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January 28, 1997


'It was like the government said Yes, we want private airlines. But no, we don't want them to succeed'

But where did the relationship really go wrong? Part of it was the expensive alliance and part of it, as one employee described it, were 'Mr Modi's Unique Business Practices.'

Last year, when the airline was badly in need of money, the S K Modi group had ventured into four more alliances: Modi Hoover in alliance with Maytag of US; Modi Accor hotels with Accor of France: Jardine Insurance Consultants with JI Brokers of Hong Kong; and Modi Express Travels with Cunard of Hong Kong.

At one point of time, when Modi Hoover shares were reigning high, it is said S K Modi toyed with the idea of putting ModiLuft money into Hoover, pushing up the Hoover share price, sooping up the cream from there and putting it back into ModiLuft. But Lufthansa realised that if you juggle with too many balls at once, at least once of them is sure to fall. And they didn't want to be around when that fall came.

Now S K Modi is talking with other partners, notably with companies in the United States and Malaysia, and says he is confident of turning the airline around.

But industry circles wonder if he has learnt that one valuable lesson he had missed out on in his management days: if you have very little money, and you spread it far too thin, something is bound to tear. As it did.

In the late 1980s, Indian Airlines operated 129 routes within India. Of these, 19 routes were profitable, 32 routes met their operating costs while the rest were making heavy losses. Moreover, there was also a shortage of capacity -- airline seats were hard to come by. It was generally agreed that the loss making national carrier could not manage on its own and that the private sector should be allowed entry at some level.

The phrase Open Skies gained currency during Arif Mohammad Khan's tenure as civil aviation minister but the skies only opened up when Madhavrao Scindia took over in 1991. Scindia went beyond the existing laws -- which allowed only for air taxis -- and permitted scheduled airlines to operate in competition with Indian Airlines. As he said at the time, 'I am minister for civil aviation, not minister for Indian Airlines.'

While the experiment was a success, it was also probably illegal going by the letter of the law. For instance, air taxis could not have scheduled flights (because they were meant to be taxis), so private operators were not allowed to published schedules -- even though everybody knew that they were in fact operating scheduled flights.

It was only in 1994, that the private airlines gained legal legitimacy when the Air Corporations Act -- that gave Indian Airlines monopoly over Indian skies -- was repealed.

But by then Scindia's successor, Ghulam Nabi Azad had accepted Indian Airlines's complaint that it operated under massive disadvantages and could not compete on equal terms. In any case, aviation turbine fuel prices had been hiked by the government to levels that made them amongst the highest in the world. Next, Indian Airlines demanded that the private carriers also be made to fly on the uneconomical routes that it was forced to maintain for 'social reasons'.

So private airlines were now asked to earmark half of their capacity for Category II and Category III routes: that is, areas like North-East, the Kutch in Gujarat and Jammu. Says Alok Sharma, ''If we owned three aircraft, it meant that one and a half planes were uneconomical from day one. The monthly lease for a 737-200 is about US $ 1,100,000. It meant we were losing almost $ 55,000 every month just servicing these sectors. That killed us.''

And when private airlines tried to make up for this with volumes, they had to queue up for months outside the civil aviation minister's door for permission to expand their fleet. Says an East West Airlines officer: ''We were told there wasn't enough airport and maintenance infrastructure."

Every airline's cost structures are different but, on average and long distance hauls total operating costs begin to come down after seven aircraft. Most private airlines had to wait over a year to get permission to add a fourth aircraft. And by the time they did expand their fleet, time had run out for most of them.

As a ModiLuft officer put it, "It was like the government said 'Yes, we want private airlines. But no, we don't want them to succeed.' "