FDI sparks hope

by BARRY GRINDROD  

October 1st 2013

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There has been a dramatic change in Indian aviation in recent months. Gulf carrier, Etihad Airways, is awaiting government clearance to take a 24% stake in Jet Airways. AirAsia has set up AirAsia India and hopes to launch later this year. Read More » Most recently, Singapore Airlines and Tata Sons have signed a Memorandum of Understanding and applied to the Foreign Investment Promotion Board (FIPB) for approval to set up a full service airline.

This hive of activity, involving three major overseas carriers, has come about because of the Indian government’s decision to allow foreign direct investment (FDI) in its airlines from last year. Although the three partnerships have yet to be launched, potentially they have kick-started a moribund industry that promised so much, but produced so little. Its airlines face mountains of debt because of poor management, bureaucracy, high taxes, lack of infrastructure and the highest fuel and airport charges in the world.

Along with China, India is regarded as a future world aviation powerhouse. So far, it has underwhelmed the market, despite strong traffic growth in the past 20 years.

At the time, Orient Aviation was launching its first issue, India’s skies were a virtual government monopoly controlled by its international airline, Air India, and domestic operator, Indian Airlines. Their only competition - or lack of it - was a mixed bag of small air taxi companies confined to limited domestic points.

The first new significant players to emerge in the country were Sahara Airlines in 1993 and Jet Airways. Jet had launched as an air taxi company in 1992, but was cleared for scheduled domestic operations in 1995.

They made little impact in the Nineties, but in the new millennium the state carriers found them themselves under threat from other emerging airlines.

The first low-cost airline, Air Deccan, sparked a revolution in the market place, bringing ultra-cheap fares to large sections of India’s less affluent population, when it took to the air in 2003. Selling tickets in remote villages on bicycles and in markets, its aircraft were filled with thousands of first-time air travellers.

Air Deccan’s arrival sparked interest from new private investors. Budget operations became big business. SpiceJet’s maiden flight was in May, 2005 and GoAir in November of the same year. IndiGo launched in August 2006.

Kingfisher Airlines, a full-service operator owned by brewery tycoon, Vijay Mallya, first flew in May 2005.

It was not long, however, before reality struck and the newcomers discovered profits were hard to find. This was mainly thanks to India’s burdensome regulatory regime, which limited fleet expansion and barred carriers from flying overseas in the first five years of their operations.

Fuel costs for airlines were 40% more expensive than anywhere else in the world thanks to state taxes. New airports and modernization of existing facilities prompted higher take-off, landing and parking fees. And a possible lifeline of foreign investment was blocked by the Indian government.

Price wars became commonplace as more new entrants entered the market. The toll was heavy.

In 2011, Air India and Indian Airlines merged, but the process was painful. The new Air India was dogged by union disruption. Its losses mounted. Government bail-outs were necessary and the carrier is in the midst of a major restructuring initiative.

Air Deccan disappeared in December 2007, taken over by Jet to become its budget brand, Jet Lite. The same year Sahara succumbed, absorbed by Kingfisher to become no-frills Kingfisher Red.

The most high profile failure was the steady decline and eventual grounding, in October, 2012, of Kingfisher itself by India’s aviation authorities, which suspended its licence. It had debts of more than $2 billion and was unable to pay staff wages or buy fuel.

The decision to allow FDI was a breakthrough for the Indian aviation industry, but carriers continue to appeal for changes, particularly an easing of the tax on fuel.

Another promising development this year was a decision to create an independent civil aviation authority. Unlike the current Directorate General of Civil Aviation, the new body will have full operational and financial autonomy.

It is not clear when it will be established, but the sooner the better. India’s air safety system is facing a downgrade by the International Civil Aviation Organisation (ICAO). Late last year, in a scathing report, ICAO, in particular, criticised a 40% shortfall in the staff of Indian safety regulators, including insufficient numbers of trained safety inspectors.