FDI in aviation may give flight to domestic airlines

January 22nd, 2012 - 12:39 pm ICT by IANS  

KPMG New Delhi, Jan 22 (IANS) Operating through a tough financial environment, Indian carriers see a ray of hope in the government proposal to allow foreign airlines to invest funds and expertise in them so as to bring back the zing in the sector.

“A market growing at over 15 percent, huge untapped market in the interiors, growing per capita incomes and propensity to fly make India an attractive aviation market to be in,” said Amber Dubey, a director in global consultancy firm KPMG.

Civil Aviation Minister Ajit Singh will move a cabinet note seeking 49 percent foreign direct investment (FDI) by foreign carriers in domestic airlines. The Group of Ministers will take up the issue of direct ATF imports and discuss plans to revive the aviation sector.

Currently, the government allows for FDI up to 49 percent in Indian carriers by non-airline players but bans foreign airlines from directly investing for security concerns.

But would foreign carriers be keen to invest in a bleeding sector where three listed players — Jet, Kingfisher and SpiceJet — are reporting heavy second quarter losses?

Industry watchers say ‘yes’. The Indian aviation market is one of the fastest growing in the world. Last year, it expanded by 20 percent.

And the current downturn makes valuations attractive. “Those who wait and watch may have to pay a higher price later,” Dubey told IANS.

But a deterrent for foreign carriers could be the plethora of state sales taxes which make jet fuel one of the costliest in the world.

Dubey said that bold steps were needed for a turnaround in the sector. These include rationalization of taxes imposed on air turbine fuel (ATF) and maintenance, repair and overhaul (MROs) facility.

According to International Air Transport Association (IATA) estimates, the Indian aviation sector would require $140 billion in the next 20 years to keep pace with the growing demand.

Other estimates have placed the current fund needs of the airline sector at $2.5 billion, with Air India alone accounting for $1.32 billion of the total.

Analyst say that having a foreign partner will help domestic airlines to raise funds with low interest rates from international markets.

“The interest rates are very high. Airlines are finding it difficult to raise more funds. Having a foreign partner will help them in sourcing funds from abroad at a cheaper rate,” Sharan Lillaney, aviation analyst at broking firm Angel Broking, told IANS.

“FDI seems to be the only way that the airlines will get fresh funds required for their sustenance.”

Aviation experts say that infusion of foreign capital by international carriers would help in fleet expansion.

“This (FDI) will alleviate short term and long term fund requirements like upgrading their fleet to more fuel efficient aircraft. Besides, equity infusion would also provide comfort to banks that are reluctant to lend,” said Rajiv Chib, associate director, aerospace and defence, PricewaterhouseCoopers (PwC).

Spinoffs from the proposal, they say, may result in global best practices like route planning, technology, operational and financial management entering domestic airlines.

The experts feel that even new airlines can be formed as a result of the proposal with 49 percent foreign capital and 51 percent investments from an Indian partner.

(Rohit Vaid can be contacted at rohit.v@ians.in and biz@ians.in)

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