With all of its 97 aircraft grounded now for seven weeks, and the ban on flights likely to be extended beyond 30 May, Nepal’s airlines are struggling to remain aloft, and industry sources say that the only way they can survive could be by merging.
It is a crisis affecting airlines worldwide, but Nepal’s domestic airlines were already having to cope with stiff competition, high cost and low fares, and the most expensive aviation fuel in the region, and low yield. They subsidised remote area operations for Nepali passengers by charging tourists more, but the tourist industry has collapsed with the COVID-19 lockdown.
“Given the high number of airline companies in Nepal the debate for mergers had started even before the lockdown. But in light of recent events, airline companies are going to find themselves in a very difficult position if they fail to merge,” says Yograj Sharma Kandel of the Airlines Operators Association of Nepal.
Nepal currently has state-owned Nepal Airlines and the Chinese joint venture Himalaya Airlines operating international flights. There are eight other domestic airlines, and a dozen helicopter operators.
Both international and domestic flights are not expected to resume until end-June at the earliest, and aviation industry officials say that to ride out the crisis domestic operators may have no choice but to consolidate and merge.
“Out of the 15 or 20 airline companies at present, there may be only about 5 or 7 remaining after we come out of this crisis, and after they merge,” says Rajan Pokharel, director general of the Civil Aviation Authority of Nepal (CAAN). “Helicopter companies which have only two or three helicopters will probably be the first to merge.”
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Domestic airlines have had to continue with paying salaries, overheads, parking fees, maintenance checks, insurance, even though revenue has been zero since mid-March. Some domestic airlines like Tara Air and Sita Air have been contracted by the government to fly food to Simkot, Rara and Jumla to serve deficit areas. Some helicopter companies have also been allowed medevac flights.
The airline industry is also negotiating with the government to propose a deal similar to that announced by the Hotel Association of Nepal which decided to close all medium and big hotels till November, and to pay only 12.5% of staff salary till then.
Anil Manandhar, corporate manager of the domestic carrier Shree Airlines says the current financial condition of all airlines is precarious, and the future will depend on how long the lockdown will continue.
“Even if we reopen flights soon, the next two years will be a very difficult time for all airlines. The lack of tourists will affect short-haul, helicopter and international flights, and this will make it challenging for the industry to get back up on its feet,” says Manandhar.
Mergers would allow airlines to reduce costs by consolidating staff, but it would also mean many job losses. It will also sustain skilled aviation technicians, including engineers and crew, that the industry risks losing due to the crisis.
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Already most airlines have put new acquisitions and expansion plans on hold. Buddhar Air was planning to invest in brand new STOL aircraft to operate flights to remote area airports, while Shree was planning to use its CRJ 70 jets for flights to Indian cities.
Despite mergers being the only way, aviation experts still think that the chances of major operators like Buddha Air, Yeti Airlines, Simrik Air, or Shree Airlines and Summit Air merging are slim.
“Everyone may be looking at mergers as a possible option, but that is not their first priority. They would first lobby for a government bailout,” says a former CAAN official. “Besides, no airline merger is possible unless the government comes up with a policy to facilitate it.”
In order to encourage cost-saving mergers, the government must first give airline companies that option, similar to how it once forced the banking sector to do so by binding regulations and injecting capital.
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Domestic airlines have been requesting the government to do just that and formulate a merger policy that they could then use as a basis to finalise the number of aircraft and will also come up with a figure on the amount of capital investment necessary to revive the industry.
They also want the government to authorise CAAN to cut parking fees during this period, provide concessionary loans to pay for salaries, waive penalties, and provide tax breaks.
But it is not all gloom and doom. Some domestic carriers expect a surge in Nepali passengers after the lockdown is lifted that will ease the cash flow problem till tourism rebounds next year. International aviation experts have also said that it is safer to allow smaller aircraft to start operations rather than bigger jets since they carry fewer passengers at a time.
Even though long-distance international flights may take some time to resume, aviation sources expect regional flights from China to start first followed by India.
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