Has the sun set on Paramount?

Even by the motley standards of Indian aviation— there are nearly a dozen airlines and service variants with diverse models—Paramount Airways made for the odd man out. It was the lone all-business class carrier flying domestic skies, it was the only airline to fly Embraer-made jets, it was a regional operator long before the nomenclature became common, it flew its five planes with the highest passenger occupancy among all peers, and it had profits three years on the trot in an industry that in 2008-09 alone accounted for some Rs 10,000 crore losses.

The airline seemed to have got everything right: Its medium-sized planes with a capacity of 70-75 seats qualified for a waiver of landing fees at airports and paid just four per cent sales tax on fuel (versus up to 34 per cent for larger jets), its ticket yields were a healthy Rs 4,200 (at par with Kingfisher and a third more than SpiceJet), and had a loyal following won over by gourmet on-board meals and on-time performance.

"For some of us looking at the regional carrier space, Paramount was the model to emulate," recalls Ankur Bhatia, Executive Director, Bird Group, a travel services company. Paramount continues to be the odd man out today. It is an airline with no planes. Almost. Between December and now, the airline's two lessors—GE Capital Aviation Services and ECC Leasing Company (a unit of Embraer, Brazil)—have taken back or are in the process of doing so five planes the Chennai airline had leased from them. Reason: Non-payment of lease rentals and dues, and suspicion that Paramount was cannibalising spare parts from one plane to keep others airworthy.

Some eight months ago, Paramount promoter M. Thiagarajan, a lanky 32-year-old with the demeanour of a techie, had plans all ready to expand to north India from the south where the airline flew between cities such as Madurai, Chennai, Bangalore, Thiruvananthapuram, and Coimbatore. His model worked splendidly: With just one per cent aircraft seat capacity nationally, he commanded a market share double that by flying his planes more and fuller. His share in the southern market: An admirable 26 per cent.

That is all but over and Thiagarajan is fighting court battles with lessors in the Indian Supreme Court and Royal Courts of Justice, London, even as the aviation regulator, Director General of Civil Aviation, is considering withdrawing the airline's licence to run scheduled services.

Aviation rules mandate a carrier has at least five aircraft to run scheduled services. To be sure, in the past, airlines such as GoAir and MDLR have run their services with fewer planes for short periods of time, but a telling sign of Paramount's troubles is that it does not figure in the summer schedule on the regulator's website. "We are looking into the impact of deregistration of aircraft on the status of the airline," says S.N.A. Zaidi, the Director General, without elaborating.

What went wrong? The story of Paramount, owned by a Tamil business family with a heritage in banking and textiles, is as intriguing as it comes. After at least two dozen interviews and weeks of poring over legal filings and regulatory documents, here's what Business Today found of the inside story at the feted airline that's lost all but its wings.

Diwali Shocker
The airline's cash flow problems aggravated six months ago, say people familiar with the matter. Its employees had an inkling of brewing problems in October, the month of Diwali last year, when salaries came late. Even before that, the company, say insiders, had difficulties with its payroll, but managed by making salary payouts in tranches: First paying pilots and bottom-rung workers, and then those at the middle level, but this could not be independently confirmed.

The Diwali problems compounded when GECAS, as the GE lessor is better known, hauled Paramount before DGCA to deregister three Embraer jets the airline had leased. Pending payments from the airline had amounted to $821,213.42 (about Rs 3.7 crore) by July 2009, prompting the lessor to send a grounding notice on the 20th of that month, documents from proceedings at the Royal Courts of Justice show. The amount was paid, but a series of defaults followed, according to GECAS' version quoted in court proceedings.

A lease termination notice was served on October 14— three days before Diwali. Three Embraer planes from GECAS no longer fly on Paramount's deep blue colours. GECAS declined comment saying it does not comment on client-specific deals. Even ECC, the Embraer leasing unit, has terminated its lease on its two planes rented to Paramount and is determined to recover its planes. "ECC Leasing is pursuing deregistration of the two aircraft leased to the airline with the DGCA. ECC is also following a legal process in India to repossess our aircraft due to events of default (on the lease payments) by Paramount since 2009. Arbitration is in due course in London for payments," ECC told BT through its spokeswoman in Singapore.

One of the ECC jets is grounded and the other makes for the lone one flying for Paramount. A Madras High Court order in December that restrained ECC from recovering its two jets shows the extent of the embittered relationship between the two. On July 31, 2009, according to the order, the airline told ECC in an e-mail that it had transferred some $1.5 million electronically to the lessor's bank account. ECC never received the money.

On enquiry, Paramount's local bank—Axis Bank—informed ECC on August 5 that the transfers were not intended for the lessor. That same day, Paramount wired $1.1 million to ECC, but the episode left the Embraer unit very bitter. "Despite the receipt of the said payment, the applicant (ECC) seeks repossession of the Air-crafts (sic), on the ground that the trustworthiness is gone due to the false mail sent on 31.7.2009...," the order said while summarising arguments of both Paramount and ECC.

