Will foreign airlines fly into India?

The move to allow foreign-owned airlines in India has opened up the country’s aviation market to multiple possibilities, but has also thrown up a new set of challenges.

In theory, the relaxation makes it possible for a low-cost airline giant like Ryanair to start an Indian subsidiary together with a foreign fund, a Qatar Airways to invest in an existing Indian carrier or a British Airways to expand commercial cooperation with GoAir.

With just 80 million Indians taking to the air for domestic travel, compared with 8 billion who use the Indian Railways every year, the opportunities for air transport are immense. India is the fastest growing aviation market in the world.

“The airlines industry which is in need for funding will find the new limit of 100% useful, which will also help to bring a turnaround in their operations as well as enable expansion plans,” Madan Sabnavis, chief economist, Credit Analysis & Research Ltd, said in a 21 June report.

So far, foreign direct investment (FDI) inflows have been low in the aviation sector. Since 2000, there has been an FDI inflow of $288.63 billion in India—in sectors such as trading, pharmaceuticals, broadcasting, air transport, retail and defence. Of this, only $931 million has been in air transport—or just 0.32% of the total.

Until 2012, the government allowed no foreign airline ownership of Indian airlines. This changed when Vijay Mallya’s Kingfisher Airlines Ltd, which lobbied the most to allow such a relaxation, shut down in 2012.

Ironically, weeks after the airline was grounded, the government cleared the policy to allow 49% foreign airline ownership in local carriers. Soon after, Abu Dhabi-based Etihad Airways bought a 24% stake in Naresh Goyal’s Jet Airways (India) Ltd.

This was followed by the Tatas launching two airlines—a full-service airline with Singapore Airlines called Vistara and a low-cost airline with Malaysia’s AirAsia, named AirAsia India.

The new policy made it possible for the remaining 51% stake also to be owned by a foreign fund, although airlines are still barred. In other words, while foreign entities can fully own a local airline, the stake held by foreign airlines cannot be more than 51%.

India is now part of a very small club of countries that allow 100% FDI in aviation. Only a handful of countries such as Australia and New Zealand allow similar ownership.

There are, however, several gaps that need to be filled before foreign investment can flow in.

An international airline investor who asked not to be identified said the move by India comes at an interesting time.

United Kingdom’s decision to leave the European Union and a lacklustre EU economy have put pressure on European airlines. While the likes of International Airlines Group and Lufthansa would probably like to align with an Indian carrier, they have more pressing issues to address, the investor said.

Across the Atlantic, US carriers are focused on the domestic market, trying to figure out what to do on transatlantic routes after Brexit, managing anaemic traffic to Latin America, and sorting out competition for Asia with Chinese carriers.

For them, Indian skies are only of academic interest at the moment.

That leaves Singapore Airlines (which is already an investor in Vistara), Cathay Pacific and Qantas. Of this trio, Singapore Airlines has been most interested in India, but investment of 49% in Vistara together with Tata Sons in 2012 may well represent the extent of its plans. Qantas has had its own share of challenges like fending off tough competition from Gulf airlines and Cathay Pacific seems focused on China, the investor added.

Gulf carriers would be the logical investors in India. But the price of oil and the marginal performance of several of their investments, particularly Alitalia and Air Berlin, which are going through a painful restructuring process, will force them to move with caution, he said.

“This will take some time to sort out,” the investor said.

“As for me... I would be interested (and for that) the ability to provide strong oversight through equity ownership would be very important. Involvement in decisions like fleet, network, product etc., are important to an experienced airline investor.”

A top domestic airline executive too was unsure of the new aviation policy.

“Everyone would like to wait and see what is the fine print,” this executive said, asking not to be named. “It will take over a year or so before there is some movement.”

Current rules are still complex and mandate that the substantial ownership and effective control (SOEC) of any Indian airline remains with Indian nationals.

Days after the announcement to relax the FDI norms, the civil aviation ministry said that it will change the SOEC. However, the arm of the government that deals with FDI for all sectors, the department of industrial policy and promotion (DIPP), issued a notification dated 24 June, which said that no other change is being made for effective control in the case of airlines.

This has baffled the aviation ministry, which is now taking up the matter with the DIPP.

“The aviation ministry was clueless. They were not aware of what was to come in case of FDI. With all other sectors (like retail, defence), this also was cleared without consideration of the long-term implications and international rules and regulations,” said a top bureaucrat who asked not to be named.

There was another teething problem. The civil aviation ministry now realizes that it will be difficult to give international rights to airlines that are not controlled by Indians—if at all it changes the SOEC.

That’s because the International Civil Aviation Organisation (ICAO), which controls such global agreements—and India is signatory to it—allows international flying rights only to Indian carriers that are controlled by Indians. The current air service agreements of India with almost all other countries, except some such as Australia, New Zealand, mandate the same.

