FDI in airlines: Too little?

Foreign investors are not likely to get excited to invest in aviation even if the FDI ceiling is raised to 49%

Tim Clark, president of Emirates, has hit the proverbial nail in the coffin of private sector airline operators. In an interview with the Economic Times he categorically said that a 49 per cent foreign direct investment (FDI) in airlines is not attractive enough.

Private sector airline companies have been in the intensive care unit for some time now on account of rising oil prices and a price war among them and with the government-owned Air India.

Desperate for cash and facing pressure from the creditors, these airlines have asked for everything possible from the government and their funding banks to bail them out as well.

While the government has considered some of their demands, these companies continue to bleed. The only way out was infusion of funds. Banks were not willing to extend their exposure to the sector, nor were investors interested in picking up stake. FDI is the only possible option open, and that too from a strategic partner as private equity funds have not been too enthused by the sector’s performance. Airline operators lobbied with the government to allow FDI limit to be increased from 26 per cent to 49 per cent. 

With Tim Clark’s statement it is now clear that even this is probably not going to be enough to attract funds in the sector. Emirates has also made it clear that if it is putting in money, it would like to have a say in running the airline. Indian promoters are interested in strategic partners’ money but are not likely to let go of their control.

Clark says that if the government is asking for a 49 per cent investment in the sector it should throw in incentives to sweeten the offer. By this Clark is literally asking for the sky as his list of sweeteners include a clean balance sheet, no debts, guaranteed firewall against government interference, and freedom to procure assets in a free and transparent way. None of the Indian airlines meets these criteria.

What is true for Emirates is also true for other foreign carriers. But when it comes to domestic travel, the numbers just do not add up to make it a viable business proposition.

At present, airline operators do not have access to funds, and it has to be seen how long investors will keep holding on to their shares.