With losses mounting, cash-strapped Indian carriers have no option but to welcome investment from foreign airlines.
In 1995, the Tatas set up a joint venture with Singapore Airlines to start a domestic airline in India, with the promise to invest over Rs 1,500 crore in it. The idea was, to begin with, to start off with a dozen or so aircraft, and slowly increase this, depending upon the demand. The project, however, ran into rough weather with both private as well as government-owned carriers opposing it vehemently. Both argued that the big boys from abroad had very deep pockets, they’d lower prices drastically and would wipe out the Indian aviation firms, both public as well as private. Not surprisingly, the then aviation minister C M Ibrahim said that no foreign investment, either directly or indirectly by a foreign carrier, would be allowed. The Tatas decided to retreat.
Fourteen years later, the aviation world has come a full circle. Not only are several airlines like Kingfisher rooting for it (Jet Airways, though, says that it has no plans to look for FDI from airline companies), Civil Aviation Minister Praful Patel is also in favour of allowing foreign carriers to pick up a stake in Indian airlines — interestingly, just a few months ago, Patel was opposed to any change in the policy which currently allows non-airline foreigners (like, say, a textile tycoon in Singapore) to invest in Indian airlines but doesn’t allow foreign airlines (like Singapore Airlines) to do the same! Patel has floated a proposal to permit foreign carriers to pick up between 20 per cent to 25 per cent stake in domestic airline. The Department of Industrial Promotion and Policy (DIPP) wants to go a step further and, in a note for discussion to the Committee of Secretaries, has suggested that foreign carriers be allowed to buy up to a 49 per cent stake.
The change of heart is easily explainable. For one, private carriers have, without any competition from foreign airlines, already run up cumulative losses of over $2 billion (Rs 9,800 crore). And, with no hope of being able to raise more funds in the current global environment, they’re in desperate need of funds. Indian Airlines, similarly, has losses of over Rs 2,500 crore.
With most of the major airports in the country are run by private operators who have foreign partners, it’s difficult to make the argument about national security anymore — after all, in terms of potential risk to security, the airports surely represent a higher level of risk? And, in the case of airports, even 100 per cent foreign direct investment is allowed.
More important, in the last ten years, several countries across the globe have substantially liberalised their policy on allowing foreign investment in the airline business — at the time the Tata-Singapore Airline venture was being talked of, one of the arguments made was that few other countries allowed foreigners to set up shop to service the local market. Indeed, India has not kept pace with the changes in global aviation policy. There is, for instance, no country other than India that makes a distinction between foreign investment by non-airlines and foreign investment made by airlines — while foreign investment up to 49 per cent is allowed in India through FIIs and private equity funds, foreign carriers are not allowed to invest.
Even the Asian markets have seen dramatic changes in the last few years. Malaysia-based Air Asia, for instance, has operations in Thailand and Indonesia. Qantas’s Jet Star operates in Singapore while Singapore’s Tiger Airlines will soon operate from the Philippines, all with 49 per cent equity stakes in conjunction with local partners. In China, the government allows foreign carriers to pick up a 49 per cent stake with the rider that one owner cannot have more than a 25 per cent stake. Countries like New Zealand and Australia have freed the air completely and allow 100 per cent foreign investment in domestic operations. In the UK, the limit is 49 per cent and, of course, the airlines must have sufficient funding to survive for two years.
Perhaps the most stringent rules are in the US — but even they allow foreign carriers to buy up to a 25 per cent stake. However, they scrutinise all applications carefully to ensure that the foreign airlines do not, despite their minority shareholding, somehow get management control. For instance, a current application by Virgin America to operate domestic flights in the US is under scrutiny to determine the actual level of control, despite Virgin’s stake being less than 25 per cent.
| OPEN SKIES Most other countries allow foreign airlines to own a stake in local airlines | ||
| Country | Domestic airlines | International airlines |
| Australia | 100% | 49% (but holding by a foreign airline in Qantas) |
| Canada | 25% | 25% |
| New Zealand | 100% | 49% |
| Korea | 49% | 49% |
| UK | 49% | 49% |
| US | 25% | 25% |
| China | 49% (not more than 25% for a single owner) | 49% (not more than 25% for a single owner) |
| Singapore | No domestic service | 49% |
| Thailand | 49% | 49% |
| EU | Full right of establishment among EU members, without need of local establishment. | Varies |
| Source:CAPA | ||
In India too, the government could look at similar issues before clearing foreign airline applications instead of the current practice of having a blanket ban. And given that the aviation ministry still has to clear the aircraft acquisition plans of these airlines, there are several other ways in which the ministry can exert its control.
Many have, and perhaps rightly, drawn parallels with the Indian telecom sector which had no mobile phone subscribers in the mid-90s, but has over 350 million mobile subscribers today, and is adding another 9 to 10 million every month. This revolution was made possible by big global telecom players like Singtel and Hutchison, amongst others, who took up equity stakes in Indian telcos and were followed by private equity funds to grow this capital-intensive business. All this was possible because the government liberalised the telecom policy and allowed foreign telcos to buy up to a 74 equity stake in Indian telcos. A similar revolution, following the introduction of more sensible aviation policies, could make flying affordable for millions instead of, as is the case today, for just 2-3 per cent of the population.