Will FDI in civil aviation end the sector’s troubles?

By Pankaj Agarwal and Archana Trivedi, Amarchand Mangaldas
0
1568
LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link

On 17 December 1903, the Wright Brothers made the first controlled and powered human flight and fulfilled mankind’s dream to fly, and in December 1912, with the first flight between Karachi and Delhi, the history of civil aviation began in India. This led to the formation of Tata Airlines in July 1932, India’s first airline company, which subsequently became Air India.

Pankaj Agarwal Partner Amarchand Mangaldas
Pankaj Agarwal
Partner
Amarchand
Mangaldas

Until the early 1990s, India’s aviation industry was heavily regulated. Foreign and private domestic airlines were restricted from operating air services, and the state-owned Indian Airlines enjoyed a monopoly.

Then, with liberalization of the Indian economy, the civil aviation sector was opened up to investment. Foreign direct investment (FDI) in airports was permitted up to 100% under the automatic route, and 49% FDI was permitted in air transport services under the automatic route, subject to certain conditions.

Since liberalization, the aviation industry has been growing rapidly, and today India is considered as the ninth largest civil aviation market in the world. However, with the recent financial crisis faced by Indian airline companies, can it be said that the Indian aviation industry is booming?

Action needed

With high taxes on aviation turbine fuel, increasing airport charges, high capital costs, growing interest rates, and labour issues, Indian airline companies are facing severe problems, which are beyond their control and require immediate concerted action.

So, what is the government doing in this regard? To address the sector’s urgent financing concerns, the budget for the current year proposed to permit external commercial borrowings of up to US$1 billion, as working capital, for one year. The budget further proposed to reduce customs and excise duty on aircraft parts. The government also allowed Indian airline companies to directly import aviation turbine fuel, thus reducing the running costs of such companies. But is this enough to revive the sector?

Perhaps the most effective solution would be to further liberalize the foreign investment policy for civil aviation and make it more dynamic. The FDI guidelines until recently did not permit any arrangement that gave a foreign airline company the right to interfere in the management or have effective control in the management of a domestic airline company.

However, the government has finally reviewed its position and has now allowed foreign airline companies to invest in the capital of Indian airline companies, operating scheduled and non-scheduled air transport services, up to the limit of 49% of their paid up capital, under the government approval route and subject to certain conditions.

Foreign airlines

The latest amendment to the extant FDI guidelines with respect to the civil aviation sector is more than welcome, but how will FDI help?

Archana Trivedi Associate Amarchand Mangaldas
Archana Trivedi
Associate
Amarchand
Mangaldas

The expertise and experience of foreign airline companies could provide the right stimulus to the now sluggish Indian aviation industry. Equity participation would help domestic airline companies, which are facing capital deficiencies and could even collapse. As banks have been unwilling to invest or give loans to bail out domestic operators, FDI could help provide much needed funds.

This would not only solve the problem of paucity of capital, but provide advanced technical know-how, improve operating standards and services, generate more employment and enable access to global routes.

However, is permitting FDI the most viable solution? Keeping in mind the significance of aviation to a country’s infrastructure, more FDI in the sector is appreciated, but flexible and innovative business models should also be evolved to facilitate the expansion of the aviation industry.

This step towards further liberalizing FDI policy in the aviation sector may also result in domestic airlines being targeted for acquisition.

Conclusion

The civil aviation sector comprises not just airlines but also includes infrastructure. India currently allows 100% FDI in greenfield airports, and has now allowed 49% equity participation by foreign airline companies in domestic airline operators, with the aim to revitalize the sector.

Similarly, the government could also consider further liberalizing existing FDI norms for charter flights and other non-airline functions, such as ground handling, maintenance and repair activities.

Alternatively, the government should encourage FDI in the development of avionics and pilot and air traffic control training, by granting incentives to training institutes for education and training in the civil aviation sector.

Pankaj Agarwal is a partner and Archana Trivedi is an associate at the Ahmedabad offices of Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.

am

Amarchand Towers

216 Okhla Industrial Estate – Phase III

New Delhi – 110 020

Tel: +91 11 2692 0500

Fax: +91 11 2692 4900

Managing Partner: Shardul Shroff

Email: shardul.shroff@amarchand.com

LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link