Indian aviation eyes Gulf windfall after FDI ruling
By Daniel Shane
Backed by robust economic growth, its huge geographical expanses and a population that tops well over a billion both at home and abroad, the sky should be the limit for India’s civil aviation sector.
This could not be further from reality, with many of the country’s carriers buckling under the weight of excessive debt, high taxes and an indigenous population of whom less than one percent regularly use air travel.
Air India, the nation’s state-owned flag carrier was earlier this year granted a $5.8bn bailout from the government to shore up its leaky finances, not to mention having to contend with pilot strikes and a botched attempt to join Star Alliance.
Things are not much rosier at Kingfisher Airlines, which had the second largest market share in India until the financial crisis. In early 2012, the operator was forced to scrap all of its international routes as well as suffering the indignity of having 75 percent of its aircraft repossessed by creditors, while its debts estimated at $1.3bn led Kingfisher to be suspended from the International Air Travel Association.
A collective gasp of relief will have been let out then on 14 September, when India’s government cleared a change in policy that would allow foreign airlines to purchase shareholdings of up to 49 percent in domestic carriers for the first time in fifteen years. The decision should clear the runway for overseas parties to provide a much-needed capital injection in the industry. Given the troubles the sector is facing, though, it begs the question: India’s civil aviation industry may be up for sale, but who is buying?
Airlines in the Gulf, some of which are flush with government petrodollars and already serving a large Indian expat population, are interested, it would seem.
Neil Mills, CEO of low-cost airline SpiceJet told Arabian Business days before the foreign direct investment ruling went through that the Chennai-based carrier had held “preliminary discussions” with at least one carrier based in the Gulf.
“There have been preliminary discussions to check in principle whether there is interest on both sides and the confirmation there would be ‘yes there is’,” Mills said. He declined to disclose which airline or airlines he was referring to, although a senior industry source later told Arabian Business that Qatar Airways was one of them.
The negotiations, Mills explained, had largely been academic up to that point. “[Talks have] been on a preliminary basis, because they’ve quite rightly said ‘what’s the point in investing money in due diligence if the rule to enable [an investment] doesn’t even exist’,” he added.
Any future tie-up, he added, would provide reciprocal benefits for an international partner. “We’ve got a good network and we’re carrying 36,000 people a day [and] about 1m people a month now, so we’ve got good feed and good catchment,” Mills said.
A partnership with an international carrier would also give SpiceJet, which has an eighteen percent share of the domestic market, access to economies of scale on procurement contracts and long-haul options for its passengers, Mills added. The carrier currently operates flights to Dubai, with plans to start flying from Delhi to Riyadh in October.
One aspect where SpiceJet has the upper hand over other airlines in India is its debt burden. Its twelve-month liabilities at the end of March 2012 were around $132.7m, according to Economic Times data, substantially lower than Kingfisher and Jet Airways.
Saj Ahmad, chief analyst at Strategic Aero Research, agrees that SpiceJet is the obvious choice for an equity purchase by one of the Gulf airlines. “Spicejet has a fantastic cabin product, on par with its GCC rivals, in fact, and has not been saddled with any major debt worries,” he says.
“It has not overburdened itself with questionable growth plans like [rival low-cost carrier] Indigo, which has a ridiculous amount of Airbus A320s and A320 Neos on order, with next-to-no clarification on how it will fund them or where they’ll be deployed ,” Ahmad adds.
At the time of going to press, Indian media was reporting that Abu Dhabi-based carrier Etihad Airways was in talks with Mumbai-based Jet Airways, India’s second largest carrier, over purchasing an equity stake.
Jet Airways has a network of 76 destinations across both India and overseas, has a fleet of 101 aircraft, in addition to 48 orders, but lost $266m in its last financial year. Etihad, which holds stakes in a number of foreign carriers including Virgin Australia and airberlin, confirmed it was interested in making an investment in the Indian market, but was coy about naming names.
“The Indian aviation industry offers tremendous potential, with significant passenger movement on domestic and international sectors,” the firm said in a statement amid speculation a deal with Jet Airways was imminent. Etihad is also due to launch a service to Ahmedebad later in 2012.
Sharan Lillaney, a research analyst at Indian wealth management firm Angel Broking, says there is at least one stumbling block if Etihad were to purchase an equity stake in Jet. “Jet Airways has an 80 percent foreign holding, so they’ll lose out because they’re not going to be able to sell stakes to a foreign airline,” he tells Arabian Business. Jet Airways is owned by Tailwinds Limited, controlled by the airline’s chairman and founder Naresh Goyal, and is incorporated in the Isle of Man.
