Cabinet to consider aviation FDI on Friday

NEW DELHI (Reuters) - The cabinet will consider a proposal on Friday to allow foreign airlines to buy stakes in local carriers, moving forward with a much-delayed reform that could revitalise debt-ridden domestic carriers.
Click to read more
http://in.news.yahoo.com/cabinet-consider-fdi-aviation-friday-070444981--sector.htm

Do read this also

FDI in Civil Aviation – how it will help - Archie D’Souza

http://sunriseacademyonline.blogspot.in/2012/04/fdi-in-civil-aviation-how-it-will-help.html

How Open-skies will benefit the Indian Economy - ARCHIE D'SOUZA

A news report in the Business Line of AUG 11 stated that the Aviation Ministry has asked domestic carriers to file plans of overseas flights.  According to the report the ministry is against allowing international airlines operating more flights into India till domestic carriers catch up.  Fifteen days were given to the domestic airlines to file their plans for international operations till March, 2014 and these fifteen days are over now.  The ministry’s reasoning is that if foreign airlines keep operating additional flights the Indian carriers have no chance to grow.  Is an open-skies policy bad for the Indian Aviation industry in particular and the Economy in general?  Let us see.

Today, five Indian carriers Air India (AI), Jet Airways, IndiGo, SpiceJet and Kingfisher (KF) Airlines are permitted international flights.  At the time of writing KF, due to its financial woes, has stopped operating its international routes.   AI too suffered badly dues to its pilots’ recent 58-day strike.  Foreign airlines, at the moment, operate over 1300 flights a week to India while Indian carriers operate less than 1000.

The decision to curtail the operation of foreign carriers will definitely adversely affect them, especially the Gulf-based ones.  Among these are Qatar Airways, Saudia and Oman Air, all airlines that are keen to expand their Indian operations.  Is this policy good or bad?  In August I had posted three articles, or should I day an article in three parts, on FDI in Civil Aviation.  The same principle with regard to benefit to the Indian economy applies here also.  Let us see how.

Among India’s international airports how many can be termed as international hubs?  Other than Mumbai and Delhi I couldn’t think of any other.  Sorry, Bangalore has not yet earned this tag.  By restricting foreign carriers from entering India, are we going to shake this off?  I feel that current restrictions have, instead of having a favourable effect on the Indian aviation industry, actually have had an adverse effect.  Restrictions placed have prevented other airports from becoming international hubs.  Further, travellers  are given a limited choice resulting in not just higher fares but also huge waitlists.

Dubai and Singapore are today two examples of nations, a fraction of India’s size, that are now truly international hubs.  Would this have happened if these nations had to place restrictions on who should or shouldn’t land there?  And, in both cases, national carriers, Singapore Airlines and Emirates Airways, were huge beneficiaries.  A passenger landing in Dubai and Singapore can take a single flight to almost any major destination in the World.  This has resulted in huge numbers of business and leisure travellers using these airports benefitting not just the airports but the nations’ economies as well.

A study recently conducted by the National Council of Applied Economic Research (NCAER) and sponsored by the Dubai headquartered Emirates Airlines (EK) concludes that an efficient civil aviation sector is important for economic growth.  This is because it is inter-linked with other sectors in the economy, generating income and employment through global commerce and tourism.  In the globalised World that we are living today, a well-managed civil aviation infrastructure with efficiently-run, competitive airlines are an absolute must.  With expanding airport infrastructure and more airlines operating, transport and communication costs can come down drastically.  This will lead to the promotion of increased commercial and cultural activity.  The result more jobs, and ultimately unification of people and markets.

According to the sponsors of the study EK, who are keen on increasing their operations into India, the move to increase services of foreign carriers will result in direct as well as indirect benefits for the country.  There are two ways in which this expansion could take place; one, through both higher seat allocation and two, through additional points of service.  Their findings are very interesting.  At a presentation in New Delhi on Monday, SEP 3, 2012, Will Lofberg, Senior Manager, Public and Environment Affairs, said allowing Emirates to operate 80,000 seats a week into India or carry 6.16 million passengers annually would lead to a direct contribution to the Indian economy of $363 million and have a multiplier effect of $720 million.  Below is a chart to show how.   At the moment, this is all the data I have but shall make further comments the moment I get a copy of the report entitled Emirates in India: Assessment of economic impact and regional benefits.

