Desperately seeking aid: Airline industry urges government to permit FDI liberalisation

Author: | Published: 1 Aug 2012
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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 distress.

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 competitive environment."

Government role

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."

British Airways and Etihad Airways would both like to actively invest in Indian carriers

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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