A combative Thiagarajan says GECAS has $49 million from Paramount in maintenance claims, a caution deposit and a maintenance deposit. "We told GECAS in September-October last year that ‘You owe us a lot of money, so adjust it against the lease rentals payable' because we had no intention of renewing the lease of the three jets set to expire in October this year," he told BT.

"So, we stopped paying lease rentals from October end (2009)." Paramount has booked planes—four Embraer jets and 10 Airbus-made planes—that start arriving in May, he insists. This is where the story gets murkier. Both Airbus and Embraer deny they have any orders from Paramount. A June 2009 deal to buy 10 A-321 planes (with the option of picking up another 10) that Paramount repeatedly points to with Airbus is just an intent to do so, Airbus India President Kiran Rao said.

"We signed a Memorandum of Understanding with them at an air show, that does not equate to an order," he says. Embraer, too, told BT that Paramount has "no aircraft orders with us presently". Thiagarajan's answer is that he may prefer to lease from elsewhere or make outright purchases. "With several aircraft grounded, there are opportunities to get them—either on rental or on purchase—at cheaper prices," he says.

That will be tough because the world of aircraft lessors is a close-knit one with airline reputations marked and checked closely. Paramount could, then, find leasing planes virtually impossible, leaving it with only expensive purchase options. Example: Airline lessors were wary of leasing to Indian firms in the mid '90s after ModiLuft and East West Airlines went belly up.

Costs, the Drag
An investment banker from Chennai, who does not want his name taken, says what Paramount is going through is a classic "heart-over-mind" behaviour seen among deeply-driven entrepreneurs. "Perhaps, Thiagarajan was not aware how hard an airline can guzzle money, until he experienced it. He was driven more by passion and integrity, not logic," he says.

A close parallel could be Capt. G.R. Gopinath, the man who seeded lowcost aviation in India through Air Deccan, but was forced to exit in four years after funds dried up. Being a private company (the only outside investors are Kotak Private Equity and Bennett, Coleman & Co. that together hold five per cent), Paramount is not required to make its financial data public. The only publicly available numbers are its profit figures filed with DGCA and presented to the Lok Sabha by Civil Aviation Minister Praful Patel.

The carrier made a profit of Rs 7.26 crore in 2008-09 and waferthin profits in the two years before. In Paramount's instance, experts think it's the steep lease rentals and fuel costs that did the airline in and offset all gains from lower sales taxes on fuel and exemptions from landing and parking charges at airports. Lease rentals on an Embraer E170 or E175 plane were at nearly $180,000 a month, about three times what an ATR turboprop costs, an analyst says. "An airline can hope to make profits if it can keep its lease rentals at around 15-16 per cent of its revenues.

But in the case of Paramount, it was at an unsustainable 37 per cent in 2007-08, 30 per cent in 2008-09 and about 20 per cent in 2009-10," estimates Mahantesh Sabarad, Senior Analyst with Fortune Financial Services, a Mumbai-based broking firm. Still, a more fundamental reason for Paramount's troubles, experts point out, was its flawed business model. Thiagarajan used long-haul, small commercial jets to fly short routes. The reason behind this argument becomes clear when one looks at one measure of airline performance with ‘Cost per Available Seat Mile', or CASM. Embraer E-170 planes operated by Paramount do not compare favourably with ATR turboprops used by Jet Airways and Kingfisher even though both types of aircraft carry around 70-odd passengers.

Data from the US and Europe show Embraer jets have a 20-25 per cent higher CASM. This should not make a difference on what airlines call "long-thin" routes—that is longer routes with lower passenger demand (such as Chandigarh-Bangalore or Lucknow-Chennai), because ATR turboprops are not designed to fly long routes and fast. But on shorter routes, the jet's speed advantage gets negated and they waste fuel in taking-off and landing. Worse, because most of Paramount's routes were in the 500-km range, the planes had to fly at lower altitudes, which again guzzled fuel. Paramount seems to have learnt this lesson: A company insider says a few Q-400 turboprops from ATR rival Bombardier may be an option to replace the seized Embraers.

That may, then, be the way forward for Thiagarajan: Low-cost, short haul. "Executive travel is being permitted only on a ‘need to fly' basis. For the VFR (visiting friends, family and relative) segment, especially in the tier-II towns, the ability to get higher RPKM (rupees per passenger kilometre) is limited," says Amber Dubey, Director (Aerospace) at the consulting firm KPMG.

The road back to business is going to be very arduous for Thiagarajan. The Paramount brand has suffered with cancellations and safety scrutiny by the regulator (remember the cannibalised plane?). He has very few options: Pump in substantially more than the $100 million he has already invested. Or, close shop and let Paramount be another casualty of the dogfight that Indian aviation is. Both choices are painful, sadly.