As per the study, allowing EK to operate 60,000 seats a week would allow it to carry 5.03 million passengers annually and directly contribute $296 million to the Indian economy with a multiplier impact of $644 million.  The study, though sponsored by them, has been conducted by NCAER (www.ncaer.org), an independent body.   Imagine what kind of a multiplier effect would take place if India opened up its skies and allowed FDI in domestic aviation.  I’ve always maintained that we should ignore what other countries are doing and follow our own model which is good for our own economy.

Coming back to the presentation Mr. Lofberg mentioned that EK, at the moment, is allowed to operate 54,200 seats a week into India and since 2008, has not been allowed to increase that number.  He also stated that EK’s India operations carried 45 per cent of passengers between 10 Indian cities and Dubai, with the remaining 55 per cent of passenger traffic being carried from Indian airports to points beyond Dubai.  I always maintain that if EK can do it, why not AI or any other Indian carrier?  On the contrary, I feel, that Indian carriers have, with the help of the government, following a dog in the manger attitude.  They are opposed to allowing any more rights to international carriers to operate more flights into India, arguing that foreign airlines carry passengers not only to their home country but also to third countries from their home base.  How exactly should it adversely affect them?

The study states that EK contributed $596 million to the Indian economy by way of $274 million in the air transport sector; $76 million in the petroleum and chemicals sector; $62 million in the manufacturing sector; $39 million in the trade, banking and insurance sector and $145 million in other sectors of the economy.  The Dubai-based airline has provided direct employment to 1,045 employees and supports a total of 72,323 jobs in India through its operations.  On the tourism front, Emirates has brought in 529,928 foreign tourists in India in 2010-11, as a result of which, $1,153 million were contributed to the economy as foreign exchange earnings.

Every $1 contributed by EK to the Indian air transport sector generates an additional $1.176 in the Indian economy, giving an output multiplier for Emirates’ contribution in the Indian economy at 2.176.  EK’s operations have a role in enhancing air transport and tourism as it connects non-hub airports to a significant number of points in India which would otherwise not be directly linked.  If it  expands to four additional destinations in India: Amritsar, Pune, Mangalore and Trichy, apart from 10 cities from where they are operating, it would benefit the Indian economy by $106 million and would also lead to the creation of 13,011 jobs.  The study states that in 2010-11, 65 per cent of the expenditure were on relatively small airports whereas only 35 per cent of Emirates’ direct contribution went to three big airports – Mumbai, Delhi and Chennai (in terms of passenger share). This indicates Emirates’ role in developing economic activities at non-hub points.

To get local carriers soaring, wings of global airlines may be clipped

Aviation Ministry asks domestic carriers to file plans of overseas flight
Click to read:
http://www.thehindubusinessline.com/industry-and-economy/logistics/article3751120.ece?homepage=true

Indian airlines to return to profit in FY2014: Merrill

Click to read

http://www.deccanchronicle.com/channels/business/industry/indian-airlines-return-profit-fy2014-merrill-033

New Proposal for FDI in Civil Aviation on Fast Track

Here's a very interesting piece of news. Looks like FDI in Civil Aviation will be a reality soon

http://www.thehindubusinessline.com/industry-and-economy/logistics/article3486917.ece?homepage=true

Air India's last chance for a take-off

http://www.sify.com/finance/Air-India-s-last-chance-for-a-take-off-imagegallery-others-mfbpICbehbj.html

Posted without comment

FDI in Civil Aviation – how it will help Part II - Archie D’Souza

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.

ATF Imports - more sops to airlines & more skin balm to a burns victim - Archie D'Souza

Airlines need brave lenders
Editorial Deccan Chronicle April 22, 2012

Since the proof of the pudding is in the eating, one will have to wait to see how helpful is the lifeline thrown by the government to cash-strapped airlines. The government has opened a one-year window for external commercial borrowings of up to $1 billion, with an individual airline limit of $300 million, for working capital requirements. In normal circumstances, the ECB route is preferred because it is a quicker and cheaper way of getting loans. But these are not normal times. Almost all airlines are running huge losses.

