In a landmark decision, the Government has
permitted foreign airlines to invest up to 49 per cent in Indian carriers.
Until now, foreign airlines were not allowed any stake in Indian carriers.
Currently, the country’s airline sector is beset by high taxes, rising fuel
prices and steep airport charges. All carriers, except IndiGo, declared losses
in the year ended March 2012. The sector hopes to infuse financial stability
and operational improvements through FDI.
The Government’s decision may result in foreign
airlines taking stake in Indian carriers, or setting up new airlines in collaboration
with Indian partners. The beneficiary carriers are expected to gain access to
capital, global connectivity, technology, and management and operational best
practices. Increased competition would also lead to improved offerings, greater
efficiency, cheaper airfares, and more power to the passenger.
The long-term outlook for India’s aviation
market appears positive. The country’s growing economy, large middle-class, and
low air travel penetration indicate high growth potential. FDI for global
airlines may lead to significant action over the next 12-18 months. For
instance, Lufthansa has inked a strategic alliance with Jet Airways, which
allows them to sell seats on each other’s network. Emirates is looking at a 52
per cent increase in weekly seats on the India sector. Qatar Airways, Etihad,
Singapore Airlines, and AirAsia have also indicated expansion plans for India.
While low-cost carriers with relatively better
balance sheets are likely to attract a lot of attention, airlines with huge
losses would also be an attractive target, given their low valuation. Air
India’s equity is not up for sale at the moment — the government recently
approved a Rs 30,000-crore revival package for Air India, subject to specific
improvements in its operational and financial performance.
It is important to note that airline FDI will
not happen through the automatic route. Applications from foreign airlines
would be scrutinised by security agencies and relevant government ministries.
Furthermore, the Chairman and two-thirds of the Board of Directors in the joint
venture should be Indian.
Issues of national security and anti-competition
behaviour may be used to prevent entry of certain airlines. There are fears
that global airlines with strong financial muscle may indulge in predatory
undercutting of airfares. These issues are likely to be resolved when the
Government lays down detailed rules and procedures for approving FDI
applications.
Buying a stake in an airline is a complex
decision, and may take several months to fructify. Interested airlines that are
currently in talks with prospective Indian partners are closely watching the
political developments here. No one would like to commit unless they are sure
there would be no rollback on the decision. Those planning new start-ups would
need suitable joint venture partners. Airlines can also limit their exposure by
taking a non-scheduled operator licence, or explore other strategic options.
Domestic airlines are seeing enquiries from
interested parties, and as they have time on their hands, they can drive a good
bargain. However, the bold decision on FDI needs to be followed up with
reduction in aviation turbine fuel taxes, and abolition of indirect taxes on
MRO (maintenance, repair and operations). If that happens, India could aspire
to become one of the top aviation markets in the world, alongside the US and
China.
Sonal Mishra, Consultant, contributed to the
article.
The airline sector hopes
to gain financial stability and operational efficiency, while competitive fares
and offerings promise more power to the passenger.
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