.

Bringing in a reputed operational airliner as a strategic partner has a number of benefits in store for the NAC.

So how do we go about bringing in a strategic partner at the NAC?

  • First of all, since the NAC is regulated by the Nepal Airlines Corporation Act, 1963. Government of Nepal controls the structure and has the power to influence the management. Therefore, in order to make room for strategic partnership and hence run the NAC as a profit-oriented enterprise, the Nepal Airlines Corporation Act, 1963 needs to be repealed and the NAC should be brought under the domain of the Company Act.
  • The idea of going for a strategic partnership can be confronted with a serious resistance from labor unions. Therefore, any reform process that is initiated at the NAC will require strong communications and buy in of the labor unions. The union leaders need to be convinced of a better outcome for all their members. Ministry of Culture, Tourism and Civil Aviation (MoCTCA), as the governing ministry could therefore intervene. MoCTCA could form a committee that will hold talks with labor unions, heed their grievances and act accordingly. Laying off employees wherever necessary could have to be achieved by providing them several lucrative severance packages or by providing job placements in other companies.
  • Given the high degree of political interference at the NAC, there will also be strong opposition from the political community. MoCTCA will have to play an active role on this front as well. Before embarking on organizational restructuring, one of the crucial steps would be to garner political support for this reform. MoCTCA could take up this responsibility of garnering political consensus.
  • MoCTCA, could then form a competent team that can handle the task of bringing in a strategic partner at NAC. Strategic partnerships require dealing with critical issues like how much equity to sell, what new management model to set up, how to share the risks and rewards, and more. The credibility, reputation and capacity of the strategic partner should be such that a partnership with it enhances the NAC’s own credibility. These are some of the issues where the knowledge of an ex-officio team (which GoN usually formulates to look into any new matter) might not suffice.
  • The NAC currently operates in both domestic and international markets. This function could be unbundled into two. The strategic partner can then concentrate on competing in the international market and doing the necessary home-works therein. On domestic front, the strategic partner would not be active, but the domestic airliner would still function under competitive model. In case the NAC needs to subsidize its fares to the people in rural parts of Nepal as it has been doing at present, these subsidies could be provided by the MoCTCA by drafting a cheque in the name of the passenger who is subsidized, instead of having the NAC sell tickets at discounted rates. By doing so, the burden of subsidy would be transferred into the state from the NAC, an enterprise. The NAC could then concentrate on competition on both domestic and international ends.

For more on reforming Nepal Airlines Corporation, please click here.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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