The Centre for Asia Pacific Aviation (CAPA) has strongly
advocated for last 10 years that foreign airlines should be allowed to invest
up to 49 per cent in Indian domestic carriers. Our regulations with respect to
FDI have been unique in the world - we have excluded one class of investor that
has the greatest strategic interest to develop the sector. This regulatory
anomaly existed for more than 16 years.
CAPA welcomed the decision to allow foreign airlines to
invest up to 49 per cent in Indian carriers in September 2012 and expects it to
be a game-changer that will positively impact the entire value chain. Foreign
airlines will bring in strategic capital and expertise. Other forms of
institutional funding will follow, further strengthening the sector.
Deep structural issues
Allowing in
foreign airlines, though, will not solve the deep structural problems of the
Indian aviation sector. We need a comprehensive policy and regulatory framework
which is transparent and aligned to the needs of the sector. Moreover, this
framework should not be at the discretion of a few people, which,
unfortunately, has been the case since the early 90s. We need to quickly remove
the negative fiscal regime which makes the Indian airlines largely
uncompetitive and also have a robust long-term infrastructure development plan
. Overall, a focus on core and fundamental issues is most critical, which has
not been addressed for almost two decades.
The decision of AirAsia to start a low-cost carrier (LCC)
in India is on expected lines. The combination of AirAsia with partners such as
Tatas make it a very formidable entity. I was surprised with Tatas playing the
role of a junior partner in this JV and having a limited role. The FIPB
approval is a significant step, as I was expecting some hurdles, especially
with respect to the structuring of this JV but welcome the quick decision from
FIPB. CAPA also welcomes the clarification by DIPP that FDI by foreign airlines
is not limited to existing carriers but is applicable for new start-ups; this
is a strategic decision. Limiting FDI by foreign airlines only to existing
airlines is fundamentally flawed, as India needs strong new airlines which are
well capitalised and have strategic partners.
FIPB approval just the beginning
For the
AirAsia-TATA JV, the approval from FIPB is just the beginning of the regulatory
process. Getting past the ministry of civil aviation might not be easy and
challenges are likely. The ministry is not in favour of issuing new national
licences and usually recommends a regional licence as the first step. It will
be interesting to see how the ministry deals with the AirAsia application for a
national licence. There will many other challenges, especially the board
representation, management control and use of the AirAsia brand name.
The civil aviation ministry needs to come up with a
transparent framework with respect to granting new licences for national
operations and not be driven by ad hoc and a case-by-case approach. There may
be other similar applications with strategic partners and how the ministry
deals with AirAsia will set a precedent.
AirAsia is creating a pan-Asean LCC with multiple
cross-border JVs and is aggressively pursuing this strategy. The group has very
successful and profitable airlines in Malaysia and Thailand with 23 per cent
and 11 per cent operating margins but is struggling in Indonesia. JVs in
Philippines and Japan are still in the red and are likely to face losses in the
near term. AirAsia group has 120 aircraft and will touch 150 by end of 2013. It
has 460 A320s on outstanding order. It brings to India proven expertise and
credentials.
What AirAsia will bring
Expect AirAsia to
bring an ultra low-cost airline model to India, with 14-15 hours of aircraft
utilisation, high-labour productivity and low-distribution costs. The JV will
be big on ancillaries and will make strategic use of IT. Expect AirAsia to have
already chosen its route network and initially focus on less competitive
routes, with potential to stimulate the market with aggressive low fares. The
challenges to achieve high aircraft utilisation, low distribution costs and
scale in ancillaries remain though. I expect a ruthless focus on costs to
achieve a higher level of productivity than existing industry levels. We might
see many innovations and a different approach to marketing. I also see existing
carriers increasing services out of Chennai before AirAsia starts. Overall, I
don't see any near-term impact on Indian carriers till AirAsia reaches a
significant scale.
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