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BW Businessworld

Flights Of Fantasy

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Amongst the flurry of reforms that were announced last week, the government allowed foreign airlines to invest 49 per cent in domestic carriers.
Conceptually, the move makes eminent sense. Not only can a foreign airline bring in the much-needed capital, it can also aid domestic carriers with its expertise and technology, both of which can help the local airline lower its costs — the key to survival in this industry. While other foreign investors can bring in capital, airlines can bring in professionals and also assist in formulating strategy. The two are incomparable.
Practically, however, I am sceptical of the  impact of such a move on troubled Indian carriers. First, a lot of aviation’s problems lie outside the scope of such policy moves — high costs of aviation turbine fuel, various taxes imposed on the ticket price, over-staffed carriers, overpaid top management and, in some cases, poor aircraft and route management. Investments can at best help prolong the life of airlines struggling to stay afloat, but a sea-change in their fortunes requires a far more drastic overhaul.
Second, some of the airlines have pushed themselves into such a corner that most foreign airlines would be quite wary of investing in them. Look at Kingfisher Airlines, for instance. It needs to settle its massive bank debt. At the same time, its dues to oil companies are piling up, and losses mounting. Its aircraft are grounded, not being in flight-worthy condition, and need a huge investment before they can be airborne. It owes money not just to the lessors but also to their maintenance and repair partners. Employee as well as airport dues — both to the Airports Authority of India and private airports — are adding up. Tax authorities have to be paid. Almost all vendors are running on credit.

Several creditors have encashed previous bank guarantees, and cheques have been bouncing with unerring regularity. The airline has lost its best employees — those who were good enough to get jobs in other airlines or elsewhere have already done so. Its market share is down to a pittance as are the airline’s loads. It has lost frequencies and many slots. Its stock has plummeted even on days when the rest of the market has done well. It is barely valued at one fourth of what it was just two years ago. And to top it all, the airline has a chairman who appears to have done more to destroy value  than create it. Who would want to take all this on?
Assuming that some are interested — I think West Asian airlines such as Emirates and Etihad would be the easiest to rope in as they understand the Indian system of working and also have cultural links — they would probably look at some of the better off players such as SpiceJet, Indigo and even GoAir.
But as I understand it, neither Indigo nor SpiceJet are scrounging around for funds. Neither Rahul Bhatia nor Kalanithi Maran have been wooing the government to allow investment by foreign airlines. The only noises I have heard have come from Vijay Mallya and Jeh Wadia, both of whom run the least efficient airline operations.
A big problem for the aviation sector has been the irrational and unpredictable behaviour of Air India: it is given to cutting fares without any prior warning or obvious reason. While such fare cuts have come down with Rohit Nandan at the helm, there is no saying when Air India will resort to such tactics to increase loads and market share.
Ajit Singh, in interviews after the announcement, has been categorically saying that while investment from foreign airlines was welcome, the government was not considering it for Air India.

God and, perhaps, Manmohan Singh alone know the reason. It is not as if no country has ever allowed foreign airlines to buy a stake in their national carrier — it has happened in Europe. What is so sacrosanct about Air India? I think that if the government wants to save the national carrier, this is the best way to do it. Let someone who knows and understands the business come in and run the airline and make it efficient enough to compete with both Indian private carriers and foreign airlines such as Emirates, Singapore Airlines and others. In fact, I think many of these airlines would actually be open to investing in Air India — despite all its travails — as there is still enough value in the airline with its slots, frequencies and aircraft.
So, all in all, while the new policy decision sounds good on paper, I am not sure how much foreign investment it would actually bring in. Those that need investments may not find it easy to get, and those who can get it may not really want it. The grass, it seems, is always greener on the other side.

(This story was published in Businessworld Issue Dated 01-10-2012)