Airlines and experts pitch for FDI, but will govt relent?

Even as India’s private carriers lug their debt around and scratch their heads pondering whether or not the government will allow foreign direct investment in the aviation sector, experts say it is probably the best way to pull out the debt-ridden carriers from the red and sustain thesector’s growth

As the Civil Aviation Ministry sits on the recommendation of the Department of Industrial Policy & Promotion (DIPP) to allow foreign carriers to pick up stake of up to 49 percent in domestic airlines, the country’s two largest carriers reported bleeding losses.

India’s largest private air carrier Jet Airways last Friday posted a net loss of Rs 713.6 crore for this year’s September ended quarter, against Rs 12.4 crore in the year-ago period. Second-largest carrier, Kingfisher Airlines, reported a net loss of Rs 469 crore ($93 million) for the quarter ended 30 September - double of the Rs 231 crore loss it recorded in the year-ago period.

“For a Jet airways operation, Rs 1/litre up or down changes bottom line by Rs 160 crore, while a $1 movement per barrel changes my bottomline by $10 million,” said M Shiv Kumar, senior VP of finance for Jet Airways, adding, “The impact is huge.”

“Everything is high cost for an airline in India,” Vijay Mallya, chairman of cash-strapped Kingfisher Airlines, said during a press conference on Tuesday.

While experts concur with both managements - of Jet and Kingfisher - who put the blame for their losses on the vulgarly gyrating rupee, high fuel costs and an intense price war, they also said that opening up the sector to investment by foreign airlines would not just help the airlines but the sector’s growth.

Under the current rules, FDI up to 49 percent is allowed in aviation companies, but foreign airlines are not allowed to participate directly or indirectly in the equity of a domestic airline, which means they cannot own the airline or run it according to their terms - a restriction that has discouraged investment in the sector.

Ashvin Parekh, analyst at Ernst&Young, told CNBC, “When there is an economic downturn or when a certain sector goes through difficulties, the policy and banking response - if done in a collective and constructive manner - can restore values.”

According to civil aviation expert, Kapil Kaul, there is no logic in denying FDI in aviation.

“We are the only country in the world that distinguishes between foreign institutional capital and foreign airline capital,” Kaul told CNBC, adding, “Excluding foreign airlines from FDI is no longer an argument the government can support.”

While aviation minister, Valayar Ravi’s ministry is agreeing to allow foreign airlines to pick up stakes in Indian carriers, it is insisting on a 24 percent cap, according to the Economic Times .

However, the industry ministry and analysts say 24 percent may not be good enough.

Justifiably, a 24 percent stake will not give an investor enough say in the functioning of the company and why would an investor put his money in a sector where operational costs are already touching the sky and where it will have no say to help improve the situation.

“The Civil Aviation Ministry has recommended 24 percent (for FDI by a foreign airline), which is as good as not having a policy,” Kaul says.

Mallya, chairman of debt-laden Kingfisher Airlines, minces no words in his pitch for FDI.

“Aviation is a capital industry. It needs global equity and to get that equity, the industry needs FDI by strategic investors,” he said on Tuesday. “I am not hesitant in any way in saying FDIs should be permitted and hope the govt will consider this seriously.”

So, while airlines have to figure how they need to keep their operating costs in check and simply survive, the government needs to weigh why airline FDIs should be allowed to boost a limping sector - and fast.

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