Celebrities are a common sighting on Paramount Airways’ flights. This October day, the sighting on the 1 pm Paramount flight out of Chennai to the temple town of Madurai is Prakash Raj, this year’sb national award winner for best actor. On board, he quickly settles into his first-class seat—single row, wide armrest, generous leg-room. Over the next 55 minutes, when he’s not acknowledging recognition or signing autographs, Raj tucks into a three-course, piping hot meal. An airhostess coaxes him into an extra helping of biryani, while congratulating him for his award. As the 75-seater Embraer E175 aircraft taxies on the runway at the Madurai airport at its designated time of 2 pm, Raj says: “What I like most about Paramount is its on-time performance.” He flies the all-business-class airline regularly for his shoots in South India. As do several politicians, industrialists and senior business executives. In travel industry circles, Paramount is the VIP airline.

Of late though, whispers of Paramount’s cash-flow problems are becoming as common as celebrity sightings… creditor cribs are heard as frequently as customer compliments. Paramount has leased its entire fleet of five Embraer aircraft from two leasing companies—GE Commercial Aviation Services (GECAS) and ECC Leasing. Both say Paramount has not paid them rentals for two months—for an Embraer, that’s roughly $1,40,000-1,85,000 per month (about Rs 69-89 lakh)—and have threatened to seize their aircraft.

Is Paramount In Trouble?

“We are not,” retorts M Thiagarajan, Managing Director and promoter of Paramount, sitting in his sprawling 20-room home-office in Madurai. As soon as the Chennai-Madurai flight with Prakash Raj took off, 32-year-old Thiagarajan would have received an SMS from his office informing him of the time of its departure, along with its seat-load factor—the number of passengers as a percentage of the total number of seats. With 60-odd passengers on board, or 80% seat load, the flight would have been profitable. “If the door closes with 40 passengers, we break even,” says Thiagarajan, an hour after the flight’s touchdown at Madurai.

Through most of this year, when the kings of the airline industry were struggling to fly, this prince has been coasting in his small kingdom. Thiagarajan’s small kingdom is South India, which he initially chose to focus on exclusively despite having a national licence. Paramount’s national market share is a paltry 2%, but in the South, it is about 25%. Thiagarajan says Paramount has recorded net profits in the last two years; and that, on an average, about 80% of the seats on its flights are occupied. Reports say it was planning to take over GoAir. It seems the prince’s four-year old, 800-people-strong regional operation is doing alright for itself. Or, is it?

Here Come The Headwinds

Not many financial numbers of Paramount are available to diagnose its real health. Being an unlisted company, disclosure norms for it are more lenient than those for listed companies. Thiagarajan isn’t willing to reveal much other than pointing to the profit and loss numbers conveyed by the company to the government for a Parliament question on airline losses. But he gives nothing on revenues, debt, net worth, working capital, debtors. Nothing.

Two things are available in the public domain, which paint a picture of contrasts. The first is the profit and loss numbers conveyed by Paramount to the government. These show the airline posted a net profit of Rs 1.6 crore in 2006-07, its second year of operations, and Rs 1.2 crore in 2007-08, making it a rarity among airlines in India.

The second is its spat with companies from whom it has leased its fleet. GECAS has written to the Directorate General of Civil Aviation (DGCA), the Indian aviation watchdog, threatening to terminate Paramount’s lease contract. Confirms Naseem Zaidi, Director General, DGCA: “Yes, we have received a letter from GECAS, along with Paramount’s response. We are looking into the issue.” Elsewhere, ECC, which is the in-house leasing firm of Embraer, filed a suit against Paramount in the Madras High Court in September.

Tejpreet S Chopra, who is currently the President and CEO of GE India, inked the deal with Paramount in 2005 when he was Country Head, India, GECAS. He refuses to be drawn into the specifics of Paramount’s case, but offers this as a parting shot: “In a financial transaction, if you default on a payment, that’s it,” possibly alluding to deeper, more fundamental issues within the airline.

Thiagarajan says there’s no deeper problem. “The disputes are inconsequential. It’s merely a transaction structuring issue,” he asserts. “We have resolved the issue with ECC and we are sure we will work it out with GECAS as well.” (ECC could not be reached to confirm the settlement.)

