Game-changer for Indian aviation?

The easing of foreign investment last year has been a catalyst for long-term reforms in the Indian aviation ‘sky’scape. Previously foreign investors, but not airlines, had been allowed to hold up to a 49 per cent stake in local airlines. The willingness of foreign air carriers to do business in India is a harbinger of interesting times to come.

Recently we witnessed the creation of the Tata-AirAsia joint venture (JV), which is likely to create a highly competitive domestic low-cost carrier (LCC) player. With the Tata-Singapore Airelins (SIA) deal, announced last week, the game gets even bigger!

What is the value generated by this deal?

The exit of Kingfisher Airlines created a void in the full-service space despite fast growth of the LCC segment in India.

The country now has only two full-service domestic airlines — national carrier Air India and Jet Airways. The new JV may be in a position to establish a competitive, hybrid business model that offers a high quality product with a lower cost base.

Overseas potential

The greatest potential may be in international routes as traffic in and out of India, unlike domestic traffic, has grown every year in the past decade, even during the economic slowdown.

Our assessment is that SIA is not coming just for the domestic routes. Its biggest strength lies in inter-continental long-haul flights.

Nearly 70 per cent of global traffic from India is west-bound — to the Middle East, Africa, European Unions and the Americas.

Once SIA comes in, they can compete on those routes on the Indian quota of the bilateral agreements. It can also operate direct flights to the Far East and Australia from India.

This deal would help position Delhi as a global hub for long-haul flights. Since the infamous 5/20 rule requires every Indian airline to operate in the domestic sector for five years before it can fly international routes; this opportunity is still some time away, unless the Government decides to do away with this arbitrary and unilateral restriction.

As Tony Fernandes of AirAsia said recently, he can have a one aircraft fleet in Malaysia and fly into India tomorrow. Such myopic and bizarre rules have actually worked against Indian carriers than strengthening them.

The Tata group enjoys high brand equity. J.R.D. Tata was the founding father of Indian aviation and had set up what is today known as Air India. Their tie-up with a top global airline like SIA makes it a premium combination that could pose a significant challenge to the Gulf carriers that dominate the bulk of westward international routes.

Many feel that this deal may create a conflict of interest with the Tata-AirAsia JV.

As long as there is no violation of foreign domestic investment norms and national security, the future of the two JVs are best left to the companies involved and market forces.

This alliance may also open up the joint venture’s entry into Star Alliance, which may invite some resistance from other Indian legacy carriers. The Indian passengers and inbound foreign tourists get one more airline to choose from. The resulting competition will improve services and lower prices.

Rules need change

Hence, there are plenty of synergies to be tapped into from this JV, provided the unilateral 5/20 rule is abolished quickly and they are able to commence their international operations as soon as possible.

The Indian passenger lost out on the Tata- SIA combine in 1997 thanks to politics; Tatas had partnered with Singapore Airlines to start a domestic airline but the Government had rejected their proposal.

They were willing to participate in the proposed disinvestment of Air India and Indian Airlines, but stronger forces scuttled the same. The wheel has come full circle now but at the cost of wasting 16 years in the process. Indian aviation industry would have been totally different if the Tata-SIA deal had gone through then.

The current times are definitely interesting but also highly challenging for the Indian aviation industry. Any new entrant has to be prepared for few years of losses and a tough domestic market that is dominated by LCCs, which hold 65 per cent of the market. Indian carriers have already lost about $1.6 billion in the financial year ended March 31, 2013.

The Tata-SIA deal reaffirms India’s reputation as a lucrative aviation market in the long-run, despite the short-term man-made problems, such as excessive taxation and cumbersome procedures. Many progressive state Governments are recognising the multiplier benefits of aviation.

What they may forego as irrational tax on an industrial raw material like ATF and support services like maintenance, repair and overhaul (MRO) will came back to them multi-fold in terms of growth in travel, trade and tourism. It’s a known fact that for every job created, nearly 50-55 per cent comes back to the Government treasury as income tax and consumption taxes (vat, service tax, excise and customs duties).

The FDI reform and widening of bilateral quotas have opened doors for globalisation of Indian aviation. Rationalisation of taxes and simplification of Government procedures will take India right to the top.

The choice is ours!

(The author is Partner and Head (aerospace and defence) at global consultancy KPMG. He was supported by Namrata Saigal, Consultant at KPMG. Views are personal.)

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