Tax, policy concerns may delay FDI in airlines

Etihad and Qatar Airways have held informal talks with Kingfisher and SpiceJet to expand their footprints in India

The government has cleared the decks for foreign direct investment (FDI) by foreign airlines into India’s air carriers, but foreign players will not be in a hurry to sign up deals with Indian promoters due to concerns over high taxation and policy stability in India, according to experts.

Among the foreign carriers, the Abu-Dhabi-based Etihad and Qatar Airways are keen to expand their footprints in India and challenge Emirates, which is the largest foreign airline operator in the country. Both these airlines have held informal talks with Kingfisher Airlines and SpiceJet.

“The Gulf carriers’ risk assessment will weigh on whether there is regulatory clarity in India,’’ said a senior executive of a private airline. According to him, the concerns were fuelled after telecom operator Etisalat shut down India operations following the Supreme Court ordering cancellation of its licence last year.

ALL IS STIL NOT WELL
AIRLINES’ NET LOSS
2011-12 ( in Rs crore)
AIR INDIA 7,853.0
KINGFISHER AIRLINES 2,328.0
JET AIRWAYS 1,236.1
SPICEJET 605.8
Indian domestic passenger growth  (Figures in million)
2006	26.1
2007	35.0
2008	35.1
2009	42.9
2010	51.8
2011	60.7
Total international traffic from India (2010-11): 36 million. Of them 11 million travelled via hubs  outside India. Dubai, Doha, Frankfurt, Singapore and Sharjah accounted for nearly 40 per cent of the hub traffic of 11 million Source: Ministry of Civil Aviation; CAPA

International Air Transport Association (Iata), too, echoed the same concerns, while welcoming the move to liberalise the aviation policy. “This is a positive and important step forward. It allows Indian carriers to have strategic tie-ups with foreign airlines cemented by an equity stake. But allowing FDI by itself is not a panacea. The critical problems of a high cost environment, insufficient infrastructure and crippling taxes must also be comprehensively addressed within a coordinated government-wide policy framework,’’ Amitabh Khosla, country director of Iata, said in a statement.

The government will now allow foreign airlines to invest in domestic carriers and non-scheduled operators (charters) a sector hitherto restricted to them.

“Airlines are not viable because they are unable to support the cost structure with existing fare levels. The present increase in fares will not be sufficient to wipe out past losses and the airlines are relying on supplier credit to meet the operational requirements,’’ another senior executive said.

According to aviation expert Hormuz Mama: “There is not much incentive to invest because of problems in Indian aviation such as high cost, low returns and lack of policy stability. The overall investment climate does not look good. Due to economic downturn, even large foreign airlines are feeling the pinch and their are margins are under pressure. It is not that foreign airlines too are bursting with profits.’’

Iata estimates this will be the second year of declining returns since airline profits peaked in 2010 at $15.8 billion with a net profit margin of 2.9 per cent. In 2011, industry profits fell to $7.9 billion for a 1.3 per cent net profit margin. This year’s projected $3 billion industry profit would yield a net profit margin of just 0.5 per cent, Iata said in June.

The Centre for Asia Pacific Aviation (Capa), however, does not expect the Friday’s policy decision translate into immediate announcements by foreign airlines. “Balance sheets of most carriers are relatively weak and the sector faces numerous structural challenges so foreign airlines will make their own assessments about whether they consider a carrier suitable for investment at this time,’’ Capa said. “Personally, I feel there is nobody knocking on the door,’’ India head of a foreign airline remarked.

According to Capa, GoAir and SpiceJet have better prospects of attracting foreign airline investment and gives Kingfisher an outside chance as it will require significant capital infusion by the current promoters.

“We expect foreign airlines to pick up minority stake of 10-15 percent in Indian carriers initially, with a commitment to enhance it subject to further policy reforms and improvement in airline performance. We also expect two-three new airlines to be set up by foreign airlines with a scheduled or non-scheduled license over the next 12 months”,” said Amber Dubey, partner and head-aviation at global consultancy KPMG.

http://business-standard.com/india/news/tax-policy-concerns-may-delay-fdi-in-airlines/486656/

Govt goes slow on higher defence FDI

NEW DELHI: After a series of steps to ease foreign direct investment (FDI) rules, the government has decided not to immediately push for liberal norms for overseas flows into defence production.

