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September 17, 2012 10:12 am
Vijay Mallya, the Indian alcohol baron and founder of troubled Kingfisher Airlines, was granted his longstanding wish on Friday when New Delhi announced that it would permit foreign airlines to own up to 49 per cent of Indian carriers. Mr Mallya tweeted that the news was “fantastic”.
However, analysts say the opening of India’s domestic skies to international participation may have come too late to save Kingfisher – India’s second-biggest domestic carrier before it was crippled in the past year by high debt and worsening cash flow problems.
Moreover, now many foreign airlines seeking to fly within India are expected to set up new carriers with local partners such as cash-righ conglomerates that have not previously been in the airline business.
“Some airlines will come with their own subsidiaries here,” says Amber Dubey, the head of aviation at consultancy KPMG. “They may not buy into existing carriers. The requirements to enter India are not too heavy; you can just start with five leased aircrafts.”
India’s aviation market is expected to turn into one of the world’s biggest in the coming decades.
According to the Centre for Asia Pacific Aviation, Gulf carriers such as Emirates, Etihad and Qatar Airways, and south-east Asian carriers such as Singapore Airlines are the most likely candidates for entering India’s domestic market.
Mr Dubey said the main motive for Gulf or south-east Asian carriers to establish domestic operations in India would be to set up feeder routes to link travellers from smaller Indian cities into their international networks, via India’s main international airports.
Deals with some existing players are not entirely out of the question. SpiceJet, which has 18 per cent of the domestic market and is partly owned by the son of a former Indian industry minister, has begun “very preliminary” talks with Gulf carriers about possible investments, its chief executive Neil Mills said last week. GoAir, a smaller carrier, is also seen as a potentially attractive partner.
However, it is Kingfisher that is most in need of a partner. In November 2010, Kingfisher’s lenders agreed to restructure its $1.4bn in gross debt but the carrier was unable to meet the requirement to raise $500m in new equity. A year later, Mr Mallya announced that an unnamed wealthy Indian investor was poised to give the airline a $250m equity infusion to help it overcome its immediate cash crush but the deal did not materialise.
Kingfisher welcomed Friday’s announcement, saying the opening would allow it to “re-engage with prospective airline investors in a more meaningful manner and move towards recapitalisation and ramp up of operations.”
But Kapil Kaul, ceo of the centre for aviation in India (CAPA), said the airline – which has been suffering such acute cash shortages that its staff has not been paid since March – would find it tough to find a willing partner without a substantial infusion of capital from Mr Mallya and a debt restructuring first.
“They have an outside chance,” Mr Kaul says. “But I don’t think anything can happen without [Mr Mallya] putting in $300m-$350m first. Otherwise, restructuring is not possible. The fact that the government has taken this decision might influence him to put in money. But Kingfisher’s survival is getting increasingly difficult.”
Two years ago, International Airline Group formed by the merger of British Airways and Iberia, had expressed interest in investing in an Indian airline, as it set up a groundbreaking code-sharing deal with Kingfisher. But code-sharing was suspended as Kingfisher’s financial woes forced it to cut its operating fleet from 66 to about 16 aeroplanes.
Indian carriers are struggling in spite of strong domestic traffic growth, because of fierce competition from state-backed carrier Air India, rising oil prices, a depreciating rupee and high taxes on jet fuel. According to CAPA, India’s domestic airlines had combined losses of more than $2.5bn in the financial year ending in March and are likely to lose another $1.5bn this year, though much of the losses are from Air India.
Mr Kaul said that permitting foreign airlines to invest in Indian carriers was “an important milestone” but that other reforms – including reducing the tax burden in jet fuel – are required to attract greater investment, and bring the sector to financial health. “We don’t have a competitive structure to attract investment,” he said.
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