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The agony & hope for India’s domestic airlines: call it ‘FDI’
B&E analyses the outcome of allowing foreign carriers to invest in India’s domestic airlines. Finally some good news, many presume. The reality is actually quite the opposite.
Issue Date - 19/01/2012
If North American carriers have set standards of growth over the years, so have airlines in India. Only difference is – for India’s domestic industry, growth has always come in a package of losses. And over the years, despite optimism galore, all we can discuss aloud are the canyons of losses which have been etched into their financial books. Exaggerated? Turn the clock back to 2006, when airlines around the world returned to their profit-making ways after half-a-decade-long patch of drought. Since then (leading up to FY2010), global airlines have recorded profits amounting to $18.70 billion. Of this, North American carriers contributed $5.7 billion. The Indian carriers on the other hand, have been living on a prayer. Despite a 48.83% jump in total passengers carried (in FY2010-11), a 64% increase in the number of operational airports (to 82), and a 158.13% jump in fleet size, their losses have only escalated. During a five year period, when global airlines made billions, India’s domestic carriers lost $5.43 billion.

The carnage on Indian airstrips for years now, has been visible. Woebegone tales of the big three – Air India (AI), Kingfisher (KFA) and Jet Airways (Jet) – requiring urgent cash infusion have become a daily back-fence talk in the aviation circles. [A fast fact: since FY1997-98 the big three have recorded losses and debt to the tune of $3.186 trillion – roughly three times India’s GDP in FY2010.] So have strikes by pilots and other staff, winding up of operational arms to reduce losses, and problems with ATF prices and taxes levied on it by various States. The big domestic airlines got into a mode of unceremonious self-slaughter by trying to outdo each other played against them. The stifling environment did the rest.

So what is the Ministry of Civil Aviation’s (MoCA) last resort to keep the industry afloat, especially the big three? Attract investments by foreign carriers through the FDI route – MoCA suggests the limit should be 24%, while the Department of Industrial Policy and Promotion (DIPP) recommends that it should be anywhere between 26% to 49%. A piece of smile-winning news after long. But will this prove manna to the ailing Indian carriers?

Many suggest that this move could open up the gates for dollars to flood the Indian aviation space. And if ever foreign airlines would require any convincing, it should not be more bothersome than a tiny gastric event in a marathon. Let us not get befuddled. Forecasting the outcome of allowing FDI in an airline industry that is – to say the least – battered, is no easy task. Forget India, this has been true even in a liberal, transparent environment like US. There was much hope that foreign airline participation and their involvement in the strategic decision-making process would make life easy for ailing US carriers when times got tough. It was not to be. Between 1975 and 2010, US carriers lost a total of $273 billion, and 44 filed for bankruptcy. And how many foreign carriers did we see come to the rescue? For the sake of a 25% ownership – zero!

Expecting an optimistic outcome, we ask: which carriers are most likely to be attracted to the Indian market? Those that have been very profitable in recent years, obviously. And in this regard, the Asia-Pacific carriers stand tall. Airlines in this region, after having recorded $8 billion in 2010 are on track to make another $4.8 billion in earnings in 2011 & 2012 (IATA) – highest in the world. Geographical proximity also makes Indian carriers a good strategic fit for Asian carriers. Then there are the European carriers (45% of international traffic carried by Indian carriers is to & from Europe). So you have the German Lufthansa (profit of $1.13 billion in 2010), SIA ($1.12 billion), China Southern Airline ($909 million) and Cathay Pacific ($1.80 billion) as possible bidders.

CII estimated that domestic traffic count by 2020 will touch 180 million. CAPA too puts this figure at anywhere close to 180 million. How logical are these educated guesses? Even if we assume that domestic traffic will grow at the same scorching pace over the next eight years, as it has been growing in the past decade, we would arrive at forecast of a lower 161.24 million domestic passengers! As a regression analysis (with a 94.4% accuracy; see chart top left) over a 9-year period indicates, the value arrived at (for 2020) is a much lower 81.5 million. Two factors are convincing in this regard. First, at present, 59.7% of Indian travellers fall in the low fare (LCC) category. Inflation, bleeding bottomlines, rising debt and unstable ATF price will guarantee a hike in fares very soon. Secondly, some might argue that the fact that a count of 1000 aircrafts by 2020 (estimated by CII and CAPA) from the current 413 would mean more traffic – what with the number of operational airports reaching 500 from the current 82 (as per MoCA)? A clarification – this increase in fleet size would require a cash infusion of close to $80 billion over the next eight years (CII estimates). Would the cash-strapped airlines minus foreign investors be able to afford that? No. Says Amber Dubey of KPMG to B&E, “According to an estimate, Indian carriers need an investment of over $30 billion in the 12th Plan period (2012-17). This cannot come from Indian promoters and Indian funding institutions alone.” Translation – no FDI, no fleet addition.

As far as international operations of Indian carriers are concerned, there isn’t much to intoxicate the foreign strategic investors either. Traffic carried on international routes by Indian carriers is estimated (using a polynomial regression analysis with a 99.7% accuracy over a 9-year period; see chart on page no. 64) to touch 21.5 million by 2020, as compared to 13.89 million at present. Strangely again, many industry sources wrongly estimate a ballpark figure of 50 million. Next is the opportunity for foreign carriers to gain access to untapped routes and earn higher revenues by buying stakes in Indian carriers which fly overseas. Truth be told – passing new capital onto airlines with a track record of losses in an unfamiliar market would be tough to propose to the board of foreign carriers. The foreign carriers would perhaps only pay a small premium over the present value of the stake they purchase. Also, it is very difficult to see what Indian carriers bring to a foreign investor. The Gulf carriers fly directly to Indian airports and don’t need the Indian carriers to support their international routes. If Singapore Airlines does invest, it would only be left competing with itself, trying to flow Indian traffic through an Indian port rather than through Changi. The story is similar for either a BA or a Lufthansa.


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