"The issue has been discussed and the defence ministry has some concerns. We will wait until the defence ministry agrees to it," commerce and industry minister Anand Sharma told TOI in an interview on Saturday.

In a discussion paper released over a year ago, the department of industrial policy and promotion had proposed that the FDI cap in defence be increased from 26% to 74% to promote local manufacturing instead of depending on imports. The paper had said that this would help India achieve 70% indigenization, which is in line with the government's policy intent, instead of the current situation where local procurement adds up to just around 30%.

Industry department is of the view that encouraging local manufacturing would help save foreign exchange since the defence forces in any case relied on foreign players, with no presence in India, to buy equipment. Besides , local presence is expected to result in lower influence of arms dealers.

Defence minister A K Antony has, however, blocked any move to allow higher foreign investment in the sector on the grounds that it is of strategic interest. In fact, till a few months ago, the industry department was even complaining of local players setting up 100% Indian ventures finding it tough to get a go-ahead . Defence is one of the few sectors in which industrial licence is still required.

Surprisingly, Antony has received partial support from industry chambers which are against allowing more than 49% FDI in the defence sector. Sharma indicated that there was no rush to increase the cap as 100% local investment by the private sector was allowed and suggested that the industry would look at ways to leverage the current policy and also make a case for a higher foreign investment ceiling in the sector.

Although industry chambers have supported higher FDI in defence production, even they have suggested safeguards given the sensitivities . For instance, in its feedback to the government, Ficci has suggested that FDI in a venture should be capped at 49% apart from recommending a minimum capital requirement of $100 million (around Rs 550 crore). CII too was for a maximum FDI cap of 49%, with control in the hands of the Indian partner.

The issue has been discussed and the defence ministry has some concerns. We will wait until defence ministry agrees to it, says commerce and industry minister Anand Sharma, adding that there is no rush as 100% local investment by the private sector is allowed The department of industrial policy and promotion had proposed that the FDI cap in defence be increased from 26% to 74% to promote local manufacturing instead of depending on imports Ficci and CII have opposed more than 49% FDI in defence.

http://timesofindia.indiatimes.com/business/india-business/Govt-goes-slow-on-higher-defence-FDI/articleshow/16429196.cms

Move to cancel AIE flights deplored

The move of the national carrier to cancel flights of its low cost carrier Air India Express (AIE) from Thiruvananthapuram and Kozhikode to the destinations in West Asia between September 17 and October 12 has come in for criticism. The decision to cancel nine flights – five from Thiruvananthapuram and four from Kozhikode – was intimated to the local offices as the national carrier wants to withdraw two Boeing 737-800 aircraft of the AIE to ferry Haj pilgrims from Uttar Pradesh, reportedly at the instance of Union Civil Aviation Minister Ajit Singh.

The flights that were shortlisted for cancellation were Kozhikode-Dammam (three), Kochi-Kozhikode-Kuwait, Thiruvananthapuram-Sharjah (two) and three in the Thiruvananthapuram-Dubai sector.

Airline sources said the cancellation of the flights of the budget carrier would cause undue hardship to Non-Resident Keralites who had booked their tickets in advance to Dammam, Kuwait, Sharjah and Dubai as there were no alternative flights to the destinations.

Following the opposition, the airline has decided to restore the IX 535 flights from Thiruvananthapuram to Sharjah on September 17 and 19. However, the airline is yet to take a decision on the restoration of IX 5377 flights from Thiruvananthapuram to Dubai on Thursday, Friday and Saturday and other flights. A proposal is to use the IC 465 flight that arrives daily from New Delhi to Thiruvananthapuram via Kochi at 9.45 p.m. to operate the flights from the State capital to Dubai on Thursday, Friday and Saturday.

http://www.thehindu.com/todays-paper/tp-national/tp-kerala/article3903253.ece

P.J. Kurien makes a strong pitch for Aranmula airport project

Says large number of people from the region working abroad

Rajya Sabha Deputy Chairman P.J. Kurien on Saturday made a strong pitch for the Aranmula airport project as it was crucial for central Tranvancore which had the maximum number of expatriates spread all over the world.

