The Caribjet leasing scam - Air India
Case history:
The state owned international carrier Air India leased 2 A310-300's on short-term leases. These leases were approved even though it was clear that the flights operated with these aircraft would make operational losses due to high lease costs. The argument at that time was that it was a short term move to retain market share and overcome "capacity shortfall" (Familiar argument?).
Later on 2 L1011-500's were also taken on lease form the same company on similar unfavorable terms. Terms which were against AI's interests were introduced into the contract obviously with the connvance of AI management. Apart from high cost, these leases were also affecting safety of flight operations since Caribjet was in charge of engineering. Caribjet used regular flying crew for conducting safety checks instead of qualified engineers.
Despite the known issues like high cost and poor maintenance: AI mgmt went ahead leased 2 moer A310-300's. Until some NGO's active in monitoring corruption got wind of the deal. The AI mgmt hurriedly scrapped the deal but then it became public that there was no exit-clause which meant AI had to pay Caribjet damages to the tune of 302 crores plus legal expenses amounting to over 10 crores!
After a short hiatus, ten years later, the leasing game scam is still very much on in the form of ad-hoc leases on very very strange terms for 777's, 767's and 757's.
Detailed link:
http://cag.nic.in/reports/commercial/2000_book4/chapter3.htm
Air India Limited (AI) concluded two wet leasing agreements between December 1994 and December 1997. The total loss incurred by Air India from its wet lease operations during the period December 1994 to December 1997 amounted to Rs. 321.92 crore. Wet lease operations accounted for 45.4% of total losses of Air India between 1994-95 to 1997-98.
Wet Lease Contract was awarded in such a manner as to entail the highest loss for AI among the available options. Award of wet lease contract for the period from December 1995 to December 1997 to the highest loss option was not based on transparent reasons.
AI awarded softer contract terms to one of the lessors as compared to the other lessor, without apparent reasons.
AI made extra payment of Rs. 1.32 crore to Caribjet due to insertion of two special clauses in their contract agreement without any apparent compulsion.
The Management terminated (4 September 1996) the wet lease agreement with Caribjet due to “several serious violations of established technical and operating procedures by Caribjet”. The Board in its 24th Meeting held on 24 September 1996 endorsed the Management’s decision. Following termination, Caribjet Inc. instituted (January 1997) arbitration proceedings at London and claimed a total amount of US$ 72.69 million (approximately Rs. 302 crore) towards damages excluding interest. The Arbitration Tribunal decided (19 January 1999) the case in favour of Caribjet and held that Air India wrongfully terminated the Wet Lease. Meanwhile AI had already incurred expenses to the tune of Rs.7.40 crore on arbitration proceedings up to November 1998. Air India Board decided (6 February 1999) to go into appeal against the award of the Tribunal in London High Court, which was still pending (May 1999).
Some related links:
http://www.thehindubusinessline.com/2003/02/05/stories/2003020502530500.htm
http://economictimes.indiatimes.com/articleshow/381521.cms
http://www.expressindia.com/ie/daily/19991130/ige30009.html
http://www.india-today.com/itoday/20010604/business.shtml
http://www.telegraphindia.com/1030205/asp/nation/story_1640516.asp
