Jet, Kingfisher gain but FDI in aviation spells more turbulence
If foreign airline decides to invest, a major chunk of the funds will be used for paying old dues and bank loans. Little will be available for operations and perhaps none for growth.
Stocks of Jet Airways and Kingfisher traded nearly 2.5 percent higher in opening session today on account of the government allowing 26 percent FDI in aviation companies. But these airlines are unlikely to benefit from it in the near to medium term.
Why foreign firms will not be interested in an interest-sensitive market
The key word is that 'foreign airlines' have been allowed to pick up stake in domestic airlines. Since most of the international airlines themselves are not fairing too well, it is very unlikely that they would be interested in a price sensitive market like India, where companies are barely making operating profits.
A blank cheque is not going to benefit anyone
Secondly, no airline will invest unless they get control over running the show. A blank cheque to most of the Indian airline companies would result in a funding loss as these companies will come back for more funds in a few years if not months.
Capital will be deployed only for paying off debt, not growth
Thirdly, if at all the foreign airline decides to invest, a major chunk of the funds will be used for paying old dues and bank loans. Little money will be available for operations and perhaps none for growth. With none of their capital being used for growth, it makes little sense for anyone to invest in the sector.
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The proposals of individual airlines would be considered by RBI under the approval route which is based on factors like cash flows and repayment capacity of the company.
Stubbornly high fuel prices, 11 percent rupee depreciation and lower load factors will lead to another quarter of losses for Jet Airways and SpiceJet for the December quarter.