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BW Businessworld

Mounting Problems

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I have been reading with some amazement speculative reports on Chennai-based Paramount Airways's plans to buy Mumbai-based GoAir for Rs 100-150 crore, and take Go Air's Rs 400 crore-odd debt onto its books.

Though the deal — if it were ever to happen — between these two small players would not create a significant new player, it would lead to some much-needed consolidation in a sector that has been floundering for almost two years now. But subsequent denials by GoAir seem to suggest no such deal is in the works.

I find the entire episode amusing because Paramount itself is struggling to stay afloat, let alone buying rival carriers. Its problems have been worsening in the past 2-3 months, and one senior civil aviation ministry official told me it was fast "going down the tube".

Paramount has debts accumulating on all fronts. Industry sources say the airline's debt stands at Rs 350 crore today. It has failed to pay Airports Authority of India its dues for a while, and has been put on cash-and-carry mode. The company has been collecting tax deducted at source from its employees, but the money has, say sources, not been paid to the tax authorities. Several employees, who have left the airline, complain their dues have not been settled. Employee-turnover in the company, especially at senior levels, has been high. Even worse, the airline has been taken to court by its own aircraft-leasing company, ECC Leasing, for failing to pay its lease rentals. The Ireland-based company sought Madras High Court's intervention to allow it to seize two of the airline's five aircraft.

Like many other small airlines in India, Paramount too has announced several grand plans. It hopes to have a fleet of 40 Embraer aircraft by 2010 (just three months to go). In June 2009, at the Paris Air show, the airline signed a deal to buy five A320-200 aircraft from Airbus, with options for five more. But it is yet to produce the token amount of $1 million to seal the deal. Sources say it is having trouble raising even that amount. Paramount plans to start international operations by 2011. It wants to start with Europe, connecting cities such as Rome, Vienna, London and Paris, before foraying to the Middle East, Far East and the US.

But the ground reality is different. A recent safety and maintenance audit of the aviation watchdog Directorate General of Civil Aviation (DGCA) found some Indian carriers, including MDLR and Paramount, wanting in terms of their maintenance practices and safety standards. (The audit was done at the behest of the US Federal Aviation Administration that had threatened to downgrade India's rating in terms of aviation safety standards.) A show-cause notice was issued by DGCA to Paramount. The airline has also been told it cannot fly new routes within India unless it demonstrates some kind of financial stability.

There are two points to be made here. One, DGCA and the civil aviation ministry need to undertake a far more thorough investigation of the financial stability of the groups seeking approval, before allowing them to take to the skies. There is also no harm in running a background check on the promoters. Keeping Paramount company, for instance, is India's first ‘vegetarian' airline MDLR, which has been in the news more for the wrong
reasons. (The last I recall is the MDLR chief being raided by the income tax department and investigated by the Enforcement Directorate and the CBI).

Secondly —  though this is a digression, it's a worthy one — award-obsessed Indians, and some global ones too, continue to shower accolades on Paramount, even as news of the airline's troubles come in. The airline's promoter and Managing Director, M. Thiagarajan, a soft-spoken textile baron from Madurai, was accorded the Lakshya Bhartee Foundation's Visionary Award for Excellence -2009 in October for his contribution to "new age business". God alone knows what the criteria for evaluation are, but consultancy firm Frost & Sullivan conferred Paramount with the ‘Global Emerging Commercial Company of the Year' award for 2009 at its ‘Excellence in Best Practices' awards ceremony in London. Accepting the award, Thiagarajan reiterated his commitment to offer services to the global traveller, even as he struggled to retain his existing aircraft from being confiscated! The airline had also received a certain ‘Arch of Europe' award, and the Award of Excellence by the Institute of Economic Studies in Delhi.

The point here is some degree of discretion in grant of awards is called for. (Is the Nobel prize screening committee listening?). Encouraging far-from-proven companies with awards is not only dangerous, it is downright silly too.

anjulibhargava at gmail dot com

(This story was published in Businessworld Issue Dated 02-11-2009)