Foreign airlines get all-clear signal on FDI

Ministers reach consensus, to seek cabinet nod soon

A key group of ministers on Tuesday reached a consensus on allowing foreign airlines to buy up to 49 per cent stake in Indian carriers. Foreign carriers are not currently allowed to directly or indirectly make any investment in Indian carriers.

“We have reached a consensus on allowing foreign carriers to buy 49 per cent stake in Indian airlines and a Cabinet note will be moved soon,” said Union Civil Aviation Minister Ajit Singh after a meeting with Finance Minister Pranab Mukherjee, also attended by secretaries of the civil aviation, commerce and petroleum ministries.

The move is expected to open the doors to international carriers looking to leverage the large domestic network of Indian carriers. It could also provide a reprieve to airlines under financial strain and looking to raise funds. Private equity funds are not interested in the sector and raising money through debt is becoming difficult, with banks not keen to fund the sector further.

ONE VOICE ON INVESTMENT CAP

* Govt reaches consensus on allowing foreign carriers to buy up to 49 per cent in Indian carriers. Final clearance to come from the Cabinet

* The ministries of civil aviation and commerce differed over the limit to which foreign airlines should be allowed to buy into Indian carriers

* While the commerce ministry favoured a cap of 26 per cent, the civil aviation ministry wanted it to be 24 per cent

* Govt to release Rs 150 crore to pay salaries to Air India employees soon

*Air India debt restructuring plan and proposal to allow airlines to import fuel directly to be discussed in a meeting of Group of Ministers soon

Varying views have been put on the table on what the cap should be for foreign carriers wanting to invest in Indian carriers. The limit was a bone of contention between the civil aviation ministry and commerce ministry. The aviation ministry had recommended a figure of 24 per cent but the commerce ministry wanted 26 per cent. The commerce ministry felt no foreign carrier would come if it did not get a say (which it would if allowed to buy 26 per cent). The civil aviation ministry was averse to 26 per cent as that could trigger an open offer, giving 20 per cent more to the buyer.

The Indian aviation market, however, is attractive. The domestic airline industry, despite a feared slowdown, has been doing reasonably well, with passenger growth at 18 per cent in the last calendar year. It is expected to grow at a comfortable clip of above 15 per cent this year. The market has seen fares go up by around 15 per cent, especially as most airlines have pared capacity.

The markets gave the thumbs up to aviation stocks, expecting a positive announcement from the government on Tuesday. Jet Airways shares jumped 10.20 per cent to settle at Rs 234.90. Spicejet soared 10.10 per cent to close at Rs 22.35 on the BSE. Kingfisher Airlines closed with a gain of 4.80 per cent at Rs 25.10.

Analysts say the move could bring in a fundamental shift in the country’s aviation sweepstakes. Kapil Kaul, CEO of the Centre for Asia Pacific Aviation, Indian sub-continent, says, “While the global scenario in 2012 is not good, you will see some players come in the near term and through 49 per cent they will have a major say in the operations and strategies of Indian carriers. It will also pave the way for large corporates like Tata-Singapore Airlines, who have stayed away because of policy flip-flops, provided the government provides new licences.”

Kaul says companies like the International Airlines Group set up by British Airways to invest in other carriers and many cash-rich West Asian airlines looking at building a global footprint will surely enter the country.

Amber Dubey, director aerospace, KPMG, says, “Apart from the much-needed fund infusion, it would also provide access to global routes, managerial expertise and synergy benefits. The low air penetration in India (four per cent) indicates the potential for growth. The current losses of the airlines make the valuations attractive."

A Lufthansa spokesperson said, “Lufthansa currently has no plans whatsoever to take up equity stakes in any Indian airline. Our strategy to achieve a strong presence in India is working. Since it launched flights to India 50 years ago, Lufthansa has emerged as the largest foreign aviation group and the leading European airline in this market.” A British Airways spokesperson said, “We are awaiting a formal government decision on the issue." Among Indian carriers, Kingfisher Airlines and SpiceJet would be looking at inducting foreign partners.

Meanwhile, the government on Tuesday also cleared the immediate release of Rs 150 crore for part-payment of Air India salaries. The money is part of the Rs 600 crore dues the government has to pay the airline for operating VVIP flights.

On the contentious issue of permitting Indian carriers to import aviation turbine fuel directly, it was decided to refer the matter to a group of ministers on aviation.