The falling rupee is wreaking havoc in the aviation industry, as nearly 70 per cent of an airline’s operating cost is linked to the dollar. All Indian carriers, save one, are reeling under loss. Foreign direct investment (FDI) in airlines has, therefore, become critical. The entry of foreign carriers in the domestic sector could lead to competitiveness, innovative products, price wars and consolidation. The biggest beneficiary would be the passengers and, in turn, the country.

The Jet-Etihad deal is a lifeline for Jet Airways, which is buffeted by long-term debt, current liabilities and losses. If Jet, with 22 per cent market share, goes under, airfares would shoot up — as they did in the case of Kingfisher. This would put air travel completely out of the reach of the aam aadmi . The resulting mayhem would hurt everyone — airlines, airports, employees, banks, vendors and creditors. The fall in trade, commerce and tourism would ultimately lead to a fall in employment generation and Government revenue.

The arrival of Tata-AirAsia is a positive development. AirAsia’s focus on efficiency and affordable pricing has turned it into a leading player in the highly competitive ASEAN market. Its point-to-point operating model is expected to enhance regional connectivity and ensure quick aircraft turnarounds.

Much has been said about the way the bilateral quota for Abu Dhabi was quadrupled overnight. This has to be seen in the context of overall trade and investment promotion. Whenever companies like Toyota, Nokia or Hyundai set up shop in India, the Central and State governments do provide them incentives including land, connectivity, material resources, and tax breaks.

The only benefit airlines seek is an enhanced bilateral seat quota, which steps up seat capacity and not cash. It is the passengers who will decide whether they want to fly to New York via Abu Dhabi or Dubai, or fly direct on Air India. Having said that, the Government should bring in a transparent policy that links enhancement of seat quota to FDI.

A lot has also been said about the loss of traffic for hub airports such as Delhi and Mumbai, by allowing more landing points for foreign carriers. Should we force people in Vellore, Visakhapatnam, Vadodara or Varanasi to fly to large airports in order to fly abroad? International connectivity in tier 2–3 cities gives a fillip to local trade, tourism and employment creation, and helps broad-base economic development.

Sixty-seven years of protectionism have not helped Indian aviation. Our annual foreign tourist arrival is a dismal six million as compared to Thailand (19 million), Malaysia (25 million), and China (58 million).

The arrival of global carriers will enhance Air India’s efficiency as well. The company’s current management has diligently focused on on-time performance, route planning, yield management, and cost-competitiveness. The results are there to see — Air India’s brand new Dreamliners will provide cost-efficient long-haul direct flights to global destinations.

However, Air India’s structural problems are too many and too deep. Privatisation could be one option. Private bidders for AI may be mandated to have at least one world-class foreign airline as a strategic partner in the consortium.

KPMG in India had predicted three equity tie-ups and two start-up airlines when the FDI reform was announced in September 2012. We appear to be on track. Transparent rules for FDI and seat quotas are needed to avoid unnecessary controversies.

Namrata Saigal, Consultant contributed to this article.

The author is Partner and Head — Aerospace and Defence at KPMG in India

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