Foreign direct investment (FDI) in aviation has raised hopes of further reforms in the aviation sector, according to analysts.

Most prominent would be rationalisation of the duty structure in aviation turbine fuel (ATF), a report by Edelweiss said. High ATF price has been one of the major contributors to losses for most of the airline companies.

Analysts feel that the move is a sentiment booster for the whole aviation sector. “It gives a signal that the government is serious about aviation reforms; it gives the cash-strapped domestic carriers an additional source of funding. However, in the near term, it doesn’t change the operating environment or the financial stress of industry,” a recent report by Bank of America Merrill Lynch said.

Also, in longer term when operating environment eases, this would lower the entry barrier into the sector thus increasing the risk of competition, the report added.

Of the current five private domestic carriers, three can be a potential target for the foreign carriers - SpiceJet, GoAir and Kingfisher.

“Indigo and Jet Airways already have more than 49 per cent foreign stake making them ineligible for any further foreign investments. Among the eligible carriers, SpiceJet is the best placed to attract FDI on account of wider network, better market share and low debt,” the report added.

Aviation experts feel that the airline’s focus on operational efficiency will help it to continue its growth. It also gained market share from 13.6 per cent to 18.6 per cent in a year to become the third largest player in the domestic market in the first quarter of the current fiscal.

“With strong balance sheet and low leverage in sector as compared to its competitors, which are facing problem of high debt, SpiceJet is in better place to expand and attract investment,” a report by Antique Stock Broking said. While the debt-ridden Kingfisher Airlines is banking on attracting a foreign airline to pump in money, industry experts feel that the airline may struggle to attract FDI in the near term.

“This is on account of its large outstanding debt ($ 1.8 billion) and vendor payments, small market share, large proportion of impaired fleet. Additionally, according to reports, a large part of its fleet has already been repossessed by the lessors,” the report by Bank of America Merrill Lynch added.

Even though India is one of the fastest growing aviation markets, many foreign carriers such as British Airways and Lufthansa have publicly denied any interest in the Indian carriers.

Analysts feel that this is on account of high taxes and levies, tough regulatory environment and Government support to Air India.

However, some of the Gulf-based carriers are likely to take stake in Indian carriers in order to get the additional traffic from India to their hubs in West Asia.

nivedita.ganguly@thehindu.co.in

(This article was published on September 18, 2012)
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