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Sector
 
PRITAM BHAVNANI, PRESIDENT – AEROSPACE, HONEYWELL INDIA
“Infrastructure needs more attention than FDI”

Issue Date - 24/11/2011
 
B&E: For long now there has been a debate on whether foreign carriers should be allowed to invest in the ailing Indian aviation space or not. We actually stand at a juncture where this might become a possibility. As an industry insider, how do you view this development?

Pritam Bhavnani (PB): I think it is good news for all airlines in the domestic circuit. Besides the fact that the money that will be invested will come at a lower rate of interest, of course, for the foreign airlines as the rate of borrowing in India for the airlines is very high, the bigger advantage will be in terms of Indian carriers gaining on operational ground. Their operations will become disciplined and their efficiencies will improve if foreign carriers buy strategic stakes in domestic carriers. Also, if a foreign airline gets management control, you could be looking at crew exchange programmes, which could serve both the foreign airline and the associated Indian airline as well. So during a peak festival, high-travel season in India, crew and pilots of the foreign carrier can be transferred to the Indian carrier. The same is true the other way.

B&E: But the government had allowed investments in Indian carriers by non-airline foreign investors, including VCs, long back. At an FDI limit of 49%, we did not see much interest generated amongst these non-airline investors. So how do you expect the outcome to be different if airline companies are allowed to invest?

PB: In the case of allowing foreign airlines, you are talking about giving an investment opportunity to companies that are already in the business and understand what they are getting into. With VCs, it is not really a strategic or an operational investment, it’s just a financial investment which is rather short term. With a carrier buying into an Indian airline, the Indian carrier can derive operational synergies out of the arrangement, in addition to other benefits. The same is true for the foreign airline. It will view this as a long term investment and draw various benefits out of the arrangement. Therefore, given an opportunity to foreign carriers, I think we should see a better response if the FDI norms are relaxed on that front.

B&E: But why would a foreign carrier want to invest in a sector, where the top three carriers carry a debt of more than Rs.600 billion and a domestic traffic just in excess of 50 million passengers a year is primarily an outcome of the fare-wars that is on in the domestic circuit? In terms of profitability, Indian carriers are not very attractive propositions don’t you think?

. PB: They do appear worthy. Yes, there are certain FSCs which are losing money at the moment. But there are others too, the LCCs, which are certainly making money even at those low fares. It is less about whether you are buying into an already profitable airline in India, than it is about how efficient you can make this particular Indian carrier and how you can take advantage of the assets the target has. As for the loss-making domestic carriers, if they can improve their efficiencies with the help of the strategic foreign carrier, they will make profits. We have two choice – either start with a notion that nothing good can happen in this sector, or look at the possibility of positive outcomes.

 
B&E: As you mentioned, at present, the LCCs are the lot which is making money, despite a bleeding sector. Do you think this segment of the aviation market will receive maximum investments from foreign carriers?

PB: It all depends on the airline that is investing. What they are looking for? If they are looking for fast growth, then expect them to invest in LCCs. If they are looking for strategic investments, where they want to get into the thick of things and turn around a loss-making carrier, then they are looking at FSCs. In any case, even if the foreign carriers invest in a money losing domestic entity, they will require less funds to acquire a significant stake in them. Therefore the risk is automatically lower. But I would say, if it’s a cash-rich FSC that is interested in picking up a stake in India, it would be most interested in an FSC Indian carrier.

B&E: Just a change in FDI policy won’t be enough to make the days ahead better for Indian domestic carriers. Should there be other policy changes accompanying a change in FDI too?

PB: Of all the matters that policymakers need to attend to, I think infrastructure is something which cannot be ignored if we are to really become a market with 100 million plus domestic travellers and over 1000 aircrafts by 2020. A quick example – in 1947, for Air India to travel the distance from Bangalore to Madras, using an old Douglas aircraft, with a speed of less than 150miles/hr, it used to take an hour and ten minutes. Today, AI’s aircrafts fly at double that speed, yet it takes only five minutes less to cover the same distance. Why? It takes much longer to take off and land these days. The problem clearly is infrastructure, which is not keeping up with the rate of development. I would say – infrastructure needs more attention than FDI.
Onkar Pandey           

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