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BW Businessworld

Riders In The Sky

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The Centre's proposal to allow foreign airlines to take 49 per cent equity stake in Indian carriers was greeted more with scepticism than elation by the long suffering aviation sector and its analysts.

One, there were doubts whether the proposal would actually go through. "I am not sure the home ministry and security agencies will be comfortable allowing foreign airlines to take such a big stake, since there is no way to bar airlines from countries with whom India's relations may be strained from investing," says a senior finance ministry official. He points out that like FDI in retail, it is one thing expressing intent and another to bite the bullet.

Two, analysts were unsure how the move could help spark off a sustained recovery. "This will help as a short-term measure, but first we need to set our own house in order, " says Paresh Parekh, partner, Ernst & Young.

There are two major issues that make the sector unviable: one, high fuel taxes and surcharges, and, two, the interference of the regulator every time airlines raise fares. The flip side to this is, if fares rise in the current scenario, passengers might stop, reduce or switch to
low-cost options.

Most agreed that there will be interest from foreign airlines. "Air penetration in India is low at 4 per cent, so that's one reason why foreign airlines would be interested. The current losses of the airlines make the valuations attractive," says Amber Dubey, director (aviation) at global consultancy firm, KPMG.

A top Jet airways official told BW: "The 49 per cent stake will entice some airlines as they will have greater representation on the board and in the overall business plan. But worldwide, airlines expect a difficult 2012."

Moreover, many analysts doubt whether even a 49 per cent stake will be enough to keep afloat cash-guzzlers such as Kingfisher Airlines. Even if a foreign airline is convinced to take a stake in Kingfisher (there may be better options in the Indian market considering the carrier's huge losses and large debt) due to its "intangible assets" (routes, slots, frequencies and manpower), it will fetch the company Rs 400-500 crore at a premium based on current valuation. The market capitalisation of Kingfisher Airlines is about Rs 800 crore. For the remaining, the investor would have to make an open offer as per Sebi rules — money that will clearly not come into the company.

Says a Mumbai-based analyst: "Assuming this is the money that comes into the company, it is a matter of judgment how long it can survive with this kind of fund infusion, as what it owes its creditors is far in excess even if we exclude the banks."

Experts say there are too many ifs with the proposal — if 49 per cent is finally permitted, if the fundamental problems with the sector change for the better, and if foreign airlines are convinced and not too preoccupied with their own problems. And to top it all, another if , whether this may be too little, too late.   

(This story was published in Businessworld Issue Dated 30-01-2012)