NEWS
COMMENTARY
INTERVIEW
CHAT
ARCHIVES

'Our mistake was that we hired the most expensive airline in the world to give us aircraft and services'

By all reckoning, the Modi-Lufthansa partnership should have been a happy one. At the time S K Modi was the only known 'corporate entity' in the airline business in India. Lufthansa's technical crew is among the best known in the world. After an initial three aircraft, Modi had gone on to lease another Boeing 737-400 and the brand equity of Lufthansa had given him a unique prestige.

But within one year -- by March 1994 -- ModiLuft began to fall back on payments to Lufthansa. In April that year, the Lufthansa board first considered whether to continue or terminate the contract. But around this time, the Indo-German bilateral had just been renewed, giving them a 50 per cent increase. The option then was to try and run the existing relationship better or to look for a new partner. "But given the fickle nature of government policy at that time, we knew we wouldn't even be allowed in if we looked for a new partner,'' says Sethi. And they stuck with ModiLuft.

The first year, ModiLuft declared profits of Rs 74 million -- a very high figure by airline industry standards. But that was the best year. In 1994-95 profits went down to Rs 56 million. And by 1995-96, when Modi had a total of seven aircraft, profits rose only marginally to Rs 62 million. And these were book profits -- not necessarily reflecting real profits.

By December 1995, the airline was weak enough to be shake by a takeover threat by a little-known businessman from the south -- Khemka from NEPC. Rumours were that most of Modi's personal shares were pledged against loans in the market and Khemka was planning to buy them. Thankfully for Modi, Khemka ran into troubles of his own and the takeover never happened.

Nevertheless, the Modi-Lufthansa alliance was already showing fissures. While Modi kept telling the press that Lufthansa would be coming in with a 40 per cent equity any time now, Lufthansa remained stubbornly unmoved and absolutely tight-lipped.

And the first time the German airline's representatives opened their mouth was on the 29th of May last year: They declared that the partnership had been unilaterally terminated by them.

All break-ups are bitter. But this was more than most. Says Modi, ''I learnt of it through the press. I was absolutely taken aback."

He really should have known better. Because industry watchers had seen this coming a long time ago.

There were two things fundamentally mismatched in this alliance. Modi's background lay in threads and fibres. And Lufthansa was, and remains, the most expensive airline in the world to tie up with.

S K Modi's major complaints are Lufthansa's prices, their refusal to bring in equity and, as he charges, their refusal to let ModiLuft get into a financial tie-up with anyone else. Says S K Modi, "Our mistake was that we hired the most expensive airline in the world to give us aircraft and services." Apparently, while a Lufthansa pilot cost a whopping US $ 32,000 a month, a Malaysian Airlines pilot (that Modi later hired) came for as les as US $ 6,000.

Besides, says Alok Sharma, ModiLuft's general manager, planning and product development, ''In October 1994, when the ModiLuft share listed at Rs 100, we decided to go in for a financial tie-up with another airline. But Lufthansa not only refused to bring in its own money, it even refused to let us tie-up with anyone else."

In fact, Modi has repeatedly told the press and maintains to this day that Lufthansa had promised to take up 40 per cent of the equity. "It would have solved a lot of our financial problems.''

"That," says Lufthansa's Sethi, "is a lie." He insists Modi was told in the very beginning that as a matter of policy, Lufthansa didn't go in for financial equity. ''Even today, despite 26 major alliances, we have a financial stake in only three."

The bickering apart, 18 months before the alliance actually broke up, ModiLuft already owed Lufthansa 10 million dollars as per Sethi's estimates. He owed up to Rs 100 million in Inter Corporate Deposits loans. And was said to owe another Rs 170 million to sundry creditors. In addition, the British company Parc Aviation had also served notice, threatening a winding up case for non-payment of dues.

Now, Lufthansa has sued ModiLuft for nonpayment of 3.3 million deutsche marks along with a 5.5 per cent interest on 3.2 million DM. In turn, S K Modi has sued Lufthansa for a sum of Rs 5 billion for over billing and for causing 'loss of prestige.'

Courtesy: Sunday magazine