Turbulent Times

How Domestic Airliners are Dealing with Downturn in Business

the HRM

In the last week of June, the Civil Aviation Authority of Nepal (CAAN) said that it is going to conduct a special financial audit of domestic airlines. As a string of domestic airline companies began to face financial problems, the regulatory body of the Nepali aviation sector decided to conduct an audit of the airliners.

Guna Airlines which was back in the sky after a hiatus of eight years grounded its air fleet on March 2023 while Saurya Airlines has resorted to employee layoff as a cost-cutting measure to survive. Even Yeti Airlines, the second largest domestic airline company in Nepal, is reportedly seeking to divest its stake and is looking for new investors.

Although domestic airlines experienced record-high passenger numbers in 2022, carrying 4.46 million passengers, the first half of 2023 has been challenging for the companies. The Yeti Airlines ATR-72 crash in Pokhara earlier this year, along with a series of other safety issues, has raised serious concerns about the safety protocols of domestic airlines. Furthermore, they are also facing a financial crisis due to soaring aviation fuel prices and increased landing and parking charges.
72 people on board were killed in the fatal crash of Yeti Airlines ATR-72 aircraft on January 15, 2023, that occurred despite clear weather. This led to a sharp decline in air passengers as well as the number of flights, especially to Pokhara for almost a month. While official data is yet to come, industry insiders say the passenger flow has declined dramatically in the first half of 2023 compared to the same period in 2022.

The last 12 months have been quite difficult for the aviation industry. While the sector has largely recovered from the Covid-19 pandemic impact, airliners are now reeling under financial stress. The sharp surge in the price of aviation fuel following the Russia-Ukraine conflict along with the rise in other expenses has hit airliners.
The aviation turbine fuel (ATF) price almost doubled in 2022, rising to Rs 190 per liter in December 2022 from Rs 106 per liter in January 2022. While aviation fuel price has come down to Rs 136 per liter now, companies are faced with rising costs due to the changes in the civil aviation regulator tariff policy. The CAAN not only doubled the passenger service charge but also raised the landing and parking charges. “Because of these two combined effects, despite rising passenger numbers, airlines are incurring losses because there is competition,” said a senior manager of a leading domestic airline.

There are nine fixed-wing operators and 12 helicopter companies in Nepal. Sustainability has been a major issue in the domestic aviation sector in the last three decades. Companies like Nepal Airways and Everest Air collapsed in the mid-90s while Cosmic Air and Necon Air bite the dust in the 2000s.

While Buddha Air and Yeti Airlines managed to survive the turbulent period and expanded their footholds in the domestic sector, the newer entrants did not had much luck.

Guna Airlines is one example in this respect. The airliner that resumed operation in September 2021 after a hiatus of eight years struggled to pay pilots and employees for a long time, forcing CAAN to ground all its aircraft and conduct a financial audit.

Guna Airlines which owns two Beechcraft aircraft and five Jetstream aircraft is seeking to sell its Jetstream aircraft to come out of the financial mess. However, the CAAN has imposed a condition that prohibits the sale of the aircraft until Guna Airlines settles its financial dues, including a debt of Rs 4 million to the government and pending staff salaries that have been unpaid for several months.

CAAN Spokesperson Jagannath Niraula said that the authority has sent multiple letters to Guna Airlines, urging them to engage in discussions with the government to resolve the issues. However, the airline’s promoters have shown reluctance in participating in these discussions. The HRM tried reaching out to Guna Airlines officials on the matter, however, they declined to comment.

Saurya Airlines is facing operational difficulties with its CRJ-200 aircraft. Of the three CRJ-200 aircraft owned by the company, only two are currently in operation. In a recent statement, Saurya Airlines announced that it will operate with a low-cost approach until it acquires ATR-72 aircraft. As a cost-cutting measure, the company has already reduced its staff by 40 percent. As of now, the two operational aircraft have flight licenses for limited hours. One aircraft is authorized to fly for 200 hours, while the other is permitted for 25 hours. Both planes require maintenance checks (C checks) to continue regular operations. However, due to the ongoing financial crisis, there are doubts within the company about whether they can afford to send the planes for the necessary checks. “Kuber Group, the Indian investor in the company, has halted further investments as they have not seen any returns on their previous investment, which has severely affected the company. This situation has also prompted pilots working for Saurya Airlines to actively seek job opportunities in other airline companies. The company is likely to close down within a few months,” a source at Saurya told the HRM.

