ANALYSIS: Indian carriers may benefit from relaxed foreign ownership rules

Singapore
Source:
This story is sourced from Pro
See more Pro news »

India's decision to allow 49% foreign ownership in its domestic carriers is an important step for its ailing airline sector, although it could be too late for Kingfisher Airlines.

The change was announced by India's ministry of commerce and industry at 19:25 local time on Friday, 14 September 2012. It gave several reasons for the decision, including its view that foreign partnerships will help Indian carriers become more efficient and allow them to learn international best practices.

The release added: "Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions and a vital gap in the country's infrastructure."

The precarious state of India's carriers is well known. Among publicly listed carriers, low-cost carrier Spicejet earned a net profit of Rs562 million ($10.3 million) in its first quarter for the fiscal year 2012 ended 30 June, but only after five straight quarterly losses. Similarly, rival Jet Airways ended five streaks of quarterly losses with a profit of Rs247 million for the first quarter of its FY2012.

Long suffering Kingfisher Airlines, however, doubled its Rs3.9 billion loss a year earlier to Rs6.5 billion for the first quarter of FY2012. The carrier blamed high fuel costs, high interest rates, the depreciation of the Indian rupee and its inability to operate a full fleet for its woes.

Privately-owned low-cost carrier, Indigo, is reportedly India's only profitable carrier, but it has never released financial numbers.

Spicejet, Kingfisher and Jet Airways are viewed as the most likely targets for foreign buyers. News of the foreign ownership changes boosted shares of Kingfisher and Spicejet on 17 September, with Kingfisher climbing by 20% in early trade on the Bombay Stock Exchange and SpiceJet rising by over 10%.

"The change is very significant," says Indian airline consultant Kasha Teckchandani. "It could lead to more efficient and profitable airlines. They will have access to deep pockets, and can benefit from the expertise of foreign airline management teams, which have better ways of running an airline."

An industry observer Flightglobal spoke to says that Qatar Airways, Etihad Airways and Emirates are likely to be very interested in building up their Indian network, which would provide valuable point-to-point feed for their hubs in the Middle East.

The "big three" gulf carriers view India and Africa as vital short-haul feeder markets. Indian carriers could operate single-aisle aircraft from secondary cities in India, feeding the hubs of Dubai, Abu Dhabi and Doha.

Paul Sheridan, an analyst with Flightglobal's consultancy Ascend, agrees with the view that Middle Eastern carriers will be very interested in India's policy change.

"Indian traffic is very valuable to Qatar, Etihad and Emirates, owing to connections via their hubs," says Sheridan. "It would make sense for one of these carriers to capture some of this traffic."

Teckchandani also sees the new rules spurring foreign companies to invest in Indian airline start-ups, mainly on the basis that relaxed foreign ownership rules will make it easier to sell large stakes in Indian carriers. He also expects the new policy to spark a wave of airline partnership announcements.

The most pressing question about the new foreign ownership rule is whether it comes in time to save Kingfisher.

Experts are divided on this. They generally feel that the carrier's chairman, Vijay Mallya, is not to be underestimated. But they believe that Kingfisher's brand and balance sheet have suffered too much. While Kingfisher does have valuable slots and infrastructure, it would need a massive capital infusion to return to normal operations.

"The investment community has lost faith in Kingfisher and the airline's problems have hurt the reputation of India's carriers in general," says an industry source.