FDI hike to 24% won't rescue our ailing airlines. Here's why

Will the proposed increase in foreign direct investment to 24 percent be enough to rescue the struggling Indian aviation sector?

Not really, according to an opinion piece by Jitender Bhargava, former executive director at Air India in Tehelka magazine.

“At 24 percent, it is unlikely that a foreign carrier would come and finance an Indian airline because of the market environment in which airlines are regularly losing money and of not having a say in the running of the company.”

“After all, a foreign carrier would not only like to be part of the Indian carrier but also guide the airline’s destiny,” wrote Bhargava.

The former Air India official also wondered whether Vijay Mallya, whose cash-strapped Kingfisher Airlines is likely to be the first company to line up for foreign investment, would actually allow a foreign airline to have greater say in running Kingfisher.

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Kingfisher Airlines’ snowballing financial problems are the immediate reason why the topic of easing foreign investment norms in the aviation sector suddenly surfaced in the media as well as government circles.

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High fuel costs, high maintenance costs and intense price wars among airlines have led to almost all major airlines posting losses in the September-ended quarter.

While some problems afflicting airlines are self-inflicted (Kingfisher and Jet had bad business models, which they are now trying to correct), most industry experts noted that flawed sector policies are also to blame.

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Noting that the aviation industry is a highly capital-intensive industry offering returns of not more than 3-4 percent even in a really good year, Bhargava said it was currently difficult for airlines to make money because of a combination of high costs and intense competition, despite posting an impressive growth in passenger traffic.

In the opinion piece, he also thought that the idea of allowing airlines to import jet fuel- as suggested by Kingfisher Airlines - is worthy of consideration by the government and would allow airlines to reduce their costs without increasing airfares.

“A positive that may come out of the crisis is that even though it has been the flights cancellation and nonpayment of dues to vendors that has brought the lack of economic viability of Kingfisher in particular, and the industry in general, to the centre stage, the Centre cannot ignore the ground realities any longer as the financial condition of other airlines is also not different,” Bhargava wrote.

For the full Tehelka interview, click here.