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“Allowing FDI in india’s airlines will not help”

Issue Date - 24/11/2011
B&E: At present, we have many airlines which are in serious need of funds in India, be it private carriers or the State-run airline. Do you think raising the FDI limit by up to 24% for foreign carriers will help improve matters?

Gordon Bevan (GB): No. Opening the doors to FDI won’t encourage foreign airlines at the moment. It might make the investment climate in India more attractive, but not enough to warrant placement of capital in these markets. The airlines that have large exposure to the Indian market can manage to attract their traffic without local airline investment. Each airline can negotiate its own deal with carriers to secure Indian connecting traffic, but on international routes there may be duplication of effort. If Lufthansa acquired Jet Airways, what should the airline do with the Jet services to US? Lufthansa would want that traffic to route via Frankfurt or Munich. There may be a shrinking of direct services as the quickest way of gaining an ROI is to pump traffic through the owner’s hub system. I am sure the Indian Govt. would have an opinion on a shrinking, foreign-owned airline by now.

B&E: So are you suggesting that partnerships and code-sharing agreements instead of an acquisition would be better for the acquirers?

GB: Many airlines have learnt that they can secure additional revenues from partner airlines without tying capital in airline ownership. The fashion is now for airlines to co-operate in a JV on a route or country-pair, deriving the best of both carriers without the cost of investment. Ultimately, airlines are about securing traffic and revenue streams. Except in very rare instances – Swiss and Lufthansa is a good example – foreign airline ownership does not deliver this aim.

B&E: There is a serious concern that it is the LCCs who will benefit more from this FDI limit if it is allowed, as they will enjoy better valuations at the moment due to their profitable status at present. Your views on this?

GB: India represents all of the conditions to attract foreign LCC investment. LCCs would see the Delhi and Mumbai domestic markets as one where they could carve a sizeable market share. They are battle-hardened having had to compete with their own legacy carrier and legacy carriers at the other end of the route. The more successful LCCs already have high brand recognition within the Indian diaspora in countries like Malaysia, Australia and Europe. Exporting this brand to India would not represent a difficult challenge.

B&E: The count of domestic passengers in India is 55 million. Now is this enough a market size for foreign carriers to get greedy about? GB: I am not sure whether foreign legacy carriers can get too excited about a domestic market of 55 million that spends an average of $60/sector within India, or not. The reason 55 million Indians travel domestically is because of the level of fares at the moment. More interesting is the 38 million passengers that fly to and from India. In almost all cases airlines can pitch for this traffic without investing in Indian carriers. The domestic air market is also subject to non-air competition. Although the domestic air market has more than doubled in five years, average ticket prices have fallen to US$60 from $125 on average. Growth is developed through discounting – a message that legacy carriers are familiar with but not receptive to. It is clear that Indian domestic fares are unsustainably low. There is nothing wrong with low fares if it is related to the cost of production.

B&E: Which Indian airline(s) do you think will benefit the most from the FDI policy change? Also, which foreign carriers will be most interested in investing in Indian carriers?

GB: Air India presents the least attractive investment opportunity. Apart from its structural labour issues and quasi-government vehicle, the average yields generated by the carrier are the lowest in the market. Air India seems to discount its fares to attract traffic. Jet Airways represents the most attractive proposition, but it needs greater focus. As for the buyer, of all the carriers that understand India, Singapore Airlines is probably the most experienced and adventurous enough to consider an investment in Indian carriers.

B&E: One final question – should FDI by foreign carriers be allowed? And if yes, how much – 24% as the MoCA proposes or up to 49% as the DIPP says?

GB: The real question for India is “how do we fix the airline industry so that it is attractive to foreign investment?” At the moment Indian carriers are merely looking for their next capital fix, and this is not really fair on foreign investors. When a 25% limit on foreign ownership has not encouraged airlines to invest in US carriers, I get reluctant to provide an opinion on the level of FDI that could assure Indian carriers of investments by foreign carriers. If Indian investors are not prepared to invest in their own airline industry, what makes the opportunity any more attractive to foreign carriers? What’s in it for them?
Steven Philip Warner           

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