Last year when Cosmic Air introduced Nepal's first jet service on domestic routes, it looked like the country's aviation business was finally taking off in a big way.

The airline had a steep rate of climb: expanding from a helicopter carrier to turboprop and then acquiring a fleet of four Fokker 100s, two SAAB 340s and two Dorniers. Cosmic also aggressively promoted budget fares, allowing Nepalis to start flying like never before. In mid-2005, Cosmic also started flights to Delhi, Dhaka, Calcutta and Banaras. Even Bangladeshis preferred Cosmic to their own cramped Biman.

But stall warnings are getting louder and the airline seems to be on the verge of collapse. Last month, a day after it announced first-ever mountain flights by jet, Nepal Oil Corporation (NOC) stopped supplying fuel to the airline because arrears had crossed Rs 85 million.

Domestic flights were grounded for a week but resumed after the airline paid Rs 5 million and promised to pay cash every 15 days. There are other signs of things being seriously wrong: two of Cosmic's four jets are being cannibalised to keep the other two flying, some pilots and most staff haven't been paid for three months, the Dutch company AerCap that leased the Fokkers says Cosmic is behind on payments and even Royal Nepal Airlines has refused to rent its pushback trucks at the airport. Cosmic owes nearly Rs 10 million to CAAN for ground handling and fees, several ad agencies now refuse to work with the airline. Sources told us 12 out of 17 banks the airline approached have rejected its loan request.

Cosmic says the problems are temporary. "We're making economic sense and Cosmic Air is in a state of consolidating its operation," general manager Lawrence Lieu, formerly Singapore Airlines manager in Kathmandu, told us. Lieu also denies other arrears and says the two grounded jets are waiting spare parts including an engine that is being overhauled in the US for $1 million.

The crisis could force the airline to cut costs to stay afloat and the Cosmic could come out trimmer and more airworthy. "It is still a viable business proposition, it just needs to make sure it doesn't go down like Necon Air due to financial mismanagement," said one investor. The Necon saga is a sordid story of a perfectly good airline that was run to the ground by owners who abandoned hundreds of share holders. Necon's two ATR-42s sat rotting on the tarmac for more than a year until last week a deal was struck with the lessor to take back one of the planes and dismantle the other one for parts.

Other aviation analysts say Cosmic's days are numbered. "It just doesn't have the money to pay its dues, it's going down," predicted one.

Despite the problems, Cosmic is making full utilisation of its two flying Fokkers. The flights to Biratnagar, Bhairawa and Nepalganj are full. But yield is not high and load factor on the international routes is not optimum.

Cosmic's debtors have no option but to give the airline another chance, the alternative is to write off what they are owed. Cosmic is NOC's biggest customer buying Rs 80 million worth of avgas every month. Cosmic must now clear its bills every 15 days. NOC itself is in the red and has to pay Indian Oil Corporation Rs 3 billion a week.
For Nepal's aviation industry, it could be the sad demise of yet another airline that had a bright future.