Addressing a meet-the-press programme organised by the Thiruvananthapuram Press Club, Prof. Kurien said a large number of people from central Tranvancore were working abroad and an airport would be beneficial for them. He dismissed the environmental issues raised against the airport project stating that the paddy fields that had been earmarked for it were fallow lands that had remained uncultivated for some time now.

“Those expressing concern about the environmental issues related to the airport are the ones who migrated to cities such as Thiruvananthapuram and Kochi by selling off their property,” he said. The airport project had got the environmental clearance from the Union Ministry of Environment, which is known for its stern stand on such issues. He said the project would bring more benefits and limited damage to the ecology.

With regard to the washout of the monsoon session of Parliament, Prof. Kurien said Parliament was a place for debate and not slogan shouting. There could be difference of opinion among parties, but this should be sorted out through debates in Parliament. “If such debates cannot be held, then it can only be construed as the failure of our democratic functioning.”

He denied the charge that the government tried to steamroll the Opposition as could be seen by the fact that 30 Bills were kept pending. Only those bills that were absolutely essential to enable smooth administration had been pushed through.

On the decision to permit 51 per cent foreign direct investment in multi-brand retail, he said the government which had the majority to rule had every right to take a policy decision. Parliament was the appropriate forum to debate such issues. With regard to a question on whether the legislature was losing importance, Prof. Kurien said the executive cannot be blamed if the law-making bodies were losing importance. Legislators and parliamentarians should do their job. The government was accountable to Parliament.

On the controversy over the CAG reports, he said the CAG report was not the final verdict. The CAG reports would have to be discussed by the Public Accounts Committee and the decision of the committee was final.

It would be highly inappropriate to undermine the office of the CAG by alleging motives in his actions. But the methodology of his findings was subject to scrutiny and debate, he added

http://www.thehindu.com/todays-paper/tp-national/tp-kerala/article3903257.ece

Air Kerala may clip Air India’s wings

Air India holds monopolyin the Gulf sector

The launch of ‘Air Kerala’, with an initial capital of Rs. 200 crore, to operate flights to West Asia will hit the prospects of the national carrier, Air India and its low cost carrier, Air India Express, which hold monopoly in the Gulf sector.

Though the Board of Directors of Air Kerala, chaired by Chief Minister, Oommen Chandy, has decided to launch the airline, several hurdles have to be overcome to commence flight operations to the Gulf countries. The main hurdle is the rule that the airline should have at least 20 aircraft in the fleet and five years minimum domestic flight operations.

It will be difficult to secure exemption from the Union government as it would have to give similar exemption to all companies that come up with similar plans to commence international flights from other States. Highly placed sources in the Civil Aviation sector told The Hinduthat the Union government did not grant exemption when the domestic carriers approached it. Kingfisher airlines had to take over Air Deccan, which had completed five years of domestic operations, to seek permission to fly abroad.

The Union government will also have to consider the ‘threat’ posed to Air India, its low cost arm Air India Express, by the proposed Air Kerala, sources said. The State is pitching for the airline at a time when the government is infusing Rs.30,000 crore to bring the national carrier out of the red.

Air India Express, which has its headquarters in Kochi and mainly concentrates on West Asia, will be the worst hit if Air Kerala is launched, sources said. The national carrier and Air India Express now operate 160 flights a week from the State to destinations in West Asia.

Mr. Chandy has sought necessary exemptions to commence Air Kerala taking into account the hardship Gulf-Malayalis are facing owing to the profiteering attitude of airlines operating in the sector.

The resignation of Non-Resident Keralite businessman Yousuf Ali from the director board of Air India recently has also raised questions. Mr. Yousuf Ali, one of the Director Board members of Air Kerala, has announced that there is an offer to invest Rs.100 crore in the proposed airline.

The State government, Cochin International Airport Ltd (CIAL) and public sector undertakings will together hold 26 per cent of the shares of the company being floated under Cochin International Airport Ltd (CIAL). The initial report for the airline that was drafted some six years ago is now being updated.

