The tactics are well known by now: India is threatening to withdraw traffic rights from international airlines to defend its interests. The country's government was not shy in applying that approach when it came to Europe's planned emissions trading system (ETS). This time, the issue is not politics per se; it is the future of Air India, the struggling flag carrier.

Austrian Airlines and Swiss International Air Lines, both subsidiaries of Lufthansa Group, are being investigated by the Indian Aviation Ministry to determine whether they comply with the substantial ownership and effective control clause that has historically formed the basis of bilateral air service agreements. Officials have indicated to Swiss and Austrian executives that the airlines might soon find themselves barred from services into India if they are found to be operating in violation of those terms.

Or this could be a bullying tactic. According to airline industry sources, India has also unofficially outlined a way to avoid a withdrawal of traffic rights: Star Alliance—of which both Austrian and Swiss are members—could finally allow Air India into the global group of airlines.

What looks like a blatant and inappropriate mixing of unrelated issues is also only the latest sign of an aviation market in turmoil.

As far as the legalities are concerned, India now appears to be meddling with a situation that it has lived with for years. Swiss has been a fully owned subsidiary of Lufthansa Group since 2004, and Austrian was added to the conglomerate in 2008. To ensure effective control remains in Switzerland and Austria, respectively, the involved companies established locally controlled foundations. These were created to ensure that both airlines continue to comply with bilateral air service agreements in cases such as India, where the long-standing, traditional nationality clause has not yet been replaced by the European Union ownership and control definition. Austrian, Swiss and Lufthansa say the airlines are in full compliance of the required ownership and control limits.

In September 2008, India and the EU signed a horizontal aviation agreement, in which India de facto accepted the principle of the EU designation. India made implementation of this pact conditional to negotiating traffic rights with member states on a bilateral basis, a process that is ongoing, a European Commission official confirms. India is stretching out the process for reasons one can only speculate notes the individual.

But sources close to the discussions believe there is a deeper issue at play. India's airline industry has been in financial distress for years. Air India's merger with the formerly domestic carrier, Indian Airlines, has become a well-known failure in terms of its integration efforts. Air India now lags behind SpiceJet, IndiGo and Jet Airways in domestic market share.

While some financial improvements are now evident, the national carrier must fix its ineffective business model while it simultaneously tackles a host of other problems. These include whittling down $9 billion in debt, ameliorating its fractious labor groups and fending off political interference—even though it is beholden to the government for funding.

Many believe that a Star Alliance membership would trigger a reversal of fortunes. But experience has shown that alliances are not powerful enough to fix the more fundamental problems their members face.

India's airline malaise also includes the demise of Kingfisher. And Jet Airways, the other large private legacy carrier that has become a key competitor of Air India in recent years and has surpassed it in size, is in the process of being partially acquired by Etihad Airways. Mounting losses in past years have given rise to the belief that Jet would not have been able to survive on its own in the long term.

The Jet/Etihad deal is coming at a price—politically first, and then economically. As part of the agreement, the government has in principle agreed to triple Etihad's weekly seats into India to 36,000. Emirates, Qatar Airways and Gulf Air are arguing that they should be given more access to India as well. According to the International Air Transport Association, Dubai-Mumbai is already the busiest route between a Middle Eastern and Asian destination, and carriers such as FlyDubai are serving the lower-yield market of labor traffic to many destinations beyond Mumbai.

The influx of Middle East capacity into the Indian aviation market has hurt local carriers. For Air India in particular, a combination of the Jet/Etihad deal and even more Gulf carrier seats into India appears to be a recipe for disaster.

The idea to bring Air India into Star Alliance is not new. The airline was announced as a candidate for membership in 2008. The integration process that was supposed to lead it to comply with the so-called minimum joining requirements—a list of hundreds of demands to ensure comparable quality standards—was initiated under the sponsorship of Lufthansa. The German airline has had a keen interest in more access to India and has been code-sharing with the national carrier for years. Lufthansa also hopes India will eventually allow it to fly the Airbus A380 into New Delhi or Mumbai.

But after more than three years, the application was put on hold in 2011. Jaan Albrecht, who was then CEO of Star Alliance and now heads Austrian, said at the time that Air India had failed to meet all conditions.

Other alliance sources say talks about whether and when the process could resume have taken place since then. These sources indicate, however, that they see little progress as far as key performance parameters of Air India are concerned. In their view, the airline still does not meet the punctuality and quality requirements needed to qualify for alliance membership.

These officials claim that the alliance will take a tough stance in dealing with political pressure surrounding Air India's alliance plans. But, given the Indian carrier's relative retrenchment in both international and domestic markets, its value to Star has diminished, too. On the other hand, Star has limited options as far as Indian partners are concerned. The only other airline that it would have liked to bring on board appears to be firmly tied to unaligned and alliance-averse Etihad now—barring any last-minute policy changes.

With Cathy Buyck in Brussels.