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CIVIL AVIATION: FDI PROPOSAL
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 - 24/11/2011
 
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. [This is despite the $25.90 billion in losses they suffered during downturn-struck 2008 & 2009.] 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 (domestic & international; to touch 64,522,662 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.

To make more sense of how our domestic carriers are stuck between the devil and the deep sea, here is a forecast from IATA. Given the recovery in the industry since 2009, airlines globally, after returning a record $18 billion in FY2010, are scheduled to record $6.9 billion in profits in FY2011. Even better, all the broad geographies are expected to make money. Carriers in North America will make $1.5 billion, Europe: $1.4 billion, Asia-Pacific: $2.5 billion, Middle East: $0.8 billion, Latin America: $0.6 billion & Africa: $0.1 billion. And India? A negative $3.0 billion in FY2011 (forecast by CAPA). Shocking.

The carnage on Indian airstrips for years now, has been visible from miles away. 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 (ATF currently contributes to 40% of the cost-base of Indian carriers, much higher a proportion as compared to global standards – in 2010, total fuel bill globally, amounted to $176 billion, which was 30% of industry costs, as per IATA). That 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 it seems. 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 (due to the Aviation Act of 1958 which allowed foreign airlines to purchase up to 25% stake in a US carrier) 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 (like TWA, PanAm, Northwest, UAL et al). And how many foreign carriers did we see come to the rescue? For the sake of a 25% ownership – zero! It has been 53 years since the rule allowing foreign carriers was enforced, and till date, only Lufthansa has invested in an all-economy class US carrier – JetBlue, in which it bought a 19% stake in 2007 for $300 million. [For the record, only 9 of the 44 emerged from Chapter 11, thanks to bailouts by the Federal Government.] And to talk about returns, Lufthansa’s stake, despite a total net profit of $564 million by JetBlue in the three years following the stake purchase is valued today at just $241.3 million. That does not speak highly of returns from investing even in a profitable airline. [In fact, today, there is only one carrier in the world which has an investment grade stock – Qantas – which is also expecting a downgrading any time soon.] Why then, would you have a foreign carrier buy stocks of loss-making Indian carriers?

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. That 45% of international traffic carried by Indian carriers is to & from Europe, makes airlines from this profitable region ($1.9 billion profits in 2010, with another $1.7 billion in 2011 & 2012), strong contenders to bid for a stake in Indian carriers. So you have the German Lufthansa (profit of $1.13 billion in 2010), Singapore Airlines ($1.12 billion), China Southern Airline ($909 million) and Hong Kong-based Cathay Pacific ($1.80 billion) as possible bidders.

          

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