The Foreign Direct Investment (FDI) of 49 per cent in the Indian aviation sector – scheduled and non-scheduled air transport services, was a decision everyone awaited with bated breath. Under the scheme, the chairman and at least two-third of the directors would be Indian citizens and the substantial ownership and effective management control would be with them. Following a turbulent year, the industry had pinned its hopes on the decision, unanimously rejoicing when it was finally announced in 2012.
However, in the two years since the Indian skies were opened to investments, the first FDI deal between Jet Airways and Etihad is yet to see the light of day. The Tata-SIA deal is yet to cross its turnstiles. Most international airlines still firmly nod their heads no when asked if they have plans to invest in Indian carriers.
According to Biji Eapen, President, IATA Agents Association of India (IAAI), the government decision to permit FDI in aviation would pave way for much-needed equity infusion into Indian carriers which are in dire need of funds for operations. “It is a good decision that the scheduled operator’s permit would be given to a company which is registered and has its principal place of business with India. The opening of the sector to foreign airlines may bring good news for passengers who would benefit from more competitive fares, better product and services and better international connectivity,” he opined.
Why then, is India, which is often described as a country with ‘tremendous potential’, ‘a growing aviation industry’ and ‘emerging tourism markets’, the country where the FDI scheme is slow to take off?
Policy speed breakers
As is the case with several other issues that plague tourism in India, ranging from infrastructure development to visa procedures, the blame for the FDI scheme’s slow ascent is pinned partly on cumbersome government policies. The SEBI notice, Competition Commission of India’s intervention, and opposition from few political quarters among others created great hurdles in executing the Jet-Etihad deals. Later, clearance was obtained from FIPB, CCEA, all of which was a lengthy process in our aviation industry, stated Eapen.
Satyendra Pandey, Manager, CAPA, commented that Indian aviation overall has some fundamental structural challenges which need to be addressed especially taxation policy, regulation, approval processes (including timelines and transparency) and aviation turbine fuel (ATF) rates. “The lack of a cabinet approved comprehensive civil aviation policy has also been a detractor as investors require certainty especially with the significant amounts of capital required for investment. Investors factor all of the above elements into the country risk premium (CRP) for India. While the change in FDI norms will undoubtedly benefit the sector, the fundamental structural challenges above – if addressed in a decisive and timely manner will likely generate more interest by international carriers in the sector,” he said and opined that each of the conditions to attain FDI requires approval and oversight where processes are fairly slow. Speeding up the processes coupled with more policy certainty would presumably make the process for investment in Indian airlines less cumbersome, he added.
Hector D’Souza, President, L’Orient Travels opined that the profit of investing in an Indian carrier are not clearly defined, making it less attractive to investors. The RoI in this business, he added, is very low, owing to high cost fuel, airport handling charges and parking fees. “Aviation is not even listed as an essential item! It is still counted as a luxury. So, instead of FDI, airlines increase their frequencies, which is easier for them. We do have investments coming in, with Jet-Etihad, Tata-SIA and Air Asia India, but it’s taken a long time. And the question is, what will the government do with it? What concessions will it give?”
Raising one of the most interesting points, Nigel Mayes, Senior Vice President Consulting & Product Development, ASM opined that the Indian government needs to be able to remove the politics from these FDI deals. “Recently Tim Clark, CEO of Emirates commented that the investment Emirates made into Sri Lanka was successful because the government of Sri Lanka managed to “ring-fence” the contract with the government which protected the airline from any interference the from the Sri Lanka government, but in India, the government wants too much involvement,” he said.
The possibilities
According to Mayes, the airline industry in India is no different to any other sector, and yet it appears to attract greater attention from the Indian politicians. “There are wider implications for India from the inability to attract airline investment, it is not only holding back the development of the aviation sector, it is restricting the connectivity of India to the world which in turn restricts the wider growth and development of the Indian economy.”
“The problem is we don’t have a national carrier that is worth its salt. That is the biggest issue. If FDI has to come, let it come to our national carrier. Qantas also registered loss last year. The Government said that it will not provide any more aid, but rather change policies to allow investments from foreign sources. So now, if BA decides to invest in Qantas, it will be an advantageous FDI. If AI does the same, we will see some action on this front,” D’Souza suggested.
