2014 could be a make-or-break year for the Indian aviation industry
If turbulence and uncertainty best describe the last few years for the Indian commercial aviation sector, there are signs of a turnaround ahead.
With global airlines and investors with deep pockets coming together, India's ailing aviation sector could finally feel some wind beneath its wings from the start of operations by, and (SIA), along with their Indian partners in 2014.
While Tata-SIA will launch a full- service airline, Malaysia's AirAsia will start a low-cost carrier, again with the support of Tata.
“Since both SIA and AirAsia have strong international partners in Southeast Asia, India can expect a greater outbound emphasis in Asean countries who are already tourist-friendly. And with the Jet-Etihad deal already sealed, we will soon be able to see strong domestic-international tie-ups both east and west of India,” says Sanat Kaul, chairman at the International Foundation for Aviation, Aerospace & Development.
The-Etihad deal will bring together one of the largest airlines in India with a well-capitalized Persian Gulf carrier with global ambitions. Abu Dhabi-based Etihad will inject $600 million in equity into the Indian private carrier and help the debt-ridden airline strengthen its balance sheet and focus on fleet expansion.
“This will be a game-changer for Indian aviation, the roots of which lie in the Foreign Direct Investment (FDI) reforms of September 2012,” says Amber Dubey, partner and head of Aerospace and Defense services at global consultancy KPMG.
In September 2012 the Indian Government decided to allow international airlines to invest in Indian carriers. Its goal was to secure capital for existing domestic airlines which were grappling with debt. However, in March 2013 the Foreign Investment Promotion Board (FIPB) ruled that foreign airline investment is not limited to existing carriers.
This has resulted in AirAsia receiving approval to make a 49% investment in a joint venture airline—AirAsia India—with the Tata Group and Telestra Trading. The airline is expected to launch in the first half of 2014.
The return of Tata Group to the aviation sector may boost the sagging image of the Indian aviation market, paving the way for new investments. The Tatas have a long association with civil aviation in India. In 1932, J.R.D. Tata started Tata Airlines, later renamedin 1946, and subsequently nationalized in 1953. “The development [SIA's alliance with Tata] affirms India's reputation as a lucrative aviation market in the long run. We expect two more FDI deals with existing airlines. . . These strategic partnerships will help airlines such as GoAir and SpiceJet, currently in talks with foreign carriers, to have more stable cash flows. All this will bring in global best practices, greater competition, better choices for passengers and lower fares,” Dubey says.
Indian carriers are likely to see an infusion of $1.3 billion by 2015, and major international carriers, such asand are showing interest in investing in Indian airlines, analysts note.
The year 2014 may also see the debate over privatizing the national carrier Air India gathering steam. Civil Aviation Minister Ajit Singh said recently he was in favor of privatizing the flag carrier, and “the government of the day will have to look at this [issue].”
Though his statement caused controversy, the minister reiterated his position, saying, “after the package of 320 billion rupees ($5 billion) equity infusion, the government will not give any more money to Air India. It will have to fend for itself . . . I am firmly of the view that government should not be in the service sector like hotels.”
Privatization of Air India has been a long-pending correction that successive governments have shied away from, due to fears of political and union backlash.
“We expect that the new government which takes over in June 2014 may seriously consider privatizing Air India,” Dubey hopes. “There is public pressure on the government not to spend the $5 billion bailout package on Air India and instead use it to reduce the large taxes on Aviation Turbine Fuel and Maintenance Repair and Overhaul and to support growth of no-frills airports in India's interiors.”
Though Air India significantly improved its operational and financial performance during the previous year, its business plan is still under attack. The carrier still suffers from low productivity, a huge interest burden, a bloated workforce, insufficient recapitalization and regular government intervention. “If the carrier is to have any chance of success, it must be radically restructured both financially and operationally. This will require a level of political will to take tough decisions, a feature that has been absent to date. If decisive action is postponed—as we expect—Indian taxpayers will bear the cost,” the CAPA consultancy argues.
India's airlines could seea combined loss of about $1.6 billion in the financial year ended March 31, 2013, with most of this accounted for by Air India and the now-defunct Kingfisher Airlines.
Analysts expect domestic traffic in the 12 months ending March 2014 to grow by around 5-7% over the previous year, and international traffic by around 9-11%. A civil aviation ministry report expects 12% average annual growth in domestic air traffic between 2012 and 2017.