But why did Paramount hold back the rentals in the first place? “We wanted the leasing companies to adjust our remaining rentals against our security and maintenance deposit,” says Thiagarajan. The five-year lease agreements come up for renewal in mid-2010, but Paramount wants fresh deals for new aircraft. “We want aircraft that are less than four years old, as younger aircraft give better fuel efficiency.”

That said, the standard industry practice is to always keep the two components—monthly rental and deposit—apart. Leasing companies do make an exception, based on the nature of the relationship and their outlook on the company. “How much rope a leasing company gives to the airline is a commercial decision,” says Nirvan Veerasamy, Managing Director, Veling, a Mauritius-based aircraft leasing company. “It (seizing) will disrupt operations—and impact the business model.”

That is something Paramount can ill-afford at this juncture. The same goes for the bad press and whispers. Paramount’s charmed existence is being challenged like never before, as Thiagarajan steps out of his cocoon and spreads his wings. He’s trying to take the airline to the next level: national, even international. “I want to replicate my South model in other regions,” he says of his national plans.

Southern Comfort

Thiagarajan, who belongs to the influential Chettiar community, knows the business milieu of South India well. Besides aviation, his family has business interests in textiles, commodities trading and education, with revenues of, he says, around $1 billion. Aviation is the group’s most recent business, conceived, birthed and nurtured by Thiagarajan.

His tryst with aviation began in 1994. As a 17-year-old on a trip to Frankfurt, Germany, he got a first-hand feel of a Boeing 747 flight simulator. Subsequently, he went to a flying school in London and trained in a Cessna. He was bitten by the aviation bug. In October 2005, at the height of the boom in the aviation sector, Paramount launched operations, with a 28-year-old Thiagarajan at the helm.

At your service: Good service has made Paramount the preferred airline for celebrities like actor Prakash Raj.

He took a contrarian approach. While most airlines focused on metro routes, Thiagarajan targeted non-metro routes in South India. When the standard was tilted towards no-frills, economy-class flying, he pitched Paramount as a full-service, all-business class airline. When the strategy was to build up passenger count by offering low fares, he turned his back on the pricing game. When the aircraft of choice for regional routes was 70-seater ATRs, Paramount opted for 70- or 75-seater Embraer jets, which are faster, smoother and more fuel-efficient.

Paramount started small, with just one Embraer aircraft and was based in Coimbatore. It shifted its headquarters to Chennai, and its fleet size increased to three in 2006 and five in 2007, where it has stayed since. In 2007, two policy changes announced by then Finance Minister P Chidamabaram, who is said to be close to the Thiagarajan family, brought Paramount on par with other airlines who were plying on non-metro routes.

The two firms that own Paramount’s five planes initiated action against it for non-payment of rentals. One even filed a suit to seize two planes.

The other airlines were flying ATRs, which are powered by turbo props. In order to incentivise airlines to fly to smaller towns, the government lowered the sales tax on aviation turbine fuel (ATF) to 4% for ATRs plying on routes where one or both the destinations was a non-metro (for example, Chennai-Madurai, Coimbatore-Madurai). ATRs plying on non-metro routes also didn’t have to pay airport landing and parking charges.

These two benefits weren’t available to jets (like Embraer), even while flying non-metro routes. They had to pay the normal ATF sales tax of 12-30% paid by larger jets servicing metro routes, as well as airport charges. Paramount’s Embraer jets were more fuel-efficient than ATRs, but that advantage was being neutralised by the additional ATF outgo. In 2007, Chidamabaram extended the lower ATF sales tax benefit and waiver of airport charges to smaller jets also. That translated into a cost saving of Rs 40-50 lakh per month for Paramount.

By 2007, Paramount was servicing nine destinations, all in the South. “Before 2005, most business travellers had to rely on Indian Airlines and Indian Railways,” says R Ghosh, Assistant General Manager (South India) for Balmer Lawrie, a government-owned travel agency that handles all PSU travel. In September 2008, Paramount started looking beyond. Since then, while its South coverage has stayed at nine cities, it has added seven destinations elsewhere. Still, the South remains its mainstay, accounting for 60 of its 72 flights in a day.

