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The much talked about foreign direct investment by an airline into an Indian carrier has finally been approved by the Aviation Ministry. Hooray! But not surprisingly, no one is opening the bubbly – neither the foreign airlines, nor the Indian carriers.
Firstly, it is only 26 per cent stake that is allowed. The Aviation Ministry might as well have not allowed it at all. The airline industry is littered with cases of investments without management control (i.e. less than 51 per cent) dying along the way.
MANAGEMENT CONTROL
The world's premier airline, Singapore Airlines, has had many such examples. It is even setting up a wholly-owned low cost subsidiary, Scoot, as the management is not happy holding a minority stake in Tiger Airways, another low cost carrier.
The airline industry, like many other industries, needs absolute management control to override the emotions and the egos associated with the industry. For examples of emotions and ego, look no further than the Jet takeover of Sahara, the Kingfisher takeover of Deccan and the furore over the Air India's purchase of aircraft.
Secondly, and more importantly, the Indian Airline market capitalisation is at an all time low.
There is no light at the end of the tunnel in the clouds, with the industry seemingly going into free fall year after year. Airlines in India have run into thousands of crores of debt for working capital, and the interest on these loans has hit the airlines hard.
If a cash rich and an overtly optimistic airline has enough money to spare and wants to put it in acquiring a 26 per cent stake in either Kingfisher or Spicejet (the other carriers are not interested because they are either profitable or they don't want to give up any control), it will be a short term Band-Aid fix for the carrier concerned.
Money will flow in, but will go into a sink and get drained out in six months. What makes it worse is that the market value of all the listed carriers is close to 75 per cent lower than a year earlier, so the amount of capital injection won't be too high either.
NO PROFITS
Thirdly, the Indian carriers have collectively never made a profit from 2006, the peak of the Air Deccan pricing harakiri. Air Deccan got the Indian consumer used to a ridiculously low fare and the industry was never able to raise fares into profitability after that.
The Indian carriers contribute to about a third of the worldwide airline losses even though they carry around 2 per cent of the world airline traffic. Indian carriers have also reported losses in the rosiest years of the airline industry – pre-Lehmann 2007 and 2008 being the prime examples.
Airlines are chasing market share and seat factors and are pricing well below cost, and this doesn't seem to be changing in the near future with record orders from Indigo and Spicejet, and Jet Airways also looking at aircraft orders or leases to stay ahead of the pack.
ARCHAIC INFRASTRUCTURE
Finally, the aviation infrastructure and the setup in India will prevent any foreign carrier from thinking about this market.
Airports may have been modernised, but air traffic management systems are still archaic and lead to circling and congestion around airports. Pilots are listed as “Workmen” under the Workmens' Act, which gives them the ability to go on strike.
Given that they are a short commodity in India, this gives them enough negotiating power and they fly an average of 800 hours a month compared to the DGCA recommended and the international average of 1,000 hours a month.
The Government acts as Big Brother when it comes to regulating airfares. It also dictates that low cost carriers should offer water free of charge, and not charge for seat selection or other ancillary revenue, which is the norm for low cost carriers worldwide.
The FDI in airlines may just be an eyewash by the Government that has been pushed onto the backfoot by FDI in retail and other policy paralysis. Nobody is interested other than Mallya, who won't find any takers anyway.
(The author is a Bangalore-based freelance aviation consultant and writer.)
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