New Delhi: The government has, in principle, decided to allow investment by foreign carriers in the domestic aviation sector, a move that could potentially throw a lifeline to the cash-strapped Kingfisher Airlines Ltd.

According to a person familiar with the developments who did not want to be identified, the preliminary discussions between the civil aviation ministry, the finance ministry and the Prime Minister’s Office (PMO) have been concluded, setting the stage for the matter to be placed before the Union cabinet in the next four weeks to get its nod to allow 24% investment by foreign airlines in Indian carriers.

India allows foreign investment of up to 49% in Indian carriers, but foreign airlines are not allowed to invest directly or indirectly in domestic carriers.

Photo: Bloomberg

Shares of Kingfisher Airlines slumped 18% in intraday trade on Friday to a lifetime low as the airline continued to cancel flights, and newspapers reported that leasing companies were planning to take back planes and pilots were leaving.

Mint had reported on 8 November that the airline was proposing to cancel flights, including on key metro routes.

Vijay Mallya, chairman of Kingfisher Airlines, said, “We have not asked for any bailout or restructuring. We have only asked for additional working capital and guarantee facilities in view of a 50% increase in ATF and depreciation of the rupee, which increases dollar expenses."

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Injection of fresh equity as well as financial relief would give considerable fiscal room to Kingfisher Airlines. It has accumulated Rs7,057.08 crore in debt and has grounded two dozen aircraft this week following a severe cash-crunch.

“The UPA (United Progressive Alliance) government wants to increase foreign investment in the country. The airlines sector is one key sector that can get it," the first person added.

The civil aviation ministry has already written to the department of industrial policy and promotion (DIPP), giving its nod for an increase in foreign investment, but capping it at 24%; DIPP had favoured a 26% cap, which could allow the foreign investor to claim a seat on the company’s board.

“If the approval (for the foreign holding in domestic airlines) does not come soon, many domestic carriers, including Kingfisher, will be in deep trouble," the first person said.

Mallya has met both the finance minister and the civil aviation minister in the past few days to discuss the present condition of Kingfisher Airlines.

The Kingfisher chairman did not comment on his meetings with Mukherjee, but said: “I have been a strong advocate of allowing FDI (foreign direct investment) by airlines in this capital-intensive industry and consistent with Government of India policy of encouraging FDI across many sectors...the decision is left to the government."

A Jet Airways (India) Ltd official said allowing foreign airlines to invest is not the solution to the industry’s problems. Instead, the focus should be on addressing issues such as the high-cost environment, taxes and low fares, the official added, asking not to be identified.

Private airlines in India have lost Rs3,500 crore in the six months ended September, more than the Rs2,900 crore they lost in all of 2010-11, according to lobby group Federation of Indian Airlines (FIA).

IndiGo was the only carrier that registered a profit in 2010-11. Its stand on FDI remains unclear, but SpiceJet Ltd has made its views clear. Earlier this week, SpiceJet chief executive Neil Mills wrote a letter, reviewed by Mint, to the aviation ministry backing the proposal to allow 24% FDI. Mills did not reply to phone calls and text messages seeking comment.

Top airline executives, led by Jet Airways chairman Naresh Goyal, Kingfisher Airlines’ chief executive Sanjay Aggarwal, IndiGo president Aditya Ghosh, SpiceJet’s Mills and GoAir chief executive Giorgio De Roni also met aviation minister Ravi last month to discuss the industry’s problems and seek the government’s help, Mint reported on 18 October.

FIA general secretary Anil Baijal said the lobby group has not written a letter seeking foreign airline investment because there is a “difference of opinion among the member carriers".

He added: “We have made representation at the highest level of the government to reduce state taxation on fuel and provide some relief to carriers. One or two airlines going down will not be good for anyone".

Meanwhile, the main opposition Bharatiya Janata Party (BJP) said the government should not give concessions to private airlines. “As a finance person, I cannot support such a concession to a private sector entity. If Kingfisher Airlines is unable to function in a financially viable manner, they should find their own way out...there is no case for a government bailout," said Yashwant Sinha, former Union finance minister and senior BJP leader.

Ruhi Tewari and Reuters contributed to this story.

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