Mumbai / New Delhi: The shares of three listed commercial airlines took off in a flat market on hopes that the current blanket ban on investment by foreign airlines in Indian carriers would be lifted soon.
Indian airlines have flown into an air pocket as a fall in passenger traffic and, till recently, high fuel prices led to losses and a cash crunch. Most need infusions of fresh capital. Current policy allows them to sell upto 49% of their equity to financial investors, including private equity funds. Foreign airlines are not allowed to buy stakes in domestic airlines. But the global credit crisis has put private equity funds in a tight spot and reduced the probability of them investing in Indian airlines.
Civil aviation minister Praful Patel hinted last week that the government may allow foreign airlines to buy into their Indian peers. There was a “reasonable case” now to allow foreign airline investment into Indian carriers, though restricted to between “20 and 25%”. A civil aviation ministry official who asked not to be named said the surge in shares could be because of speculation that the Foreign Investment Promotion Board, or FIPB, has circulated a note to concerned ministries seeking 49% investment by foreign airlines. It could not be confirmed if such a note has already been sent.
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Jet Airways (India) Ltd, the country’s largest carrier by passenger load, rose 19.58% to close at Rs87.80 on Monday. The second largest airline, Kingfisher Airlines Ltd, was up 7.68% at Rs37.15, while shares of Delhi-based low-fare carrier SpiceJet Ltd rose 12.96% to close at Rs15.25.
The airline industry is divided on the issue. Kingfisher Airlines’ promoter Vijay Mallya has been supporting investment of up to 25% by foreign airlines. However, Jet’s CEO Wolfgang Prock-Schauer has said that his airline is not in favour of it. Kapil Kaul, India CEO of the Centre for Asia Pacific Aviation, or Capa, said the swing was “pure speculation” but that there was no guarantee “at the moment” that such a proposal would be accepted.
A Mumbai-based aviation analyst, who did not want to be identified, said lower jet fuel costs, better-than-expected quarterly results from Jet Airways, and government’s stance on foreign airlines’ investment also helped lift investor spirits.
“Correction in crude oil prices, which now seem to have stabilized in the range of $35-40 per barrel, has solved one part of the problem for the domestic airline companies. Further, where outlook on air traffic growth continues to be bleak, airline companies have been continuously rationalizing their capacities by phasing out or sub-leasing out aircraft. This, along with fare cuts, should improve load factors (currently closer to breakeven) for the coming fiscal,” wrote Mihir M. Shah, an analyst with Mumbai-based brokerage Prabhudas Lilladher Pvt. Ltd, in a 5 January report.
In a 12 January report, Kaul wrote that Capa expects demand in the first half of 2009-10 to remain weak, but added that if oil prices stayed below $50 a barrel, airline losses would significantly shrink.
Graphics by Sandeep Bhatnagar / Mint