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FDI In Aviation: Will It Be A Game Changer?

Posted in Finance Articles, Total Reads: 2237 , Published on October 02, 2012

Today the civil aviation industry is seeing one of its worst phases. Many cash strapped airlines are struggling to survive in the market. Airlines like Vijay Mallya's Kingfisher, which is on the verge of bankruptcy, have been pushing for FDI to boost the sector. Finally the Cabinet Committee on Economic Affairs (CCEA) approved the FDI in aviation proposal, which would allow foreign airlines to buy up to 49 percent in domestic carriers. This decision has lifted a ban on foreign airlines from investing in Indian airline companies.

Industry experts have welcomed the move & called it as a ‘Bold & Game changer’. But the big question remains: Will it be a game changer?

The Indian aviation industry experienced a revolution in the last few years .Today it is the 9th largest airline market in the world. As per the report of Centre for Asia Pacific aviation, it would be the largest in the world by 2030. Domestic traffic has tripled; international traffic has doubled in last five years. But the biggest refute is that at the same airline companies have been going through turbulent times. Five of top-six Indian's airlines are loss-making, including state-owned Air India which is operating on taxpayer life support. India’s airlines have approximately USD16 billion of debt, of which USD 6-7 billion is for aircraft-related loans.

Experts have pointed out that not all airlines will benefit from the move. Today airlines giants are bogged down by high fuel costs and the Eurozone crisis. The biggest sufferer is the airline business in Europe. So the analysts believe that cash rich companies like Abu Dhabi based Etihad Airways , Qatar Airways, Singapore Airways & Malaysia based budget airline Air Asia would be the possible investors.

Vijay Mallya who has been a staunch supporter of FDI in aviation, reported his carrier is in talks with overseas airlines for investment. But analysts say that the chances of finding an International airline investor for debt ridden Kingfisher airlines are very little, due to its operational inefficiencies, huge debts, accumulated losses and lower asset base. Jet & Indigo Airways have high foreign holding already, so its promoters have shown their unwillingness to divest their stake at this moment. According to investors Kalanithi Maran , promoted airline SpiceJet and Wadia Group-promoted GoAir is better placed to receive foreign investment because of their financial performance & operational efficiency. These companies are likely to receive FDI by the end of this year.

But experts say, not just the opening of the gates for the international players will save the Indian aviation; it’s time for a grand plan makes the fundamental changes in a current policy. Today the growth of the aviation industry is hampered by exorbitant taxes, high cost & insufficient infrastructure.

The higher tax rate has resulted into Indian air fares to be about 300 percent higher than those in China and some other countries. India stands out to be the only country in the world to impose a service tax on their airlines. 200-300% higher fare compared to world's other carriers looks like the greatest hurdle for the aviation industry. Earlier, service tax was levied on 10 per cent of the total value of the ticket with a cap of Rs 100 for domestic ticket and Rs 500 for international ticket. This has been hiked to 40 per cent of the total value of the ticket without any cap. Such government taxes are not just hampering the growth but also resulting in a loss of the airline industry.

As far as Aviation Turbine Fuel is concerned, price in India is at least 50 per cent higher than in places like Singapore and Sharjah and determined by a process which is not at all transparent. ATF accounts for 40% of Indian carriers' costs as against the global average of 20%. The main reason for this being that state governments levying sales taxes between 20-30%. The ministry’s recommendation to include ATF under 'declared' goods status under the Central Sales Tax Act so that states charge a uniform 4% sales tax on the fuel, still remains to be enacted.India has recently encouraged direct ATF import. However, the infrastructure currently available doesn’t support to do so. Hence, many airlines don’t consider this an option. This government initiative has not been able to bail out an industry from continuous loss.

Also , any airline officials raised concerns about increase in 364% hike in airport charges at the Delhi International airport this year. These officials said these would be counterproductive. All these things are making India as an attractive destination to serve but not attractive to invest.

No doubt this will help  in demonstrating that the government is committed to support the development of the airline industry, this is a positive milestone.Analysts and aviation experts  believe that this will benefit domestic carriers only if these fundamental issues resolved immediately and foreign investment   alone won’t make any difference.

This article has been authored by Nikhil Deshmukh, Dhiraj Nemade, Chandan Patekar from Sydenham Institute of Management Studies (SIMSREE), Mumbai.

Image courtesy of FreeDigitalPhotos.net

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