If the Manmohan Singh Cabinet approves the proposal to allow foreign airlines to pick up 49 per cent stake in domestic airlines, it will perhaps be the second biggest game-changer after the Government opened up the civil aviation sector in the early nineties. It wasn't a mere 24 per cent or even 26 per cent stake — the Civil Aviation Ministry gave its approval to allow a foreign airline to pick up nearly half of the total stake in a domestic carrier.

While announcing the decision, the new Civil Aviation Minister, Mr Ajit Singh, was silent on whether the move comes with riders, whichthe retail FDI decision (which has now been shelved) did have. Even if the approval does come with riders, the landmark move throws up several uncomfortable questions.

SHORT-TERM MOVE

Though there isn't much difference between a 26 per cent stake and a 49 per cent stake when it comes to approving or stalling key board resolutions, it needs to be debated whether the Civil Aviation Ministry acted in haste.

For someone who took over the Ministry merely a few days before he signalled his approval, it seems clear that the decision was made much before he was sworn in. Mr Ajit Singh's press conference later didn't reveal much, except the fact that his Ministry wanted to save some bleeding airlines from closing down. An obvious reason one could infer was that the government wasn't exactly keen to face the wrath of the Opposition if the state-owned banks, notably, State Bank of India, a principal lender to the loss-making Kingfisher Airlines, reports a loss for the next quarter.

Hence, the urgent need to get someone from outside to pump in money. Going by the same logic, the government would have to open up several other sectors if the private enterprises in that sector start making losses. Clearly, someone very important in the government is thinking short-term. The argument that foreign airlines will bring in best practices, better technology and perhaps better services, doesn't hold much water because most of our private airlines, including Vijay Mallya-owned Kingfisher Airlines, offer excellent, if not first-class, services.

Kingfisher Airlines still commands tremendous equity among its customers because of its praiseworthy service. Jet Airways and a few others have hired the best globally to run their airlines, as well as have some of the latest aircraft to compete fair and square in their business.

So, it boils down to just one reason: cash. Foreign airlines will now be looked upon as Santa Claus, or even as the white knight to rescue our domestic carriers with more money than ever before. If money was the only reason to get airlines out of the current mess they are in, then why is it Kingfisher Airlines, with dollops of cash from state-owned banks, continues to bleed more?

To understand the issues pulling down the sector, one needs to go back to the man, who, for reasons best known to him, is championing the need for foreign airlines to part-own domestic carriers. In several of his interviews, Mr Mallya has made it clear that the sector is in a mess mainly because of high taxes, and norms and restrictions that are in place without any logic and several of them dated as well.

TAX ISSUES

Going by that reasoning, why would any foreign airline venture into India knowing full well that except for the FDI, everything else remains the same? A recent press report states that some of the foreign carriers now want to stop flying to Delhi because of “unreasonably high” landing charges and expensive fuel which are, in fact, higher than some of the other Asian countries. The Planning Commission in one of its reports has said that the industry faces “many taxes”, including those on aircraft leases, airport charges, aviation turbine fuel and a few others, and that these charges are either not present or are much lower in mature markets.

Obviously, the answer to the ills of the sector lies in how the government will work towards bringing down these heavy taxes. Or, how tier-two-and-three cities can have better airports and better infrastructure around them. Even the entry of foreign airlines into the sector cannot do much, if the infrastructure outside the 10-12 major cities remains poor.

After taking these into consideration and acting upon them, if the government still believes that it is necessary to allow foreign airlines to pick up stake in their domestic carriers, it can open up a small window, may be a 24 per cent stake, something similar to what has been done in some of the mature markets. If the foreign airlines really believe that India has a huge potential, and have long-term plans, they can do so by taking baby steps in the Indian airline sector.

CALL FOR CAUTION

Let us not forget the fact that many developed nations like the US don't favour huge presence of foreign airlines in their airline sector.

The Government should also either provide more incentives or allow foreign airlines' stake in Air India as well, so that the national carrier has a level playing field with the private airlines. Else, Air India might end up becoming the biggest casualty of the liberalised policy.

Opening up the sector to the foreign airlines can turn out to be counter-productive if infrastructure building isn't speeded up.

After all, there is a limit to the amount of money a foreign airline can invest because it, too, is answerable to its shareholders.

What we certainly don't need is a situation where foreign airlines start dumping their Indian partners once they realise, to their frustration, that the country's growth potential continues to remain only on paper. Nothing more — with infrastructure not keeping pace.

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