In a financial transaction, if a company defaults on its payment, that’s it.Tejpreet S Chopra, President and CEO, GE India

In 2006-07, its second full year, Paramount posted a profit, though meagre. “We were always bottom-line-centric,” says Thiagarajan. When it comes to fixing fares, it targets the discerning economy-class and business-class passengers of Jet Airways and Kingfisher Airlines. So, it prices its fares at a 10-15% mark-up to the economy class of these two premier airlines—for a business-class service. The emphasis is on passenger comfort, defined in terms of on-time performance and service.

Paramount’s passenger numbers have been rising: 560,000 in 2007, 630,000 in 2008, 650,000 in 2009 (till September). Thiagarajan says the slowdown actually worked to Paramount’s advantage. “Many business-class passengers are uncomfortable travelling economy. We are effectively giving them business-class comforts at economy rates,” he says. While full-service carriers such as Jet and Kingfisher have had to come down to an all-economy model to woo passengers, Paramount, he claims, has not seen any erosion in its yields.

The National Challenge

Thiagarajan is talking big. In the next two years, the plan is to expand in the South and the East. In October 2010, Paramount will complete five years, making it eligible to fly abroad. By end-2011 or early-2012, the plan is to fly overseas, to smaller destinations in the Far East, Middle Eastand Africa.

By going national, Paramount doesn’t intend to lose its regional identity. Unlike national carriers like Kingfisher or IndiGo, which have a strong metro focus, Paramount plans to retain its non-metro orientation. So, it will be more interested in, say, a Kolkata-Guwahati or a Kolkata-Jamshedpur rather than a Delhi-Kolkata.

We’ve got a letter from GECAS and Paramount’s response. We are looking into it.Naseem Zaidi, Director General, DGCA

What will change is that it will be stepping out of the market it knows well—South India—and stepping into markets with which its degree of familiarity is lower. Increasingly, it will start competing against national players—not on its turf, but on theirs. Its scale of operations will increase. Says a Chennai-based airport manager of a no-frills carrier: “It is easy to give personalised service to 35-40 passengers in a flight, but the model will be tested when it scales up.” Adds Veling’s Veerasamy: “It will be challenging to scale up such a model in a price-sensitive market.”

The stakes will increase. At most non-South destinations, Paramount is operating a flight or two a day. “That’s not enough to justify the cost of a ground crew and set-up. You need at least three to four flights daily,” says Alok Sharma, ex-President, Air Sahara. It will need more planes, more money and more management depth, and all three are not easy to come by for Paramount currently. The leasing squabble would certainly have eroded Paramount’s equity among leasing companies and aircraft manufacturers.

Thiagarajan wants to buy or lease 30 aircraft in the next two years, but his funding plan doesn’t inspire confidence. At the Paris Air Show in June 2009, Paramount signed an MoU with aircraft manufacturer Airbus for a confirmed order of 10 A321 (180-seaters) for its international operations—at a list price of about $1.5 billion. Airbus executives say they have not heard anything or received any money from the airline since. “We will announce our engine selection at the Dubai Air Show in November,” says Thiagarajan.

Last week, Thiagarajan said he was in talks to buy Star Aviation, his future rival in South India. Star called it a “cock-and-bull story”. More contradictions...

In February 2008, Paramount had announced a similar plan to increase its fleet strength to 20 by the end of 2009 and 40 by 2010. Today, it still operates a fleet of five, of which, one plane is grounded for maintenance. As for funding, Thiagarajan says it will be completely from internal accruals and loans. “A placement with private equity investors or a public issue is not planned in the immediate future,” he says. For a company whose annual turnover is said to be about Rs 400 crore and which is on the edge of profits, it might not have the room to think that big now.

But it continues to. Earlier this year, it was reported to be interested in buying GoAir, the airline promoted by the Wadias that is laden with debt and bleeding heavily. Jeh Wadia, Managing Director, GoAir, termed it as “baseless market speculation”.

Then, last week, Thiagarajan was linked to a buyout of Star Aviation—an all-economy, regional airline promoted by investors in the Gulf that is, after several postponements, due to launch in January 2010. Star targets Paramount’s bastion of South India, using a similar business model. “Yes, we are talking to them,” confirmed Thiagarajan. A Star Aviation spokesperson, however, denied the development. “It’s a cock-and-bull story. We haven’t spoken to Paramount.”

The contrasts and contradictions continue. Loyal Paramount flyers like Prakash Raj may value the airline’s on-time performance and in-flight service, but Thiagarajan will need much more than that to keep his aviation dreams flying.