On Tuesday, Civil Aviation Minister Ajit Singh said the civil aviation ministry would circulate a proposal before the cabinet to consider allowing up to 49 percent investment by foreign carriers in local airlines.
Aviation stocks soared on news of the plan, as investors bet that investment by foreign airlines would open a new avenue for funds for the financially troubled sector.
Here’s a quick view on how allowing foreign direct investment (FDI) will affect India’s airline industry.
Will FDI be a ‘game changer’ for the aviation industry?
Certainly not in the near future. The aviation sector is riddled with a host of problems and not everything will be resolved by just injecting more cash, local or foreign. Much more needs to be done on the infrastructure and regulatory fronts. More importantly, something needs to be done about bleeding state-run carrier Air India.
Nevertheless, permitting FDI in aviation does have significant implications for the sector because it opens the door to potential improvements in airline operations and technology. Given the tough operating environment for local carriers though, don’t expect foreign carriers to fly in at supersonic speeds with bags full of cash just yet.
FDI in aviation by itself, will not solve all the problems that the sector faces today.
Do local airlines need FDI?
Certainly, Kingfisher Airlines, whose financial problems have been making headlines practically every day, desperately needs an investor. SpiceJet has also said that it would be willing to sell a portion of its shares to foreign airlines if regulations permitted. However, Jet Airways, another airline with financial problems, has remained silent on the subject.
All three airlines, which are listed on the stock exchanges, have huge debt loads, and at least SpiceJet and Kingfisher will be hoping that foreign partners will bring in much-needed cash to pay off their debts.
The question is, will foreign airlines be willing to do that? If they don’t get a substantial equity stake in return (giving them a say in running the airline), it’s difficult to see why they would step in and pay off a local carrier’s debt. However, most local carriers will be unwilling to hand over a large, management-interfering stake to a foreign airline, so the plan to get a foreign partner might eventually fall flat.
A smaller stake could appeal to foreign airlines only if local carriers clean up their act and there is a good growth plan. Unfortunately, without more money, neither is likely to happen. In the financial year ending March 2012, airlines could suffer losses of about Rs 15,000 crore, industry body Assocham predicted. More than half those losses will be accounted for by Air India alone.
Are foreign airlines interested in investing in India?
The answer to that has to be “yes, but not under current conditions”. The Indian aviation market is one of the fastest-growing in the world; last year, it expanded by 20 percent. However, much of that growth has come on the back of low ticket prices.
In the past, British Airways, Lufthansa and Singapore Airlines were rumoured to have been interested in the picking up stakes in local carriers. Yet, the operating environment is so tough right now that investments might not be an option for foreign carriers. “It would be madness, they (foreign airlines) would be burning money, this is not the time to invest in the Indian market,” Jasdeep Walia, an analyst with Kotak Securities, told Financial Times. Even banks and private equity investors aren’t too keen to help right now.
So what’s wrong with the Indian aviation industry?
Like we’ve said before, the operating environment is extremely tough. Taxes on fuel costs are among the highest in the world; in fact, fuel costs account for 40 percent of operating costs of airlines.
Other costs, like airport charges, are also climbing: recently, Delhi Airport, a major aviation hub, announced it was hiking tariffs by a whopping 340 percent across two years. In addition, infrastructure for the aviation industry is bursting at the seams: there is high traffic congestion at most of the major airports and traffic control technology is crying for upgrades.
Other problems: fleet capacity and shortage of trained staff. Some carriers, like Kingfisher Airlines and Jet Airways, have also discovered to their dismay that their business models are flawed and need a major overhaul.
More recently, Air India set off a vicious price war by selling tickets below cost, forcing private-sector rivals to do the same, with disastrous results for the entire industry. Although ticket prices have now climbed after Kingfisher slashed several flights and routes, the industry is still struggling to find its feet.
According to various analyst reports, all three listed airlines are expected to continue their losing streak and post losses for the quarter ended December.
There’s a lot that needs fixing in the aviation industry; FDI, in itself, will not solve them all.
