The Financial Crisis of Nepal Airlines
Nepal Airlines, the state-owned flag carrier, has become synonymous with financial instability and poor governance. With a debt of Rs50 billion, it is on the brink of bankruptcy, facing eroding public trust, corruption scandals, overstaffing, and chronic mismanagement. Despite these challenges, the position of chief executive remains highly sought after, with 16 candidates applying for the role as the government attempts to select a new leader through open competition.
The airline’s financial situation is dire. A recent government report highlights that without immediate corrective measures, the situation may worsen to a point where the two largest public saving institutions—custodians of vital retirement funds—could be adversely affected. These institutions hold savings from employees across the government, public enterprises, and the private sector, making their financial security a critical concern.
Key Financial Indicators
According to data disclosed by the Office of the Auditor General, Nepal Airlines’ financial indicators have plummeted far below acceptable thresholds. A comprehensive evaluation of the aviation sector, led by former Supreme Court Justice Anil Kumar Sinha, paints a bleak picture. The current ratio, which measures current assets against current liabilities, stands at just 0.60. This means the airline can cover only 60% of its immediate obligations, indicating a dangerously fragile working capital position.
The debt-to-equity ratio is a staggering negative 12.33, showing that the corporation’s paid-up capital has turned fully negative, with liabilities vastly exceeding assets. “The corporation is heading towards bankruptcy,” the report concludes. The outstanding loan liability is Rs34.83 billion, and when capitalised interest and penal interest are included, the total liability reaches Rs50 billion.
Impact on Public Savings
The interest coverage ratio is only 0.66, meaning operating income covers just 66% of interest payments. The debt-to-total-assets ratio has reached 1.09, showing liabilities now exceed the total value of the corporation’s assets. This imbalance between equity and debt underscores a broader lack of managerial competence and corporate governance.
Public savings, such as those held in the Employees Provident Fund and Citizen Investment Trust, have been directly impacted. These funds were meant to be invested as equity, but instead, they were used as loans. Had these funds been invested as equity, the corporation’s financial position might have been healthier. This misuse of public savings poses a direct threat to the financial security of those savings.
Loan Details and Challenges
According to the financial audit, the loan taken by Nepal Airlines from the Employees Provident Fund to purchase the Airbus aircraft stands at Rs20.46 billion. Likewise, the loan from the Citizen Investment Trust amounts to Rs12 billion. The Employees Provident Fund has capitalised the interest and penal interest, and as of fiscal year 2022-23, the outstanding principal has reached Rs23.56 billion, while the outstanding interest and penal interest amount to Rs5 billion, making the total due Rs28.57 billion.
A loan of Rs12 billion was disbursed by the Citizen Investment Trust to the corporation under a government guarantee in June 2017 to purchase the wide-body Airbus A330 aircraft. As per the loan agreement, the corporation was required to fully repay the loan within 15 years and submit instalments on a quarterly basis. However, due to late payments, the interest and penal interest were capitalised, reaching Rs17.83 billion. Additionally, the corporation has outstanding principal and interest liabilities amounting to Rs3.63 billion under various loan agreements with the government.
Strategic Vision and Political Interference
Despite being fully state-owned, Nepal Airlines has not taken adequate steps to address its worsening financial distress. Given its precarious state and the direct link to public capital, the report warns that continued government control may no longer be justifiable under the existing structure. The airline also lacks a clear strategic vision.
Tourism entrepreneur and former Nepal Airlines board member Ashok Pokharel questions why all private airlines connecting Nepal are making healthy profits despite rising fuel and airport fees, while Nepal Airlines consistently fails. He points to Nepal’s air cargo market as an example, highlighting how foreign airlines have captured significant business.
Pokharel estimates that foreign airlines repatriate around $2 billion annually from Nepal, with a significant portion coming from low-cost carriers and IATA-member airlines. He suggests that transforming Nepal Airlines into a public limited company with transparent accounting could revive the carrier.
Recommendations for Restructuring
The Sinha report echoes this sentiment, identifying persistent political meddling as a major cause of the carrier’s deterioration. Frequent changes in ministry leadership lead to pressure to replace Nepal Airlines’ executive leadership, making long-term planning impossible. One glaring example is the controversial procurement of Chinese-made planes, driven by political pressure and directives, which pushed the airline into deeper financial trouble.
The report recommends a sweeping restructuring of Nepal Airlines, including amending the Nepal Airlines Corporation Act and reorganising government-owned capital, investments, and institutional loans. It proposes splitting the corporation into three entities: Nepal Airlines Company Limited (international services), Nepal Aviation Service Company Limited (ground handling), and Nepal Airlines Corporation (domestic services). The first two should become public companies listed on the Nepal Stock Exchange, with executives hired through competitive and performance-based processes.
However, debt allocation remains a major hurdle. Nearly Rs50 billion in liabilities, mostly tied to international aircraft procurement, would fall on the new international carrier alone, threatening to pull the new entity back into crisis. A fairer financial model is essential, the report says.
Conclusion
Nepal Airlines, originally founded as Royal Nepal Airlines Corporation in 1958, began with a single Douglas DC-3 and expanded into international operations over the decades with Boeing 727s and 757s. In recent years, it has operated Airbus A320s and A330s on international routes. Despite its historical significance, the airline must undergo significant reforms to survive and thrive in the modern aviation landscape.