Civil aviation secretary Rajiv Nayan Choubey said the matter is being discussed with other government departments.

However, Choubey remains confident that West Asian airlines will invest in the country over the coming days.

“After all, the entire Gulf aviation sector... is built on the back of India’s strength. If that’s the case, why will they not come into India itself?” Choubey said.

“If someone else is willing to put money in their country based on India’s business, then I can say it is even better, let them come, I open the doors of FDI, let them come and do business in India,” he added.

Meanwhile, investors in airports are also looking for clarity before they can encash their investments or bid for new ones.

A senior official with a private sector airport operator said that old rules already allowed 74% foreign ownership in existing Indian airports.

And even though this has been extended to 100% foreign ownership now, it clashes with the regulations announced in the new civil aviation policy.

Most existing airports are owned and run by state-owned Airports Authority of India (AAI). The policy states that AAI will hold a 26% stake in such airports.

“So, where is the question of 100%? Unless the government decides that they are okay with a reduced (AAI) stake, which is unlikely,” he said.

India’s economy is expected to continue growing for many decades and therefore, this double-digit growth in aviation is likely to continue with only minor cyclical dips, inviting and sustaining the interest of several players.

The key point to analyse in the policy, therefore, is whether it will be a game-changer and help growth or obstruct it.

The policy has missed out on several critical aspects, the most important being whether this growth of 300-400 million passengers will be managed safely, and how this will be done.

India has been downgraded—to be later restored—in air safety audits in the past few decades by both the US regulator, Federal Aviation Authority (FAA), and the ICAO.

“How are you going to maintain the orderliness and safety of operations? How are you going to establish an independent safety accident investigation board? How will you strengthen DGCA? All this is missing,” said another top bureaucrat who declined to be named. “The biggest fear I have is that air safety will go unchecked,” he added.

DGCA is the directorate general of civil aviation.

The government has said that it plans to establish an all new Civil Aviation Authority (CAA) to look at the fast-growing sector.

However, during the monsoon session of Parliament, minister of state for civil aviation Jayant Sinha hinted otherwise. “The Civil Aviation Authority is not required at present,” he replied to a question on 21 July seeking to know whether the government proposes to establish it.

The crash of Air India Express flight IX-812 in Mangalore in 2010, which killed more than 158 people, was blamed on airline growth that was permitted without proper infrastructure in place, under a short-staffed DGCA whose main role is to audit for safety and pilot fatigue, among other key issues.

The new policy also has no mention of reduced jet fuel taxes—the airlines’ key demand.

Most airlines have been making losses over the past decade except in the last fiscal when oil prices dipped to a record low of around $40 from $140 per barrel in 2008. If oil prices go up, airlines will return to losses or lower profits.

Then, there is cross-subsidy. The new policy says it will subsidize regional flights by taxing flights that connect metros.

“Why should you and me pay for a rich businessman flying Hyderabad-Vijayawada?” the second bureaucrat asked, adding that he expects airlines to go to court over this issue.

The aviation sector was deregulated in 1993 and the government’s role was to allow healthy competition and check arbitrary practices.

But before the new policy was announced, the aviation ministry intervened and announced how much airlines should charge for excess baggage.

The ministry is upset with the Federation of Indian Airlines which includes SpiceJet, IndiGo, GoAir and Jet Airways, for dragging it to court over the new reduced baggage charges.

The ministry is of the view that the excess baggage rules are for the benefit of the passengers and that courts are unlikely to rule against them.

“When you have the passenger in mind, you need not be afraid. Did they get a stay? They did not,” a senior civil aviation ministry official said. “They will bloody their nose in this.”

From a passenger’s perspective, measures like reduced baggage charges and stricter norms for airfare cancellations and refunds have come as a relief. The measures that were ignored by previous governments have been welcomed by fliers on social media and consumer associations like the Air Passengers Association of India.

However, another top executive with a private airline said carriers know they will not get a stay from the courts in such matters, but they still wanted to convey their frustration with the ministry over this matter.

The second bureaucrat quoted above said that if the ministry really wants to help passengers, it should establish an independent Airline Economic Regulatory Board on the lines of the Airport Economic Regulatory Board, which looks after airports but has a light regulation with an ombudsman-like approach rather than going back to regulation.

He added that the air safety regulator DGCA has not been able to even define predatory pricing and excessive pricing.

At the moment, airlines simply submit the lowest and highest fares they will charge every month to the DGCA and airlines upload them on their websites.

“The entire air transport worldwide is based on airlines. You have to think through before taking policy decisions,” the bureaucrat said. “All these steps are knee-jerk. And in the process, the ministry has diluted its powers. Now, the cabinet secretary will decide how many international flights India needs instead of the aviation ministry.”

This is the last of a three-part series. Read the first part, ‘The next wave in regional aviation’, here and the second part, ‘Will new aviation policy change the way we fly?’ here.