Lillaney adds that Jet Airways will struggle to expand on its market share, which currently stands at approximately eighteen percent of the domestic market. “They’re also going to lose out on market share because they don’t have the money for expansion,” he says.
He also believes that international carriers may find it taxing to work in India’s regulatory environment, with laws changing quickly and with little advance notice. “The problem is the laws change every minute over here, that’s the big thing for any foreign company.”
Overseas airlines evaluating any tie-up with an Indian carrier should also consider the charges levied on the industry, which Lillaney says are not competitive. “The costs over here are very high — the airport charges, the fuel costs, the taxation — [they’re] among the highest in the world,” he says. In April, India’s Airports Economic Regulatory Authority approved a 345 percent increase in landing rights fees at Indira Gandhi International Airport in the capital, Delhi, over the next two years, which airlines may pass onto passengers.
Fuel prices will also likely be a concern. In September, state-run Indian Oil Corporation jacked up the prices of aviation turbine fuel (ATF) by between 5.3 percent and 7.6 percent. The move prompted SpiceJet, whose CEO Mills says fuel accounts for around just under half of its operating expenses, to begin importing some of its ATF requirements from Singapore.
Angel Broking’s Lillaney believes that “all airlines would be interested” in making an equity purchase in Indian operator, particularly Gulf carriers, whom he says want “to make India their second hub”.
Lillaney agrees that Chennai’s SpiceJet would make an attractive investment for a Gulf airline as “their debt level is quite low”.
Two that are perhaps less likely to attract investment though are state-run Air India, which recently had to be bailed out by the Indian government due to its debt burden, and Kingfisher Airlines, which as well as suffering under its own crippling debts was earlier this year forced to suspend all of its international operations.
“Kingfisher needs to restructure their debt and bring debt levels down by 50 percent. They need to ask their banks to cut and convert their debt into equity,” Lillaney says. According to analyst firm Centre for Asia-Pacific Aviation (CAPA), Kingfisher needs an immediate cash injection of $600m, followed by an additional $300m to $400m over the next eighteen months to stimulate future growth.
“Kingfisher has an outside chance, but a very difficult one as any deal will be complex, requiring significant capital to be committed by current promoters and the concurrence of banks to take a haircut on outstanding loans to the carrier,” CAPA said in a research note published a few days after the FDI decision in September.
“In addition, it will take time to develop and agree upon a realistic business plan,” it added.
Emirates Airline, the flag carrier of Dubai, has been the first Gulf operator to come and say it is categorically not interested in making an investment in India’s aviation industry. In a statement released by the company shortly after the 14 September cabinet decision, it said: “Emirates has no plans to acquire a stake in another airline in India or anywhere else. We are busy focusing on the many aspects of our own growth including the launch of flights to five new destinations in as many months.”
Emirates’ stance is not surprising, given executive vice chairman Maurice Flanagan’s comments to Arabian Business over summer that acquiring equity stakes in other airlines “is just not worth it”.
Ahmad, of StrategicAero Research, expects that at least one Gulf airline will eventually make an investment in the sector — most likely SpiceJet — but does not think carriers in the region will be clambering over themselves to do so.
“Many of India’s airlines are losing money so we shouldn’t expect to see any knee-jerk or rapid stake buying done by any of the big Arab airlines anytime soon,” he believes. “Indian carriers have to demonstrate they can turn things around and be attractive to investors.”
Wings of change
Prior to 14 September 2012, government regulations prohibited foreign airlines for any FDI activity in India’s domestic aviation sector.
This was not always the case though. In the early 1990s the Indian government loosened restrictions on its civil aviation industry, allowing privately-owned airlines to service these routes, as well as allowing overseas carriers to purchase stakes of up to 40 percent in these operators.
Kuwait Airways and Bahrain-based Gulf Air were two foreign carriers to take advantage of this arrangement with both buying up 20 percent shareholdings in what is now India’s second largest airline, Jet Airways.
In 1996 the policy was reversed, forcing Jet Airways to reach into its pockets and buy back the 40 percent of itself it had previously sold.
“Ostensibly this was because private carriers were still relatively small and the concern was that foreign airlines were still relatively small and the concern was that foreign airlines would control their development in such a way as to feed their offshore hubs, relegating the Indian carrier to the status of a regional carrier,” said analysis firm Centre for Asia-Pacific Aviation.