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Foreign airlines likely to take wait-and-see approach in India

Publication Date : 25-09-2012

 

India's decision to allow foreign airlines to invest in Indian carriers is an important first step, but experts warn that it will be a while before the aviation sector can pull out of its current crisis.

Don't expect foreign carriers to rush into a sector where a majority of airlines are struggling with high operating costs and low ticket prices, they say.

"Most foreign carriers will be cautious. India is a complicated market where many regulatory issues have to be sorted out," said Neelam Mathews, an aviation analyst and journalist. "Barring one or maybe two, others will take time to review the market."

Said Rishi Sahai, director at consultancy firm Cogence Advisors in Delhi: "It is a very good first step and it will certainly attract some carriers to invest, but there are many steps to go, such as reducing taxes on aviation turbine fuel. Bigger carriers want further liberalisation before they think of operating in the Indian market."

As part of "big bang" reforms it announced on September 14, the government allowed foreign airlines to buy stakes of up to 49 per cent in Indian carriers, except for the state-owned Air India.

The move is aimed at injecting foreign funds into local airline companies which have been struggling with high fuel costs - these make up half of operating costs - low ticket prices, a weak rupee and interest rate hikes.

The collective debt of India's six commercial airlines last year was US$20 billion, with Kingfisher, once the second-largest airline, struggling to pay off US$1.3 billion.

Kingfisher's chairman Vijay Mallya, a flamboyant businessman who has been keeping a low profile of late, was among the first to hail the government's move. The airline said in a statement it hoped to "re-engage with prospective airline investors in a more meaningful manner" and move towards re-capitalisation and a ramping up of operations.

But many analysts believe the move may have come a little late for Kingfisher, which has been forced to ground most of its fleet and unable to pay most of its employees' salaries since March.

"They will find it tough to find a willing partner without a substantial infusion of capital from Mallya and a debt restructuring first," said Sahai.

Other carriers such as Spicejet may have better luck.

Spicejet, India's second-biggest budget airline, is in "very preliminary" investment talks with Gulf carriers, its chief executive Neil Mills said recently.

"Spicejet is a feasible option for investment. What, when and who, that is too early to comment," said a Spicejet spokesman.

Abu Dhabi-based Etihad Airways is also in talks to pick up a minority stake in Jet Airways, India's leading business daily Economic Times reported recently.

But other foreign carriers that were in talks earlier, such as Singapore Airlines, are expected to wait and watch.

"We keep all investment options open, but at this point there are no discussions taking place on the purchase of a stake in an Indian airline," said a Singapore Airlines spokesman when contacted.

While most of India's airlines may be struggling currently, its aviation sector is still seen as having good growth potential.

Increasingly, for one thing, Indians with more disposable income are choosing to fly instead of taking the train or travelling by road. Domestic air travel is no longer seen as a luxury.

So the government remains optimistic, hoping that a fresh infusion of funds will lead to better air connectivity between smaller Indian cities.

"No doubt the aviation sector is going through a difficult phase. The decision to allow 49 per cent investment will certainly push things in the positive direction," Aviation Minister Ajit Singh said recently. But even he notes that only time will tell how many foreign carriers would show an interest in domestic carriers.

 

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