Aviation industry sources said private entrepreneurs who will corner 74 per cent of the shares will leave only a minority share of the profit to the government. The industrialists are using the government status to get exemptions and leverages, sources added.

Failed attempt

The earlier attempts to start an airline with the support of the State government had not met with success. In the late Nineties, the Kerala State Industrial Development Corporation's (KSIDC) had come out with intra-State flight plans in collaboration with the Maharashtra-based Span Aviation. The plan remained on paper as one of the key partners, Wardekar, backed out.

---

·  Several hurdles to overcome before launching airline

·  Air India operates 160 flights a week to the Gulf

http://www.thehindu.com/todays-paper/tp-national/tp-kerala/article3903254.ece

Full-fledged air cargo hub in the making

Lack of hub limiting India’s air cargo traffic

September 16, 2012:  

On one side, Cathay Pacific, Lufthansa and other international carriers are increasingly hovering over the Indian skies with their freighters, scouring for a perfect landing to bring in and take back air cargo loads. And on the other, heaps of potential air cargo parcels are lying at the warehouses of the Indian industry, waiting to be air-lifted and flown to their global destinations.

But the rendezvous between the two is not happening, at least not on the scale and speed that it should. Nick Rhodes, Director Cargo of Cathay Pacific, said, “India is an exciting market for us. We expect India’s contribution to our global (cargo) revenues to increase from 3.5 per cent to five per cent this fiscal and 10 per cent in the next three to four years.”

Major hurdle

Clearly, India has the potential to play a much larger role in the air cargo market, especially with international carriers looking at Asia as a major growth driver for their air cargo business. But the major roadblock is the absence of a full-fledged air cargo hub, backed by strong regional air connectivity and road network for the last-mile transportation.

It is this gap that the Rajiv Gandhi International airport in Hyderabad is trying to fill. Located at the centre of India’s production theatre with a strong regional connectivity, the airport is speeding along to become the country’s first full-fledged air cargo hub. Its advantage — more than 20 key Indian and other South Asian cities are less than two hours of flying time away and South-East Asian cities, such as Singapore, Kuala Lumpur and Bangkok, and Middle-East cities are four hours away.

Untapped potential

Consider this: Hong Kong with a GDP of $230 billion handles an air cargo traffic of 4.2 million tonnes. The United Arab Emirates (UAE) with a GDP of $252 billion sees total air freight movements of 3.10 million tonnes at airports. And India, with a GDP of about $1.67 trillion, handles just 2.5 million tonnes. The country’s tonne-per-billion GDP works out to about 516, as compared to 12,883 and 16,951 of Hong Kong and UAE. The volume of air cargo is just over 1.5 per cent of the country’s total trade, but even then it constitutes 29 per cent of the trade value.

The 12th Plan estimates the domestic and international cargo to grow at the rate of 12 per cent and 10 per cent, respectively, with the total traffic projected to touch 5.9 million tonnes by 2020, with the share of international cargo at 3.5 million tonnes.

There is a significant untapped potential for air cargo in India. One can get an indication of this from the fact that the total volume of about 2.5 MMTA handled by all Indian airports is less than that handled by airports such as Memphis, Hong Kong, Shanghai, Incheon, Anchorage and Paris. A recent KPMG report has shown that the average weight load factor of air cargo during the last five years was about 62 per cent, reflecting significant unused capacity. In addition, the transhipment cargo, which constitutes as much as 60-70 per cent of total volumes handled by some of leading airports, is almost negligible for Indian airports.

“Thus, a significant potential lies for the Indian airports to become transhipment hubs,” the report pointed out. Hyderabad airport, which is currently handling cargo of about one lakh tonnes per annum (TPA), is favourably placed to take on this spot. Lufthansa has already nominated the airport as its pharma hub and Cathay Pacific recently added a twice-a-week Boeing 747 freighter service. Also, Thai Airways and Blue Dart are offering main-deck through their Boeing 747-400F MD-11F and Boeing 757F freighters.