The news of Yeti Airlines looking to divest its stake has been the biggest talking point in the aviation industry. Promoted by Yeti Group, the airline has been in the business for more than two decades. However, it is reeling under the rising debt and declining business.

The business of the airline that has been hard hit by the Pokhara crash is yet to return to normal. The airline has experienced a drop in passenger flow, resulting in a decline in business.

According to credit rating agency ICRA Nepal’s latest report, Yeti sustained major losses in the FY 2020 and 2021 due to the pandemic-induced operational disturbances. Sources said Yeti Group has been discussing with banks for the sale (divest) of shares of Yeti Airlines. Earlier, media reports emerged that Yeti Airlines is planning to sell 49 percent of its stake to investors. However, Sudarshan Bartauala, the spokesperson of Yeti Airlines said that the company has not yet decided to sell a specific percentage of its stake to investors.

“The company is engaged in discussions with investors, not necessarily because we are in deep financial trouble, but rather to strengthen the company further. The focus is to move forward to the next level, not to get stagnant. No final decisions have been made by Yeti Airlines regarding the exact percentage of stake to be sold. The company is exploring options to enhance its operations and ensure its growth in the aviation industry,” Bartaula said.

According to industry insiders, domestic carriers had good passenger growth in the first half of 2022. But they began to feel pressure in the second half of 2022 with rising aviation fuel prices. The ATF price went up to Rs 190 per liter from Rs 65 per liter.

Birendra Bahadur Basnet, Executive Chairperson of Buddha Air attributes rising interest rates, rising fuel prices, and strong US dollar for the financial stress that the domestic carriers are currently grappling with. “The loan interest rates increased by five percentage points during this period,” said Basnet.

On the other hand, the ongoing economic recession has also impacted the airlines’ business. With reduced passenger numbers but rising costs of operation, many airlines are struggling to stay afloat. According to Bartaula, the ongoing economic downturn has had a significant impact on corporate events such as seminars and conferences. “These events used to take place outside Kathmandu, in cities like Narayangarh, Pokhara, and Lumbini, contributing to the tourism business in those areas. However, due to financial constraints, corporate houses have now chosen to organize these events exclusively in Kathmandu. This concentration of events in Kathmandu has resulted in a decline in the flow of passengers to other regions,” he said.

According to airline officials, air travel witnessed a surge during and immediately after the pandemic as people were reluctant to travel by bus due to concerns about the spread of the coronavirus. This led to a significant increment in air passengers in 2022 as they sought a safer means of transportation. However, as the situation gradually improved and restrictions eased, there has been decrement in the number of individuals opting for air travel.

The recent airline crashes have also played a significant role in deterring people from choosing air travel. “The incidents have instilled a sense of fear and apprehension among potential passengers, further contributing to the decline in business for airlines,” said an airline official.

According to Bartaula, tourists predominantly prefer flying to the popular destination of Pokhara, but they do not extend their travels to other parts of the country. “This selective preference for Pokhara has adversely affected domestic airlines, as they are unable to benefit from the increase in tourist arrivals to Nepal. Despite an overall increment in the number of tourists visiting Nepal, domestic airlines are facing challenges in attracting these travelers to fly to destinations beyond Pokhara and mountain regions. This limited demand for flights to other Nepalese destinations has resulted in a decline in the number of flyers, causing further difficulties for domestic airline companies.”

Anil Manandhar, Spokesperson of Shree Airline, said that this is off-season and people fly less in this season, given the weather condition and flight delays. “But the cost of airfare has also pushed passengers away from flying. The operation cost has become significantly high in recent times,” he said.

Airlines officials say the aviation industry in Nepal faces significant challenges due to high operational costs and fuel prices. “While fuel surcharges are imposed on passengers, the expensive fares negatively impact the overall business of airlines. Another cost burden is the increment in airport landing parking fees implemented by the CAAN,” said Manandhar. “These cost escalations imposed by CAAN do not serve any commercial purpose but contribute to the financial burden on airline companies, further straining their operations.”

Officials stressed the need to have affordable flight options to attract air travelers. “Imposing higher fuel costs and airport fees on carriers is counterproductive to this goal. The government should restructure the pricing strategy as it is highest in the South Asia region,” said Manandhar.

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