In the Union Budget Proposal 2012 to 2013, finance minister
Pranab Mukherjee proposed to increase the external commercial
borrowing (ECB) limits for the Indian airline industry. As much
as this decision demonstrates the Government of India's (GOI's)
desire to rescue the airline companies, it may not be of great
help to the heavily-indebted industry.
The GOI has also deferred implementing its proposal to
permit foreign airlines from directly investing in Indian
carriers, denying local airlines access to potential sources of
capital and expertise. The deferral has put local airlines in
Airline companies will be allowed to raise working capital
through external commercial borrowings (ECBs) under the Union
Budget Proposal, subject to a total limit of US$1 billion for
the entire airline industry.
The decision provides a measure of relief for Jet Airways
(India), Air India and Kingfisher Airlines, which are short of
funds and are struggling to repay debts. The extra source of
funding could help airlines refinance working capital loans by
saving up to 7%. Foreign loans normally cost less than 5% in
interest charges, while domestic loans cost less than 13%.
In recent years, the Indian airline industry has been
haunted by rising fuel costs, high taxes and fierce
competition. The combined debt of India's aviation industry is
US$20 billion, according to a pre-budget economic survey that
was published on March 15 2012. A report from the Centre for
Asia Pacific Aviation stated that Kingfisher would need US$400
million in immediate funds to prevent it from collapsing.
Majmudar & Partners' managing partner Akil Hirani says:
"The airline industry in India is in deep distress. The prices
for air tickets in India for local flights are not even
rational. Airlines have been cutting prices to maintain market
share. Many players find it hard to compete in such a
The GOI's proposal to increase ECB limits reflects its
desire to see the aviation industry, which will be one of the
five focus sectors in the 12th Five-Year Plan, overcome its
current difficulties. In addition to raising ECB limits, the
GOI is also seeking to help by exempting customs duty and
countervailing duty to aircraft spares, tyres and testing
equipment. Designated aircraft maintenance, repair and overhaul
(MRO) providers will also enjoy tax reductions.
Deloitte aerospace and defence expert Nidhi Goyal says: "The
amount of customs duty exempted from aircraft equipment is
huge. This truly reflects government's intention to relax many
burdens of the industry."
ECBs were not previously permitted in the airline industry.
And yet, the GOI's proposal may not prove that affective as it
is unlikely that overseas borrowers will be willing to finance
airline companies that are already bearing debt and interest
burdens, and have continued to experience loss.
In addition, certain foreign banks believe that the GOI is
not going to act as a guarantor for foreign bank loans, as
reflected by the airlines' proposed interest rates. For
example, Air India hopes to raise foreign loans at a 5% to 6%
interest rate, which is 2% higher than the normal 3% interest
rate for a state-owned company. Foreign loans, therefore, may
not be a viable option.
Adding to the industry's burden, the GOI has deferred the
much-awaited proposal, introduced on April 10 2012, to allow
foreign airlines to invest in local airlines. Foreign direct
investment (FDI) in Indian airlines is allowed up to 49%, but
FDI from foreign airlines is banned.
Hirani says: "There are still spaces and incentives for
investors to come in to the aviation industry. For example, the
biggest global airlines such as British Airways and Etihad
Airways would like to actively invest in Indian carriers."
and Etihad Airways would both like to actively invest in
The airline industry in India does not have huge expectations
with the ECB limit increase, but is instead relying on the
potential opening up of FDI in the industry to relieve their
financial distress. Kingfisher Airlines, which is particularly
affected by the airline debt crisis, has already attracted
potential investors, including BA's parent company IAG and
UAE's flagship carrier Etihad Airways. They are just awaiting
the GOI's decision to allow them to inject capital into the
cash-starved company. But the GOI has been slow in responding
on this issue, and its decision to defer the proposal has
strongly discouraged the hopes of many.
While FDI appears to be the more viable option for assisting
India's airline industry, the GOI's attitude in formalising
approval of FDI in the country's airlines has been unclear.
This has caused concern among investors. The ECB option, on the
other hand, is regarded by many analysts as unhelpful to the
industry's current predicament. Foreign investors wait to find
out what their options and possibilities will be in helping
rehabilitate India's airline industry.
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