Monday 24 September 2012

Will FDI clear the dark clouds hanging over Indian skies?

The Government’s recent decision to allow 49 per cent foreign direct investment (FDI) in the aviation sector has given rise to two sets of questions. The first has to do with what this will mean for airlines like Kingfisher.

Will Kingfisher be able to get the much talked about monies to keep its operations afloat? Analysts are not very optimistic as they feel that the Government’s decision has probably come too late to help the airline.

The other, more significant questions, include, will this decision to allow foreign airlines to invest in India benefit existing airlines? Will it see the birth of new airlines promoted by foreign capital? How will the flying experience for passengers change?

There is near unanimity among analysts that SpiceJet and GoAir are likely to be the two most preferred airlines for FDI. The reasoning — both are promoted by those who are not hard-core airline professionals but entrepreneurs who invested in the business to exit at the correct time and with a profit, which they are likely to get from a foreign airline buying a stake in their businesses.


While most international airlines have declined to comment on whether they will look at investing in an Indian carrier post the Government changing the policy, analysts say airlines from the Gulf, South East Asia and some European carriers are likely to take maximum advantage of the change in policy.

Already, Etihad Airways is in the news, with media reports stating that Jet Airways is in talks with the Gulf carrier.

Many in the industry feel that the policy change is also likely to see some new airlines take wings. This could be the route that Tony Fernandes, the promoter of the low-cost airline, Air Asia is likely to adopt.

Terming the decision as “excellent” Dhiraj Mathur, Executive Director and Head of National Aerospace and Defense Practice, PricewaterhouseCoopers (PwC), said that with the coming in of international airlines things can only get better for the sector and lead to a better flying experience for passengers. “Service will only improve,” he added.

Dhiraj pointed out that the other important aspects of allowing foreign airlines into the Indian aviation sector is the benefit of alliances that these international carriers can bring for an Indian carrier. International airlines that are said to be keen to invest in India carriers include Singapore Airline, which is a key member of Star Alliance.

Sushi Shyamal, Partner (Infrastructure Practice), Ernst & Young, feels that this is a step in the right direction.

“FDI in aviation was long overdue and it was only a question of ‘when’ and not ‘whether’ it will happen. It has probably got highlighted so much as currently the industry is going through a rough phase. We have allowed FDI in banking, telecom, insurance, information and broadcasting and these are sensitive sectors as well,” he pointed out.


Apart from international passengers, it is also the faster growing domestic traffic which could be of interest to foreign airlines, he added.

Shyamal adds that this could also provide a good opportunity for domestic airlines to go international as this can become a good integration strategy for local players, who are eligible to leap frog into the international arena.

An international aviation analyst feels that with the policy change aviation will finally be treated at par with other sectors. “The sector is undergoing a monumental shift and finally this policy change will allow the Indian aviation sector to participate in a fast changing industry rather than be a silent bystander,” he said.

Taking the argument further, Amber Dubey, Partner and Head (Aviation). KPMG, added, “It will also pave the way for Indian carriers to buy stake in global carriers some day, though it sounds unimaginable today. Just like no one imagined that iconic brands like Arcelor, Novelis, Tetley, Blackburn Rovers or Jaguar-Land Rover could be owned by Indians some day.”


Critics of the policy, however, feel that it lacks focus. “On the one hand the Government has put bilateral exchange with foreign countries on hold. On the other it has allowed airlines to invest in domestic carriers. What is the message being sent… come invest in our carriers, get them to collect passengers and bring them to one point from where the foreign airline, which has invested in an Indian carrier, will carry them to the four corners of the world? How will this help Indian carriers?” argued one analyst.

The other issue that some are critical about is the timing of the decision.

Analysts point out that with the industry awash in the red, domestic carriers will become cheap assets for foreign airline to invest in.

Of course, according to analysts, this will not stop Indian players from eyeing foreign partners.

“The inherently high-risk and volatile business makes it a very restrictive industry for a majority of the financial investors to even consider investing in the sector. In the current market there won’t be many financial investors evaluating this sector. Cash crunch is definitely there,” an analyst said.

However, whether international carriers will pay heed to the interests of Indian carriers is something that one will have to wait and see.
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