“Govt. allows 49 pct FDI in local airlines” read the headline of a news story posted only a little while ago.
Now for all you we-couldn’t-care-less-about-what’s-happening-in-the-world individuals, let me spell out what the confusing words in the above sentence mean.
Here’s FDI for Dummies 01(we’re talking about aviation here; that goes without saying):
Hopefully this lesson can start from the point where local airlines have been looking for a miracle of some-sort to save their broke a**** (assuming you know that they were broke in the first place).
So connecting the dots on what the headline reads and what the airlines have been looking for; is Foreign Direct Investment really the miracle that can save the sinking Indian aviation industry?
Let’s get real; probably not!
What today’s news has in store for Indian airlines is a clearance of sorts, to allow foreign airlines to invest in their own, up to a maximum stake of 49 percent.
So breaking that down, this is what you’re looking at:
Broke local planes + money from fancy airlines (like Emirates) = you still might be able to travel Kingfisher (and other airlines like Jet and Spice Jet)
The reason I say “might” and not “will” is simple. If the policy changes made by the Indian government made the world go round, well then, we probably wouldn’t be in this position in the first place, would we?
So what if the government opened up to FDI in the aviation sector? Are international airlines waiting on them with open arms? No they’re not.
Now here’s FDI for Dummies 02:
Any guesses as to why international carriers may not want to invest in local airlines?
Here are our top reasons:
a) The interested carries will have to get clearances from Foreign Investments Promotions Board and the ministry. Not to mention that almost three-fourths of their directors will have to be Indian.
b) According to statistics by Boeing Co., India needs 1,450 new aircrafts worth $175 billion by 2031
c) Statistics from the International Air Transport Association put India as the worst performer among aviation markets around the world. Domestic air traffic fell to an abysmal 1.1 percent.
d) Since March 2006 till now, the Indian aviation industry has accumulated losses worth $8.5 billion and is expected to increase to $10 billion by the end of the year.
Talk about stepping into a sinking ship…
Former aviation secretary, Ajay Prasad told CNBC TV-18, “Lifting the ban on FDI in aviation doesn’t mean that everybody will queue up to invest in Indian domestic carriers. Anyone who will invest money here will take a very hard look at the investment opportunity and debt standing, but at the same time it opens a window for some of the Indian carriers who are eyeing equity participation and it is logical that in Indian carriers it is foreign airlines who will invest rather than someone who is in some other business.”
But, the biggest hurdle that prevents Indian carriers from breathing a sigh of relief is crude oil prices that have the Indian aviation industry in a fix.
According to GoAir, almost $4000 is spent on fuel per block hour by an low-cost airline (to think, what else could have been done with that money!). This puts costs in Indian carries almost 25 percent higher than any other low cost airline in the world.
No to mention, the present tax structure is only taking the Indian aviation industry further down.
Sure, we can hope for better service, better equipment and airlines that match up to international standards, but that’s a piece of news that we will be able to dance about only later.
As far as business tycoon Vijay Mallya is concerned, I wouldn’t bet in favour of him just yet. Seeing as Kingfisher Airlines is down under with a debt of $1.4 billion and needs close to $500 million just to keep operating, even FDI is probably not the miracle that could save Mr. Mallya now.
The government’s attempts on damage control may just have come in too little, too late. Only time will tell what the future holds for Indian carriers.