Bad news for Kingfisher. After retail, FDI in aviation may just be dead on arrival

After multi-brand retail, aviation seems next in line to feel the Opposition heat to foreign direct investment.

A proposal to allow foreign airlines to take up to 26 percent in local airlines by the Department of Industrial Policy and Promotion (DIPP) was apparently given the go-ahead by the Finance Ministry, according to B usiness Standard. However, IBNlive reported late last night that FDI in aviation might also be put on hold because the government was wary of introducing a proposal that could be seen as trying to bail out a struggling private-sector airline (read Kingfisher Airlines).

That doesn’t sound surprising. Given the God-almighty ruckus over FDI in multi-brand retail, what are the chances of FDI in aviation faring any better?

In fact, the proposal to allow foreign airlines to take up to 26 percent in local carriers already has a potential problem - one that could pretty much kill the proposal - mainly because of the fact that some Indian airlines are listed on the stock exchanges (Kingfisher Airlines, Jet Airways and SpiceJet).

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[caption id=“attachment_148971” align=“alignleft” width=“380” caption=“Giving foreigners a majority stake in local airlines is definitely not going to work, judging by what’s happening in multi-brand retail. Reuters”]  [/caption]

When a company acquires a stake of up to 25 percent in a listed company, under Securities and Exchange Board of India regulations, the acquirer has to make an open offer to the public to acquire a further 26 percent. Technically, that means a foreign airline can acquire up to 52 percent of a local carrier.

Majority stake? Giving foreigners a majority stake in local airlines is definitely not going to work, judging by what’s happening in multi-brand retail. In other words, this proposal is likely to be “dead on arrival”.

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Unfortunately, it’s a catch-22 situation. Permitting foreign investment of less than 26 percent, say 24 percent, will be unlikely to attract bidders because they won’t be interested in scooping up a stake that won’t give them any say in running the airline.

A higher stake, however, triggers an open offer in the case of listed airlines, and is unlikely to garner much political support.

Pushing this proposal through would have been another mountain to climb for the already under-seige government; small wonder it’s now been put on hold.

Of course, that’s bad news for local airlines, most of which are suffering financially (barring IndiGo) because of heavy debt, high operating costs and intense price wars.

It will be an especially hard blow for Kingfisher Airlines, which has been hunting desperately for a strategic partner. Without adequate funds, the airline, which has never made a full-year profit since it was listed in 2005, risks bankruptcy. It carries debt of Rs 7,500 crore and has airline-leasing companies knocking on its door to take back aircraft.

Indeed, the Centre for Asia Pacific Aviation (CAPA), an aviation consultancy, has forecast a record $2.5-$3 billion loss for Indian airlines for the year ending March 2012, with state-run Air India alone likely to account for more than half of it.

With no FDI and no other form of help on the way, it’s a no-win situation for the airline industry right now.