The overall debt of airlines is Rs 70,000 crore, of which Air India’s is Rs 40,000 crore. The lenders would have to be very brave to lend to such clients. It would have been better if the government had permitted FDI in domestic airlines, a move scuttled by some airlines which have political clout and fear competition.
Equally distressing is the helpline that permitted airlines to import aviation turbine fuel (ATF). It sounds like a great idea as ATF is 45 per cent of the total cost of running an airline because of high state taxes. It would have been easier for the states to pare their taxes. But then, who likes to give away money?

My comments
One more opinion from the school of thought that says FDI is stalled because of pressure from certain airlines – “a move scuttled by some airlines which have political clout and fear competition.”   I do not think that this is the actual reason.  I feel this is happening to protect the interest of the only public sector airline.  I have never really been able to understand the politics of it but such protection to the public sector is definitely bad economics.   If AI is not able to fend for itself it is best that it is wound up.  I’m not going into the merits and demerits of this.  I’d keep this discussion confined to two points – one, FDI and two, what purpose do these sops serve.

Let us look at the sops first.  I’ve already stated my opinion on ECBs.  (see my post entitled FDI in Civil Aviation – how it will help, in the same blog).  Now, I’ll speak about import of ATF.  According to reports appearing in papers on APR 22, 2012, Kingfisher, SpiceJet and IndiGo gave been permitted to directly import jet fuel.  The quantity expected to be imported is 13 lack kl at a cost of about 5730 crores.  If this policy results in a saving to the airlines concerned, then there’s something drastically wrong with our fuel pricing policy.  Remember, the costs involved are freight plus storage.  If that is less than buying fuel locally, the government needs to relook at the taxes on fuel, or at least ATF.  Fuel marketing & refining companies, need in turn, to relook at the pricing mechanism.

If all the airlines decide to import ATF, the local refiners will not have a market left, rendering useless infrastructure created for the purpose.  The exchequer too – centre & states, will lose out on tax revenues.   So where does this place us?  To quote the editorial, “It would have been easier for the states to pare their taxes.”

FDI in Civil Aviation – how it will help - Archie D’Souza

The Central Government recently approved a proposal for airlines to borrow $1 billion overseas, but delays FDI.  Here are two reports on this subject which appeared in the press on week 16 (APR 15-21, 2012)
20 APR, 2012, 06.06PM IST, REUTERS
Decision on FDI in aviation not before May-end: Minister
NEW DELHI: The cabinet is unlikely to consider a proposal to allow foreign airlines to invest in domestic carriers before the end of May, a cabinet minister, who asked not to be named, told reporters.
The ruling Congress party's biggest ally - Trinamool Congress - is opposing the proposal, the minister said, adding that the decision depended on the ally's consent.
Indian airlines, facing a debt-load of $20 billion and losses of $2.5 billion, have been hurt by high fuel costs and massive competition, and are looking for ways to bring in cash to run daily operations.
Under current rules, foreign airlines are barred from buying stakes in domestic carriers, although foreign investors are allowed to hold a cumulative 49 percent.
________________________________________
Govt lays down ECB norms for civil aviation
THE HINDU BUSINESSLINE BUREAU
Industry cap at $1 b; individual airline limit pegged at $ 300 m
NEW DELHI, APRIL 19:
The Government has allowed companies in the civil aviation sector to raise external commercial borrowings (ECBs) for a year to meet their working capital needs and also refinance outstanding working capital rupee loans.
This would come as a lifeline to cash strapped domestic airlines which had to face the brunt of increased interest rates as well as rising jet fuel prices, besides the slowdown in the economy. The proposal to allow airline companies to access ECBs was part of Finance Minister, Mr Pranab Mukherjee's Budget 2012-13 speech.
Prior to this decision, domestic airline companies were not allowed to access the ECB window. Domestic airlines can now tide over their present financial crunch as they can access low-cost funds through the ECB window.
The aviation sector can avail itself of external commercial borrowing to the tune of $1 billion with individual airline companies allowed to borrow up to $300 million in 2012-13, a Finance Ministry statement said today.
The limit can be availed in a lump-sum or in tranches depending on the utilisation during one year, it added.
The RBI, which will notify the details of the scheme in a week's time, will consider proposals of individual companies under the approval route based on parameters such as cash flows and the capacity to repay their loans from the forex earnings.
The central bank would also consider relaxing the average maturity period for ECBs above $20 million from five years to three years.
krsrivats@thehindu.co.in

