Lufthansa ends ModiLuft partnership

Kamlakar Mhatre

Hufrhansa has asked ModiLuft to return its three leased Boeing 737s

THE CONFUSION that has arisen between Indian domestic carrier Modiluft and German flag-carrier Luft-hansa is symptomatic of the current troubled state of private airlines in India today. But ModiLuft is not the only one with such problems.

East West and Skyline NEPC - the old Damania Airways - also have on-going disputes with their lessors.

On May 20, Lufthansa's Middle East, Africa and Asia-Pacific senior vice-president, Dieter Heinen, announced in Delhi that they had decided (unilaterally) to terminate their agreement with ModiLuft. The reason given for this abrupt move was the carrier's failure to pay up for various services, running into "several million marks".

Heinen said that Luft-hansa had asked for the three leased Boeing 737s to be returned "as soon as possible". This would result in a 50 per cent loss of capacity for ModiLuft.

According to Heinen, ModiLuft had been in constant breach of contract payments. The situation had worsened since last January and "we had no other choice, but to come to this decision".

Three years ago, S K Modi, ModiLuft chairman and a member of the Modi industrial empire family, signed a ground-breaking agreement with Lufthansa to help the newly-formed carrier a stronger brand identity.

The agreement covered not only leasing aircraft from Lufthansa, but training as well as technical co-operation. Furthermore, two senior executives of the German carrier were based in Delhi in management positions. Equity participation of up to 40 per cent by Lufthansa was mentioned as more than a possibility.

However, Lufthansa seemed reluctant to commit itself, even as it signed a strategic alliance agreement with ModiLuft last August in Frankfurt.

There were two indications, however, to suggest that all was not well. At the beginning of this year when Lufthansa decided to form a cargo airline in India with equity participation, it join-ed with the London-based Hinduja group rather than ModiLuft. Arguably this was a decision of Lufthansa Cargo which is a separate company. At the time it surprised industry observers.

Secondly, Madras-based NEPC Airlines made a public offer to buy 30 million shares of ModiLuft at a premium of 30 per cent aimed at 47.3 per cent stake. This would give NEPC management control similar to what it had achieved in the case of Damania Airways (renamed Skyline NEPC). A subsequent court battle decided that the Securities and Exchange Board of India should determine whether the offer was valid. The SEBI ruled against NEPC which has since approached the Ministry of Finance. Throughout the controversy Lufthansa made no move to support ModiLuft.

After Lufthansa announced its decision, Modi claimed the next day that he had made all due payments (US$40 million in two years) and that Lufthansa's withdrawal would not affect his airline. In fact, the bottom line would improve by up to $7m. He would return the planes as soon as he can find replacements for them which might take three months and has plans to increase the ModiLuft fleet to 12 aircraft.

Lease/rental payments disputes have created difficulties for East West and also for Skyline NEPC. East West is now operating three Boeing 737s while the issue of four 737s and three Fok-ker and PLM has gone to court after failure to receive lease rentals. PLM has also asked for the return of its aircraft with Skyline NEPC.

Ironically, while some private airlines continue to claim strong traffic growth, high load factors and even profitability, the failure to pay lease rentals tells a different story.