Mumbai: International airlines are not willing to buy stakes in Indian carriers at this point, even as the ministry of civil aviation is considering a proposal to permit foreign carriers to invest in local airlines.
While the ministry is considering a proposal to allow up to 49% investment by foreign carriers in Indian aviation firms, it may eventually limit this to 26%. Current foreign investment rules allow foreign companies to take up to a 49% stake in Indian airlines, but specifically prohibit a foreign airline from doing so. Several Indian airlines have been asking the government to relax the rule.
A sharp fall in passenger demand and high jet fuel prices are estimated to lead to a combined loss of $2 billion (Rs9,460 crore) for Indian carriers in 2008-09, and all of them are desperately looking at raising capital to stay afloat.
Wary: Willie Walsh, chief executive of British Airways, says the airline might invest in India if the government offers it a majority stake. Goh Seng Chong / Bloomberg
Mint spoke to at least two dozen global carriers on the sidelines of the 65th annual general meeting of the International Air Transport Association (Iata) in Kuala Lumpur earlier this week, and none of them were willing to invest in Indian carriers as they are busy in putting their own houses in order.
Iata has doubled its estimate of losses that global airlines are expected to post in 2009 to $9 billion.
Richard Branson’s Virgin Atlantic Airways Ltd, which was interested in the Indian market till recently, isn’t enthused by the Indian government’s plans. Its chief executive Steve Ridgway said his airline was once looking at investing in Indian carriers, but not any more. “We are not looking at investing at this point of time. This is the worst time to do that. Forget about making profits, we are looking at how to conserve cash.”
According to rival carrier American Airlines Inc.’s senior vice-president (planning) Henry C. Joyner, this is the most difficult environment in terms of operating capital. “It’s better to stay away from investing now.”
Representatives of many European and US carriers said they are not interested in investing in Indian carriers, though the country remains an important market for them.
Still, while many foreign airlines cannot afford to invest in India right now, there are those that might invest in the country if they are allowed a majority stake in an airline.
British Airways Plc. is one such. “India is the second important market after transatlantic (routes; between the Americas and Europe). But that doesn’t mean we should pick up a minority investment in an Indian carrier. There is a big difference between getting a strategic position of Indian market and picking up a minority stake,” British Airways chief executive (CEO) Willie Walsh said.
Last year, British Airways held talks with India’s low-fare carrier GoAir India Pvt. Ltd, that runs GoAir. “We are in discussion with (a) number of Indian airlines. But that doesn’t mean we want to invest in those carriers,” Walsh added.
Hong Kong-based Cathay Pacific Airways Ltd’s CEO, Antony Tyler, too, does not believe in taking a minority interest in Indian carriers. “We don’t want (a situation where) somebody is managing our cash and we have no influence in the management decisions of that airline.”
Singapore Airlines has also echoed the same sentiment. Along with the Tata group, it had tried to bid for a 40% stake in Air India in 2001.
Chew Choon Seng, CEO of Singapore Airlines, said that in principle, he is interested in investing in the Indian aviation sector, but “it cannot be a situation where there is only economic exposure, but no real influence or participation in management and decision making”.
West Asian carriers, less affected by the economic slowdown, are also not enthusiastic about Indian conditions.
Tim Clark, president of Emirates, said India should have a long-term policy on investments by foreign carriers. “This cannot be changed frequently, based on the change in the political landscape.”
Gulf Air’s CEO, Bjorn Naf, said his airline wouldn’t be interested in this “in 2009”.
A senior Mumbai-based aviation analyst, who tracks airline stocks, said the basic idea behind foreign carriers’ presence in the country is to take passengers from various Indian cities to their hubs and beyond. Foreign airlines, he added, do not need to invest in Indian carriers for that can be done through code-sharing agreements.
“Investment makes a lot of sense when a foreign carrier wants to expand operations in India or the government opens up the civil aviation sector fully,” he said, asking not to be identified.
If the foreign carriers decide to stay away even after the ministry partially opens the sector, many Indian aviation firms will be disappointed as they are looking to get some reprieve from international carriers, with local financial institutions not willing to give them money.
Vijay Mallya, chairman of Kingfisher Airlines Ltd, wants foreign investment, but Jet Airways (India) Ltd’s founder chairman, Naresh Goyal, is against it.
Mallya, in a letter to member airlines of lobby group Federation of Indian Airlines (FIA) early this year, said it is essential to have access to strategic foreign capital while investment sentiments at large towards aviation are dismal and banks are reluctant to lend.
Jet Airways’ executive director Saroj K. Datta countered Mallya’s argument in a mail to FIA, saying the inherent problems such as excess capacity, irrational pricing, high input costs and inefficient infrastructure are not going to be corrected by permitting the foreign airlines to invest in Indian carriers.
“The current reduced valuation of the Indian carriers will also mean that the volume of funds that the foreign airlines will be able to bring in will be pitifully small and will serve virtually no purpose except to dilute control. The principal objective of the Indian carriers, if they want to participate in the equity of Indian carriers, is to be able to more easily channelize Indian origin traffic to support their own operations to and from India,” Datta wrote. He echoed the same sentiments in an interview with Mint this week.
Another senior executive with a private airline, who asked not to be identified, said there is no rationale in diluting equity when airline stocks are at record lows. The market capitalization of Jet Airways is now around Rs2,600 crore, and that of Kingfisher Airlines at Rs1,700 crore.
“Jet Airways and Kingfisher Airlines have raised Rs2,000 crore each from banks. The amount vanished quickly because of (their) high cost structure. Even 49% dilution to foreign carriers is not a permanent solution at all,” added this executive.