Lufthansa-Modiluft split shows India's aviation warts

Lufthansa-Modiluft split shows India's aviation warts

By Sonali Verma

NEW DELHI (Reuter): The split between Germany's Lufthansa AG and its Indian partner Modiluft highlights the problems affecting India's fledgling private aviation industry, industry analysts said on Thursday.

"India has the world's highest fuel prices and the lowest domestic fares. It's really a bad combination," said aviation analyst Brij Bhardwaj.

"Most Indian companies have run into problems with their payments schedule for leased aircraft because the financial situation of airlines is not good. So, most companies are defaulting," he told Reuters.

Lufthansa on Wednesday said it was ending a three-year-old alliance with Modiluft because Modiluft had defaulted on payments despite warnings and negotiations, forcing the German firm to incur losses running into millions of marks.

The agreements terminated included a leasing agreement for three Boeing 737-200 aircraft, which Lufthansa said it would attempt to repossess as soon as possible.

Modiluft chairman Satish Kumar Modi on Thursday denied he had failed to make payments under the two airlines' 1993 technical cooperation agreement.

"I am stating very, very clearly that I am in breach of no contract," Modi told a news conference. "Modiluft, as far as the law is concerned, is on a very strong wicket. We have paid the money. Nothing is due from us."

India dismantled a state aviation monopoly as part of a series of radical economic reforms in 1991, opening its air travel sector to more than a dozen private airlines.

But analysts say most airways -- weighed down by crippling fuel and maintenance costs, low passenger fares and occupancy rates, and government laws that force them to fly to remote, unprofitable regions -- are foundering.

"Every single private Indian airline has problems," said a senior European airline official in Delhi.

"To run an airline is not so simple. Everything must be imported from abroad. We're talking of every little spare part here. Then fuel prices are a big dent on the finances. Most of these companies have very limited resources."

Lufthansa's Indian alliance, operational within three months of the ink drying on the agreement, was one of the most promising new aviation ventures when reforms began.

But analysts say signs of a souring relationship soon emerged, as Lufthansa posted executives to India, then quickly withdrew them and declined to take an equity share in Modiluft.

Modiluft is currently India's second largest privately owned airline, with a fleet of seven leased aircraft that fly 38 domestic flights daily.

Modi said he expected the company's net profit in the 1995/96 financial year ending on May 31 to surge to at least 250 million rupees, more than four times the 1994/95 net profit of 56.8 million rupees.

Turnover was expected almost to double to at least three billion rupees from 1.5 billion in 1994/95, he said.

Bhardwaj, who is associated with aircraft makers Boeing and Lockheed Martin Corp's consultants in India, said most airways would cave in under the pressure of payments for leased aircraft.

"There is no quick money in airlines," he said. "The cash flows involved are very large and the profits are very low. You need a 70 to 80 percent occupancy rate to break even. That does not happen."