________________________________________
So, as per the press-releases of the government of India aviation companies will be allowed to borrow up to $1 billion (Rs. 5,100 crore) collectively and up to $300 million individually, from overseas, via the external commercial borrowings (ECB) route.  Last month, in his Budget speech the Finance Minister had announced that companies in the aviation sector would be allowed to avail of ECBs for a period of one year for working capital/re-financing of outstanding working capital rupee loans.  Here is an extract from that speech:

“The ECB made under this provision would have a maximum ceiling of USD 1 billion for the entire Civil Aviation sector. The limit for individual airline companies would be US$ 300 million. This limit can be availed either in a lump sum or in tranches depending upon the utilization of the limit during the 1 year when the facility is available.

“The rapid growth of the Aviation sector in India has generated demand for additional finance for working capital and capacity expansion. High operating costs, particularly on account of high fuel costs, have put additional stress on the Airline Industry.”

A major problem that coalition governments face is trying to carry every party on economic issues.  One party that has been a spoiler in the economic policies of UPA-2 is the Trinamul Congress (TMC).  They have not tolerated any departure from their populist agenda as we have seen in the way their own party member and former Railway Minister Mr. Dinesh Trivedi was treated.  So, in spite of the fact that we have a very able person leading our nation (no one could do better under the current circumstances) the UPA has been unable to take even small steps towards economic reforms.  And, the word FDI seems to be evil in the eyes of certain UPA members, notable among those the TMC.

The press reports are a clear indication that the proposal to permit up to 49% foreign direct investment (FDI) by foreign airlines in Indian carriers is going to be a non-starter.  The proposal was supposed to be approved by the Cabinet in week 16 of 2012.  However, from the press-releases and other reports it is clear that one more policy of the government will be put on the back-burner.  Although the report says May-end it looks like these have been put on hold indefinitely.  The PM himself, no less, has referred the issue back to a Group of Ministers (GOM) with a directive to "establish consensus".  Is it possible?  Only time will tell.

There is a perception in certain quarters that the shelving of FDI is essentially due to the friendships of former civil aviation minister, Mr Praful Patel, with the heads of Jet Airways and IndiGo.  Another perception is that both these companies are opposed to FDI, as, again another perception, their competitors Kingfisher, GoAir, and SpiceJet will benefit from it.  No doubt FDI will dilute the promoters’ stakes in the respective airlines but what about the benefits it would bring?

It does make political sense, at the moment, to pander to the allies even though it could lead to economic disaster.  The PM has definitely learnt its lesson in the last parliamentary session when it had to retract an approval to permit FDI in retailing.  My purpose in writing this is not to go into the pros and cons of political issues or strategies, though I dread to think what would happen to the economy if the NDA comes back to power.  We saw where they took the country during their five year tenure.  It is economics not politics that I’m referring to.

What does the proposed current policy do?  In my opinion, it’s like applying skin ointment on a patient with over 80% burns.  While this policy decision will provide the Airline Industry an additional source of capital at a low cost and thus help them tide over their present financial crunch, it will not solve the problems faced by the individual companies or the industry as a whole.  This is definitely one of the most unenthusiastic responses from the government – a half-baked measure that, in all likelihood, considering the volatility of the Indian Rupee, will make the situation worse.  I hope that the government’s indecision or the realities of coalition politics, whichever way one puts it, does not lead to the sector going into ICU.

 The relevant circular/notification giving effect to the aforesaid Budget announcement is expected to be issued within 7 days.

[To be concluded – in part II, I shall go into the benefits of FDI in Civil Aviation]