Airtel's 4G at 3G price: Beginning of yet another telecom price war?
Vodafone to buy Germany's largest cable operator for $10 billion

Corporate Jun 24, 2013

FDI in aviation: Why not allow foreign airlines to fully own Indian carriers?

By Sindhu Bhattacharya

Since the Arvind Mayaram panel submitted its report on easing off caps on foreign direct investment (FDI) in select sectors last week, there has been considerable confusion over whether Civil Aviation was one of the sectors mentioned in this report.

Only nine months ago, the Government reversed its 1996 decision and allowed foreign airlines to buy up to 49% stake in Indian carriers. Why would it want a second wave of reforms in such a short time, specially when only two foreign airlines have made commitments in all this time? Etihad Airways wants to acquire 24% stake in Jet Airways while AirAsia wants to set up an airline from scratch in partnership with the Tatas and Telestra Tradeplace.

So most babus in the ministries of commerce, finance and even aviation thought this is a mistake and aviation perhaps is not included in the list. Some pointed out that perhaps the move is to align FDI in different aspects of aviation but not raise that for foreign airlines any further. Now, today's Business Standard speaks of the Government proposal to allow foreign airlines up to 74% stake. If this is correct, it is rather foolhardy.

Reuters

Reuters

First, what is the point of opening up the sector partially and in multiple steps? If the intent is to liberalise, why not go whole hog and allow foreign airlines to own 100% in Indian carriers? Because 74% will give the management control but also make sure they need an Indian partner to comply with the cap.

Second, even if the cap on FDI is set at 74%, how will it benefit foreign airlines wanting to come in unless other silly rules, framed by the babus to keep a tight leash on airlines and potential investors, are also eased?

1) India does not have an open skies policy so it signs bilateral air services agreements with countries where it wants reciprocal flights to operate. The ASAs are between two Governments and their modalities are handled by the Ministry of Civil Aviation. Why not abolish ASAs and like USA and other western markets, allow any carrier to fly in or out with minimal permissions?

2) If FDI by foreign airlines is allowed up to 74%, many global airlines will want to set up subsidiary companies in India and may not necessarily seek out existing Indian airlines. Just like the AirAsia proposal, the foreign carriers may opt for roping in any Indian, non-aviation investor for the mandatory 26% Indian shareholding and begin an airline from scratch. This will also allow them to use the Indian bilaterals in addition to the rights they already have as foreign carriers. So how will then this liberalistion of foreign airline stake help the loss laden Indian airlines? And if our domestic airlines are unlikely to benefit from the FDI easing, what is the point of this policy change anyway?

3) There is one catch though. Foreign airlines may be forced to rope in Indian airlines as minority partners because we still have the ancient '5 by 20' rule which stipulates that any domestic airline must have a 20-aircraft fleet and must have completed five years of domestic operations before it is allowed to fly overseas. But again, when the intent is to liberalize, why continue with this silly '5 by 20' rule anyway?

4) Two investors - Etihad of Abu Dhabi and AirAsia of Malaysia - have announced investment into Indian ventures after getting approvals from their own shareholders, believing that the 49% cap on foreign airline investment cannot be breached. Though Etihad has only picked up 24%, AirAsia has picked up 49% equity. Now, with a sudden change in FDI caps, are these two investors not going to rethink their entire India strategy? Why would AirAsia then need two Indian partners for example? And why would Etihad continue to pay a premium for 24% of Jet's equity when it can possibly rope in a minority Indian partner for considerably less?

In effect, the 74% cap on foreign airline investment is a half baked proposal. We should either go the whole hog and allow foreign carriers to buy out Indian airlines completely or remain content with the existing 49% cap.

"Over six decades of protectionism have not got us any dividends. Its time to go for a disruptive policy change and see what happens. Air India needs to be privatized, the irrationally high taxes imposed on aviation fuel and MRO need to be drastically reduced, the five year restriction on flying international needs to be removed; and bilateral restrictions need to be suspended, say for a five year trial period. Then the increase in FDI limits will bear fruit", says Amber Dubey, partner and head-aerospace and defence at global consultancy KPMG.

Anyhow, from all available indications, the Government may be preparing a smokescreen for its own short term gains and the Mayaram panel's recommendations on aviation may turn out to be frivolous in the end. Various Government arms are themselves unclear till now about what exactly has been proposed by this pane. A senior aviation ministry official pooh-poohed the entire proposal on foreign airlines, saying there was no request from any stakeholder till now to further raise the limit of investment for foreign airlines to 74%. "And since there is no request, what is there for the ministry to consider at this stage?"

It is likely that in its comments on the proposal, the Ministry of Civil Aviation will opine against raising the limit for foreign airlines to own up to 74% equity in Indian carriers, up from 49% at present.

A senior Government official from another nodal ministry told Firstpost late last week the Government needs to be seen accelerating reforms to prevent a possible downgrade from international rating agencies and therefore it is mooting proposals which could be surprising.

But any flip flop on foreign airlines is not just surprising, it is something like history repeating itself. According to a report by the Centre for Asia Pacific Aviation (CAPA), In the 1990s when aviation deregulation allowed the entry of private carriers on domestic routes, initially as air taxis and subsequently as scheduled airlines, India permitted up to 40% foreign direct investment, including by foreign airlines. Jet Airways at the time in fact maximised this provision,with both Gulf Air and Kuwait Airways each holding a 20% stake in the fledgling airline. This strategic investment undoubtedly provided Jet Airways with a number of benefits including access to expertise and international feed.

However, in 1996 the Government of India announced that foreign airline shareholdings were not in the interests of India's aviation sector and would no longer be permitted. 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 the status of a regional carrier. But in reality it was a move designed to thwart the ambitions of the Tata Group and Singapore Airlines to jointly launch a domestic carrier in India.

Jet Airways had to buy?back the shares from its Gulf investors. The government position at that time was: as and when Indian carriers were of a sufficient size to be able to negotiate as equals with foreign airline investors then the restriction would be removed. But with the changing global environment in the 2000s, the spectre of security concerns, and the potential impact on Air India, were raised whenever the issue came up for discussion. And for many of the incumbents it suited their cause to limit the potential for a professional, well?funded competitor to arise in the market.

by Sindhu Bhattacharya

Related Stories.