In a report entitled India’s Experience with FDI: Role of a Game Changer prepared by ASSOCHAM in JAN 2012, there were several interesting and valid points raised on the role of FDI in the Civil Aviation sector. Reproduced below are some of its salient features. (Although I have not quoted the report verbatim throughout, through most of the text, the words are from the report)
The study of FDI in Civil Aviation observed:
• Huge amounts of additional investments required to realize the vision of the Civil Aviation industry as suggested in Working Groups report.
• Airport Infrastructure would require an investment of about Rs.67,500 crore during the 12th Plan of which around Rs 50,000 crore is likely to be contributed by the private sector.
• Airlines in India are expected to add around 370 aircrafts worth Rs.150,000 crore.
• Decade 2000-2010 witnessed a profitless growth. The Airline Industry in India suffers from huge debt burden – close to US $ 20 billion (Estimated 2011-12).
Allowing foreign airlines to pick up stake in three major Indian Airlines (Kingfisher, Jet Airways and Spice Jet) would result in capital infusion to the tunes of:
• Promoters off loading 26% of their Equity Stake can raise approximately upto Rs. 1341 crore.
• Figure goes approximately upto Rs.2530 crore in case 49 per cent FDI is allowed.
• Equity valuation at 26% of all issued shares (promoter and non-promoter) approximately comes out to be Rs.2835 crore.
• Estimates at 49% go approximately up to Rs.5341 crore.
The amount raised can be used to address working capital requirements of the airlines.
FDI in Civil Aviation
I. Importance
The aviation industry is critical for any nation to gain from participation in the global economy. Civil Aviation in its role of a key infrastructure sector facilitates:
• Growth of other industries
• Trade - by offering a reliable and faster mode of transport services to move products and personnel across long distances
• Tourism
• Generates both direct and indirect employment opportunities
The vision for the Indian civil aviation industry for the 12th Plan period is:
“To propel India among the top five civil aviation markets in the world by providing access to safe, secure and affordable air services to everyone through an appropriate regulatory framework and by developing world class infrastructure facilities”
II. Potential
A growing middle class supplemented with rise in disposable incomes, change in lifestyles, a globalized economy all act as drivers that project a huge potential for the industry. Another way of looking at the potential of the sector is by comparing the domestic tariff of another emerging economy China. Domestic traffic in China is believed to be five times the size of India’s despite having a population just 10% larger.
Forecast of air traffic carried out for 12th plan period suggests:
• Domestic passenger throughout would grow at an average annual rate of around 12%.
• Domestic passenger throughout is expected to touch around 209 million by FY-17 from 106 million in FY-11.
• International passenger throughout is estimated to grow at an average annual rate of 8% during the 12th Plan period
• International Passengers to reach 60 million passengers by FY-17 from 38 million in FY-11.
[please read the full report for the references]
While the report speaks about the huge investments required in various sub-sectors like Airport Infrastructure, I shall confine this discussion to FDI in airlines only and keep the other sectors for a future discussion. According to the report the amount required for fleet expansion is US$ 43 b (INR 2.15 L cr). To cater to the increasing international and domestic traffic airlines are expected to add around 370 aircraft to their fleet. I will not go into individual airline requirements although the report has. Where is this money going to come from and how will the Civil Aviation Ministry’s vision be realized? The report says that “looking at the existing financial status of the industry the achievement of set objective seems ambitious.”
Let us look at the current status and the not-too-distant past (all figures from the report). The decade 2000-10 witnessed a profitless growth phase of the airline industry. During the three-year period between APR 1, 2007 & MAR 31, 2010, Indian carriers incurred an accumulated loss in excess of US$ 5.2 b (INR 26,000 cr). As per certain estimates, the airline industry in India suffers from a debt burden of close to US$ 20 b – a very huge amount by any standard. Half of this is aircraft related and the rest for working-capital loans, payments to airport operators and fuel suppliers. Although the report has cited high cost of operation being a cause for adversely dented financials, I don’t agree. Irrational (competitive is the word the report uses) pricing policies has definitely played a part.
In part I of this same article, I have strongly advocated the cause of FDI in civil aviation. Here too I wish to harp on the same issue. I’m not in favor of any kind of government bail-out to any carrier including the public-sector one. Regarding my remedies for Air India, please read my earlier post on the same blog. Here I’ll state how mainly citing the report’s recommendations.
Raising such huge amounts of investments would require the government to adopt a more progressive and positive fiscal regime as well as develop a collaborative approach with industry. Civil Aviation industry would require not only large but continuous flow of funds if the next phase of growth needs to take place. For this to happen the government must relook at its FDI policy which disallows foreign airlines from purchasing equity of domestic airlines. One of the reasons successive governments have been citing against foreign airline equity participation is that the US doesn’t allow it. My rebuttal to this is – why follow the US model or example? Why not one of our own?
This is what direct investment by foreign airlines would do (according to the report):
• Provide managerial and technical expertise needed to improve productivity
• Raise much-needed capital for the private-sector players
• Improve operating standards and services
• Add brand value (my addition)
• Spread out the network of Indian carriers (again, my addition)
Here is an estimate of the amount of capital that can be raised by three prominent Indian private airlines shows (foreign non- airline investor’s equity has not been considered in estimation):
• The promoters by off loading 26 % of their Equity Stake can raise up to Rs. 1341.45 crores.
• This figure goes up to Rs. 2528.3 crores in case 49 per cent FDI is allowed.
• Combined equity valuation (promoter and non-promoter) at 26 % comes out to be Rs. 2834.27crores.
• The valuation at 49 % goes up to Rs. 5341.52 crores.
The capital raised from equity sale can be used to address the working capital requirements of the airlines. The report gives a detailed table for each of the carriers. I’d suggest that readers look at it.
Here are a few other benefits from FDI. It has, since 1991, proved to be a game-changer for wide segments of Indian industry. Wherever it has been allowed it has transformed those industries in ways that are now irreversible.
To conclude, I’d like to state that if India has to emerge as a global player in civil aviation, FDI in the airline industry is a must.
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