Allowing foreign carriers to pick up to 49% stake in India’s airlines looks good on paper. But one policy change, born out of financial desperation, won’t save the sector
Ten months back, when speculations were rife that foreign carriers would be given the nod to invest in the ailing Indian aviation sector, B&E had voiced its opinion through an article titled, ‘The agony & hope for India’s domestic airlines: call it FDI’. Our argument was: Little logic supported the cause of foreign carriers investing in India. In mid-September 2012, policymakers in India decided in favour of allowing foreign carriers to buy up to 49% stake in domestic carriers – precisely what the Department of Industrial Policy and Promotion (DIPP) had been recommending for over a year. The move won many-a-cheer from camps desperate for non-Rupee pay orders. Irrespective of whatever hopefuls imagine will be the outcome of this policy change, our argument stays. FDI rule change is necessary, but not sufficient to change to fate of airlines in the country.
Not to say a domestic industry that has lost $7.93 billion since FY2006-07 won’t see matters improve. But expecting foreign carriers to play good Samaritans to those wounded fatally would be a pipe dream.
who could benefit...
Imagine that foreign airlines can change the fate of Indian carriers in quick time. A year later, the loss-laden Kingfisher could see Rs.150 billion of debt and accumulated losses wiped off its books. Similarly, Jet Airways which still carries a red ink-laden earnings sheet (losses of Rs.23.50 billion in the past 5 years) could see Rs.155 billion being infused in it, making the airline healthy again. Air India (the biggest loss-making carrier in the world during the past decade, with losses amounting to Rs.2.24 trillion!) could seek God’s intervention, and have Rs.878.40 billion of debt and accumulated losses washed off its taxpayer-funded linen. At present, these three airlines – which control 46.6% of our domestic air traffic – are in the most urgent need for foreign support.
Others are capable of flying the distance on their own. IndiGo is debt-free and is profit-making (profits of Rs.12.83 billion in the past 3 years). SpiceJet is sitting on low debt (Rs.7 billion) and is back to its profit-making ways, having reported Rs.561.5 million in earnings in Q1, FY2012-13. Better still, analysts are forecasting a better than before FY2012-13 and FY2013-14 for the carrier. And GoAir, with zero debt, is today a tightly run airline, and growing fast, having learnt much from its experiments in 2006 & 2007.
... AND who will
In the case of Kingfisher, a 5.34% stake is already held by foreign institutions. This leaves Mallya with a chance to offload the remaining 43.66% to foreign airlines. Experts opine that this could be a good time to implement a big-stake-buy-for-cheap strategy. Going by its current market value, Rs.5.10 billion is all that a carrier would require to buy the maximum allowed stake in the airline. But two questions arise. Why would a foreign carrier want to invest in a carrier – with a skeletonic fleet of just 10 aircraft – losing Rs.38.84 million each day [it has lost Rs.74.50 billion since FY2007-08]? Second, would a little over Rs.5 billion suffice? The amount infused would mean little to an airline that (as per CAPA) requires an “immediate” infusion of Rs.32.09 billion to continue operations. Mathematically, selling a 43.66% stake would make just enough for Mallya to see his airline in the skies for another 131 days (without including current outstanding moneys that KFA owes to many-a-party, including the taxman). It is easy to reach answer the hows and whys in the case of two other “needy” carriers – Jet and Air India.
Ten months back, when speculations were rife that foreign carriers would be given the nod to invest in the ailing Indian aviation sector, B&E had voiced its opinion through an article titled, ‘The agony & hope for India’s domestic airlines: call it FDI’. Our argument was: Little logic supported the cause of foreign carriers investing in India. In mid-September 2012, policymakers in India decided in favour of allowing foreign carriers to buy up to 49% stake in domestic carriers – precisely what the Department of Industrial Policy and Promotion (DIPP) had been recommending for over a year. The move won many-a-cheer from camps desperate for non-Rupee pay orders. Irrespective of whatever hopefuls imagine will be the outcome of this policy change, our argument stays. FDI rule change is necessary, but not sufficient to change to fate of airlines in the country.
Not to say a domestic industry that has lost $7.93 billion since FY2006-07 won’t see matters improve. But expecting foreign carriers to play good Samaritans to those wounded fatally would be a pipe dream.
who could benefit...
Imagine that foreign airlines can change the fate of Indian carriers in quick time. A year later, the loss-laden Kingfisher could see Rs.150 billion of debt and accumulated losses wiped off its books. Similarly, Jet Airways which still carries a red ink-laden earnings sheet (losses of Rs.23.50 billion in the past 5 years) could see Rs.155 billion being infused in it, making the airline healthy again. Air India (the biggest loss-making carrier in the world during the past decade, with losses amounting to Rs.2.24 trillion!) could seek God’s intervention, and have Rs.878.40 billion of debt and accumulated losses washed off its taxpayer-funded linen. At present, these three airlines – which control 46.6% of our domestic air traffic – are in the most urgent need for foreign support.
Others are capable of flying the distance on their own. IndiGo is debt-free and is profit-making (profits of Rs.12.83 billion in the past 3 years). SpiceJet is sitting on low debt (Rs.7 billion) and is back to its profit-making ways, having reported Rs.561.5 million in earnings in Q1, FY2012-13. Better still, analysts are forecasting a better than before FY2012-13 and FY2013-14 for the carrier. And GoAir, with zero debt, is today a tightly run airline, and growing fast, having learnt much from its experiments in 2006 & 2007.
... AND who will
In the case of Kingfisher, a 5.34% stake is already held by foreign institutions. This leaves Mallya with a chance to offload the remaining 43.66% to foreign airlines. Experts opine that this could be a good time to implement a big-stake-buy-for-cheap strategy. Going by its current market value, Rs.5.10 billion is all that a carrier would require to buy the maximum allowed stake in the airline. But two questions arise. Why would a foreign carrier want to invest in a carrier – with a skeletonic fleet of just 10 aircraft – losing Rs.38.84 million each day [it has lost Rs.74.50 billion since FY2007-08]? Second, would a little over Rs.5 billion suffice? The amount infused would mean little to an airline that (as per CAPA) requires an “immediate” infusion of Rs.32.09 billion to continue operations. Mathematically, selling a 43.66% stake would make just enough for Mallya to see his airline in the skies for another 131 days (without including current outstanding moneys that KFA owes to many-a-party, including the taxman). It is easy to reach answer the hows and whys in the case of two other “needy” carriers – Jet and Air India.
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