After a gap of close to 16 years, foreign airlines will again be allowed to invest in domestic airlines.

On Friday afternoon, the Cabinet Committee on Economic Affairs approved a proposal allowing foreign airlines to acquire a stake of up to 49 per cent in domestic airlines. For the moment, Air India is being kept out of the list of airlines which could become a potential target for acquisition by international airlines.

The proposal of a foreign airline will have to be cleared by the Foreign Investment Promotion Board (FIPB) before the investment can go through. FIPB has representatives from Ministries of Home, External Affairs and Civil Aviation and is being seen as a way to ensure the safety and security of the Indian skies.

Till 1996, foreign airlines were allowed to invest in India, which saw Kuwait Airways and Gulf Air acquire a stake in Jet Airways. This also saw a tie-up between the Modi Group and Lufthansa to float an airline called ModiLuft.

When the policy was reversed, Jet Airways acquired the stake of the foreign airlines. It also saw the dreams of the Tatas re-entering the aviation sector with Singapore Air being shattered.

Welcoming the latest move, KPMG’s Head-Aviation, Amber Dubey, said that allowing 49 per cent stake to foreign airlines will create access to capital, global connectivity, technology and best practices. “This could lead to establishment of new airlines in India and perhaps, change in ownership structure of certain Indian carriers. All this augurs well for Indian passengers. Increased competition would lead to better offerings, greater efficiency, cheaper airfares and more power to the passenger”, he said.

Industry watchers feel that the reversal in FDI norms is likely to see foreign airlines looking to set up small airlines here rather than acquire existing airlines. ``At the moment, Spicejet and Go Air seem to be the most probable candidates that could see some interest from foreign airlines. This is because both are promoted by those who are not hardcore airline people. With unrealistic valuation and mounting losses most existing airlines are unlikely to be a choice for foreign airline,” a senior airline executive said.

(This article was published on September 14, 2012)
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