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BW Businessworld

KPMG Finds Long-Term Aviation Outlook Positive

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Amid a plunging Indian economy, many economists and academicians believe that a second generation policy reforms can only save the dipping economy. While recognising the importance of reforms, the Government of India only recently has shown the political will to push things through and launch 'big-ticket’ reforms. The reforms including allowing FDIin multi-brand retail, aviation, and broadcast sectors and disinvestment in four PSUs mark a complete shift from government’s dilly-dallying on the reforms front.

Coming in a backdrop of scams, policy paralysis, high inflation, plunging growth, surging budget deficit, and credit downgrade risk, the reforms offer a ray of hope to boost investments, employment, and growth in the Indian economy by reviving investors’ sentiment and attracting foreign investments.

The Indian airline sector comprises six scheduled airlines –IndiGo, Jet, SpiceJet, Air India, GoAir and Kingfisher. The sector is currently reeling under high taxes, rising fuel prices and high airport charges. All airlines except IndiGo declared losses in the year ended March 2012.

In a landmark decision, the Government of India has set aside its earlier policy of not allowing foreign airlines to have any stakes in the Indian airlines, has now decided to allow foreign airlines to invest up to 49 per cent in Indian carriers. This decision may result in foreign airlines taking stakes in Indian carriers or setting up new airlines in collaboration with Indian partners.

The beneficiary Indian carriers are expected to get access to capital, global connectivity, technology, management and operational best practices. Increased competition may lead to better offerings, greater efficiency, cheaper airfares and more choice to the passengers.

According to KPMG, the long-term outlook of India’s aviation market is quite positive. Its growing economy, large middle class and low air travel penetration indicate a high growth potential.
  •  Emirates is looking at a 52 per cent increase in the number of weekly seats on the India sector.
  •  Lufthansa has just inked a strategic alliance with Jet Airways which allows each airline to sell seats on   the other’s network.
  •  Qatar Airways, Etihad, Singapore Airlines and AirAsia have also indicated their expansion plans for   India.
Allowing FDI for global airlines may lead to significant action over the next 12-18 months.
  • •Domestic airlines like SpiceJet and GoAir with relatively good financial and operational performance are likely to attract a lot of attention.
  •  In case of Kingfisher, though the valuations are low, its high debt, accumulated losses and low asset  base (fleet size is down from 66 to around 14) are likely to be a dampener.
  •  Jet and IndiGo have high foreign holding already and their promoters have not indicated any intention to divest their stake at the moment. Air India is currently out of bounds for global investors.
However, there are risks associated with FDI in aviation as well.

FDI by foreign airlines would not be through the automatic route. Each application would be scrutinised by security agencies and relevant government ministries. The chairman and two-third of the board of directors in the joint venture need to be Indians.

There are voices of dissent from certain political parties and Indian carriers that global airlines, with
their deep financial muscle, may indulge in predatory undercutting of airfares. Further, issues of national security and anti-competition behavior may be used to scuttle entry for certain airlines.

Most of these issues are likely to be clarified when the government lays down the detailed rules and   procedures for approving FDI applications.

The Way Forward
Interested global airlines need to develop their India strategy and commence discussions with Indian carriers at the earliest. Those who plan to enter India by way of a new start-up may need to assess the risks involved and look for suitable joint venture partners. Airlines can also limit their exposure by taking a non-scheduled operator licence instead. There are many strategic options.

Domestic airlines may need to get their documentation and data-room in order and be ready for multiple    enquiries from interested parties. They may need to evaluate the offers from various interested parties and take a final call. They have time on their hands and can drive a good bargain.