In addition, about 18 scheduled airlines, including 13 international, have cargo bases here, operating close to 2,000 flights a week, thus, offering ample belly space for air cargo. The belly space ranges from two to three tonnes in a 737-type aircraft and 20-25 tonnes in the larger 747-type aircraft.

Initiatives

A senior officer of the GMR Hyderabad International Airport Ltd said, “We are taking several initiatives to become a hub, taking advantage of our location, infrastructure and connectivity. Our terminal capacity can be modularly scaled up to 1.5 lakh TPA, while our apron is being upgraded to Code F, capable of accommodating even A380s.” He explained that developing a cargo hub at Hyderabad can save both money as well as time for airlines and the trade.

Today, if a wide-bodied freighter flies in with a cargo load to Delhi, drops some of the load and hops on to another city to drop the remaining cargo, it would take a minimum of two hours flying time. “A wide-bodied freight consumes at least $25,000 worth fuel for one-hour flying time. This means, it would spend $50,000 just to ferry a part of the cargo parcel to the next regional airport. And this works out to about $16 million a year. Imagine, the carrier hopping to a few more ports to drop the remaining cargoes,” the officer added.

What the airport is looking at is that a freighter could land and drop its entire load here, which could then be dropped to at least 19 cities in its catchment area through its regional connectivity at much lower costs.

The regional frequencies from Hyderabad increased from 212 a week in March 11 to 347 a week in August 12. The airport already has a 33,000-tonne capacity dedicated temperature-controlled pharma zone, a 20-acre Free Trade Zone with warehousing and distribution and the integrated terminal operated by GMR and Menzies Aviation of UK.

New initiatives include cool container links for pharma products, general and temperature-controlled warehouses within the cargo village, promotion of road feeder services and 24x7 customs clearance of cargoes. The last initiative is particularly required for a full-fledged cargo hub as both Delhi and Mumbai airports have one-shift of customs operating hours, while airports such as Hong Kong, Dubai and Shanghai have 24x7 customs clearance.

All the airport needs now is a domestic carrier to turn it into its cargo hub. And on this count, the airport operator is in talks with a few airlines and hopes to seal a deal soon. “The infrastructure, connectivity and ancillary facilities are ready. Once we get a carrier, the airport will soon serve as India’s much-needed air cargo hub,” the officer from the airport said.

http://www.thehindubusinessline.com/industry-and-economy/logistics/article3904462.ece?ref=wl_industry-and-economy

Puja, mementoes to mark Dreamliner’s maiden flight to Chennai

New Delhi, Sept. 16: 

It promises to be a dream flight for the over 200 passengers booked on Air India’s morning flight between Delhi and Chennai on September 19, on the newly acquired Dreamliner (Boeing787).

Flyers will be welcomed on board with some small mementoes. When the flight touches down in Chennai, a small puja will be performed before the aircraft heads back to the National Capital. After a gap of about three hours, the same aircraft will be used to operate a Delhi-Bangalore return flight.

The hype around the induction of the Dreamliner started a week in advance. Following full page advertisements in leading newspapers announcing the arrival of the “most modern and advanced aircraft in the world”, the airline also sent out mailers to travel agents introducing them to the aircraft.

With a configuration of 18 executive class and 238 economy class seats, the airline plans to continue with the Boeing 787’s daily service to Chennai and Bangalore till further notice.

Not only are plans afoot to launch a “dream fare” for travel on the Dreamliner, the airline is also planning to create a visual identity around the aircraft, which will be used in all official communication with the tagline ‘Dream Comes True’. Airline officials, however, caution that the promotions in the domestic sector will be a short-term affair as the aircraft will be operated in the Indian skies for a limited period. The real big promotional blitzkrieg will take place when the aircraft begins international operations in December.

As the business class on the aircraft is said to be on par with what most international airlines offer, the airline is also wooing various corporate houses. Travel industry sources say that mailers have been sent to corporates explaining its special features for the business class.

