Aviation FDI opened up, but there's no rush to invest

New Delhi: There has been all-round cheer on the government’s decision to allow foreign airlines to invest up to 49 percent in Indian carriers this evening. Today’s move reversed a 1997 decision which had barred foreign airlines from investing in Indian ones.

The 1997 decision, allegedly based on pressure from the domestic aviation lobby, had resulted in killing the proposed joint venture between Singapore Airlines and the Tata group. After that fiasco, the Tatas never managed to enter the aviation business again.

So, in a sense, the lifting of this ban on foreign airlines entering the domestic sector is a good move.

“Allowing 49 percent stake to foreign airlines will create access to capital, global connectivity, technology and best practices. This could lead to the establishment of new airlines in India and perhaps change the ownership structure of certain Indian carriers. All this augurs well for Indian passengers. Increased competition would lead to better offerings, greater efficiency, cheaper airfares and more power to the passenger”, says Amber Dubey, Partner and Head-Aviation, at global consultancy KPMG.

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[caption id=“attachment_456200” align=“alignleft” width=“380”]  Will the FDI in aviation save Indian airlines that are in financial trouble? AP[/caption]

But if one were to look at the condition of the global airline industry, which is bleeding, it is worth asking how many large airlines across the world are in any condition to bring in mega bucks to a loss-laden Indian aviation sector. Today’s decision may seem a little less cheerful.

Only a handful of global airlines are making profits. The Lufthansa Group (which includes Swiss Airlines), Emirates and Qatar are among the top global carriers which are in a position to bring in some money to Indian carriers. Of them, Lufthansa has already said it is not interested in taking up a stake in a domestic airline. A British Airways spokesman interviewed by CNBC TV-18 said the airline may not be keen to take up a stake, and certainly not Air India. Virgin Airlines could be interested, but everyone, it seems, is waiting for the fineprint.

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A story in Mint this morning said permission to foreign carriers to invest in Indian airlines may not be through the automatic route (which means each such proposal would be subjected to intense scrutiny by the government). Moreover, the investors would also be subject to security clearance. The report also points out that the chairman of any such Indian airline which seeks foreign investment would have to be Indian, and two-thirds of the board members would also have to be Indian. Also, the airline would have to follow market regulator Sebi’s guidelines on the issue of capital and disclosure requirements.

India is a very lucrative market for most of these global airlines and these carriers are quite keen to expand their aviation business from and to India. Emirates is looking at a 52 percent increase in the number of seats on Indian flights, from 54,200 now to 80,000 eventually. Lufthansa has just inked a strategic alliance with Jet Airways which allows each airline to sell seats on the other’s network. Qatar is also looking to expand in India.

India’s importance as an aviation market is underlined by the fact that it is one of the few aviation markets in the world which is under-served and has vast growth potential in terms of air traffic.

But not everyone may welcome the arrival of aggressive global airlines. A source in national carrier Air India pointed out that foreign airlines would begin flying as Indian carriers “and hence use rights (bilateral flying rights) reserved for the national carrier”. There is also a view that arrival of these airlines with a vast global network and availability of cheaper aviation fuel will signal an aggressive and perhaps bloody price war in the market.

KPMG’s Dubey dismissed concerns over price undercutting by global carriers, losses to Indian carriers and threats to national security. “Most of these appear a bit stretched. FDI has been allowed in more sensitive sectors like defence, telecom, media and banking. Nowhere has FDI led to wiping out of Indian companies. In fact Indian companies have only emerged better and smarter. Ministry of Civil Aviation, DGCA and CCI would be keeping an eye out for predatory undercutting of airfares.”

Anyhow, some domestic airlines are quite upbeat about attracting foreign investment in India. SpiceJet has been quite clear that it wants to sign up a strategic investor, while Kingfisher Airlines’ Chairman Vijay Mallya has said often enough that his monetary troubles would ease once the cap on foreign airlines is lifted. He has repeatedly said that there are interested strategic investors waiting to invest in the bleeding airline. But aviation industry experts wonder why any foreign airline, even if it is profitable, would want to take on the huge debt and almost-no-assets Kingfisher unless the acquirer is keen to use Kingfisher’s limited domestic slots as feeder service for its global business.