January 23, 2020
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Parting Company

ModiLuft faces an uncertain future after the break with Lufthansa

Parting Company

DETER Heinin, Lufthansa's senior vice-president for West Asia, Africa and the Asia-Pacific region, minced no words at the hastily convened press conference on May 29. "The executive board of Lufthansa has decided to discontinue its existing relationship with ModiLuft with immediate effect," he said. "Financial constraints between the two partners that do not conform to internationally accepted and practised business norms leave Lufthansa no other choice but to move in this unhappy direction."

 ModiLuft, claims the German national carrier, had failed to meet its financial commitments despite numerous rounds of negotiations as well as many warnings and deadlines given to them over the last 18 months. Without naming the actual sum involved, Heinin suggested that it ran into several million deutsche marks. And he clarified that the break is total. All agreements—aircraft lease, technical support, pilots, training programmes—stand cancelled. After ModiLuft returns the three Boeing 737-200s with have been leased from Lufthansa, it will be left with only four aircraft.

Exactly 24 hours later, ModiLuft Chairman S.K. Modi held his own press conference. "There was no default at all. Actually it is the Germans who owe us money," Modi claimed. "There is going to be no disruption of flights and there is no question of the aircraft being returned until they are replaced by the more fuel-efficient 737-400s we are bringing in." He maintained that he had paid Lufthansa close to Rs 140 crore over the last three years, that he is "on solid legal ground" and that his company's finances are not in a mess.

If Modi is to be believed, ModiLuft's Euro-issue plans too remain unaffected by this setback. Indeed, he said that the company had already signed a marketing alliance with US-based United Airlines and a technical agreement with FLS of Britain. However, market analysts feel that the Germans' exit will definitely hit ModiLuft hard—for instance, its quick access to spare parts will be affected. In fact, this may even have a negative effect on Modi's other projects, since potential foreign partners may think twice before tying up with him after Lufthansa's damaging accusations.

The other angle to the fracas is, of course, the NEPC's hostile takeover bid for Modi's airline, which has been rejected by SEBI and is now awaiting the verdict of the higher appellate authority in the Finance Ministry. Says Ravi Prakash Khemka, chairman, NEPC: "We shall rethink our strategy now, provided the ministry rules in our favour." This rethink could mean NEPC backing out of the takeover bid because ModiLuft's depleted fleet makes it less attractive an acquisition or going for a lower price now than what it had offered earlier.

According to some analysts, the chances of the Khemkas tying up with Lufthansa to gain access to its fleet also cannot be ruled out, even though the Germans deny this. Insiders insist that the Khemkas may also approach Modi to buy his stake. But coming as it does right after the cases of the US company PLM Equipment & Transport taking action against East West and Skyline-NEPC, the ModiLuft mess is making people wonder whether a foreign lessor taking action against an Indian lessee for non-payment of rentals is becoming a norm in the aviation industry. 

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