Some time later this month, after the airline gets delivery of the second Dreamliner, there are plans to launch services to other domestic destinations.

http://www.thehindubusinessline.com/industry-and-economy/article3904452.ece

Foreign investment in aviation unlikely to soar for now

Mumbai, Sept. 16: 

The aviation industry in India has to overcome several challenges before a turnaround happens, since capital infusion can seldom be a solution to a weak business model, say aviation analysts.

While FDI in aviation may bring in much-needed long-term financial and strategic capital and expertise, the aviation industry has to overcome high fuel costs, stiff competition and its capital-intensive nature with high fixed costs.

Analysts said fuel costs, the largest cost component for airlines, considerably impacts operating margins, but are beyond their control. Aviation turbine fuel (ATF) prices are driven by fluctuations in global crude oil prices.

Currently, national sales tax average is 25-30 per cent on ATF, which is a major burden for Indian carriers as fuel costs account for over 45-50 per cent of costs.

“If aviation turbine fuel is categorised as a declared good, it would reduce sales tax from an average of 24 per cent to four per cent and have a substantial positive impact on airline financials,” said Kapil Kaul, India Head of Centre for Asia Pacific Aviation (CAPA).

Also, the airlines industry is capital-intensive, with high fixed costs for aircraft acquisition, leasing and maintenance. Additional costs incurred on training pilots, technical support staff and crew members are also fixed, says a Crisil report.

Aviation analysts said that the effect of FDI will not be immediate. Carriers from the Gulf, as well as IAG and Singapore Airlines have all been watching the sector with interest and informal discussions have taken place in some cases.

“But the balance sheets of most of the incumbent carriers are relatively weak and the sector faces numerous structural challenges. So foreign airlines will make their own assessments about whether they consider a carrier to be a suitable investment at this time,” Kaul said.

Analysts have alluded to the sector’s past, for in the 1990s, when deregulation allowed the entry of private carriers on domestic routes, India permitted up to 40 per cent FDI, including those by foreign airlines. At that time, both Gulf Air and Kuwait Airways acquired 20 per cent stake in Jet Airways.

However, in 1996, the Government announced that foreign airline shareholdings were not in the interests of India’s aviation sector and scrapped the policy.

Ostensibly, this was because private carriers were still relatively small and the concern was that foreign airlines would control their development in such a way as to feed their offshore hubs, relegating the Indian carrier to a regional status.

In reality though, analysts said, it was a move designed to thwart the Tata Group and Singapore Airlines’ plans to jointly launch a domestic carrier in India. Jet Airways also had to buy back the shares from its Gulf investors.

So what has changed? The crisis in Indian aviation, which has resulted in almost every carrier, except IndiGo, facing some form of financial stress, has created an environment in which all measures to support the recovery of the sector had to be considered, even those which have been off the table so far.

Analysts add that the floodgates of investment are unlikely to open in the short term.

“If the Government is serious about granting new licences to well-funded, professional start-ups, we could in due course see the launch of greenfield joint ventures by carriers such as AirAsia, Jetstar and Tiger Airways,” Kaul said.

http://www.thehindubusinessline.com/industry-and-economy/logistics/article3904450.ece

Lufthansa not to buy stakes in domestic airlines

Bangalore, Sept 15:  

German airline Lufthansa has said that it would not pick up equity in any airlines in India even though the Government has opened up the sector for FDI.

Lufthansa’s head of corporate communications for Asia Pacific, Frank Puttmann said, while India continues to be the top market for the airline, there are no plans to pick up equity. “At this moment, our strategy is to build up a strong presence in India. India is the top market for us worldwide. It is a strong message for the market,” he said.

Puttmann said airport companies in India should work along with the airlines because they are partners in their business. Hence, the decision to impose heavy airport charges would be counterproductive. He said the airports regulator’s decision to allow 346 per cent hike in airport charges by DIAL which runs the Delhi airport was detrimental to the growth of the passenger traffic. “We can understand there is a cost to be paid for better infrastructure which can be spread across over a period of time. But to start charging such a heavy fee from day one is wrong,” Puttman said.

Lufthansa director for South Asia, Axel Hilgers said his airline was willing to get to the negotiating table if the airport says that the higher development fee is for a certain period.

http://www.thehindubusinessline.com/todays-paper/tp-economy/article3901944.ece