FDI in Indian carriers gets mixed response

It also prohibits any foreign financial or other institution, seeking to invest in Indian airlines, to be in any way linked with airline business.

Updated: Jan 18, 2012, 19:58 PM IST

New Delhi: Government's decision to consider allowing foreign airlines pick equity in Indian carriers Wednesday received a mixed response with its opponents saying foreign airlines would finally dominate the Indian sky.

Acknowledging there was no consensus on the issue, a Planning Commission document on the aviation sector for the 12th Plan said, "More funds, technical know-how and global access can be unlocked by allowing foreign players to take equity stake in Indian carriers." It said a consensus on the issue "needs to be developed at the earliest".

Some experts welcomed the proposal saying it would provide the much-needed relief to the ailing Indian carriers.

"It would provide access to global routes, managerial expertise and synergy benefits. It brings us closer to the vision of making India a global aviation hub a la Dubai and Singapore. The current losses of the airlines make the valuations attractive," said Amber Dubey, Director Aviation at global consultancy firm KPMG.

Welcoming the proposal on similar lines, Ankur Bhatia, Executive Director of Bird Group, had a word of caution that the fresh equity should not be used to meet the losses or debt burden of the cash-strapped Indian carriers.

Rajiv Chib, Associate Director in PricewaterhouseCoopers, said it would allow the much needed infusion of funds as "the situation was becoming serious with banks demonstrating their unwillingness to pick up equity or give loans."

But, opponents quote the concerns behind the present FDI guidelines for the aviation sector, saying these "strict rules against allowing foreign airlines to enter the domestic airline sector were formulated with serious concerns".

"How much FDI has flown in since the government allowed foreign investment in domestic airlines seven years ago," they countered.

The opponents also quote a note of the umbrella body Federation of Indian Airlines (FIA) favouring the current policy disallowing foreign airlines to invest.

In a global environment where restrictive foreign ownership in the airline industry is the norm, not allowing foreign carriers to invest protects Indian carriers for being targeted for acquisition, the FIA note prepared earlier said,
adding foreign carriers could also use "bilateral air service rights to their advantage".

"A further FDI allowance in airlines in India would only impact adversely, the financial health and future of India's own homegrown carriers; and also the civil aviation sector...It is important that India should seek reciprocal opening of airline industry in other countries, before allowing open access of its market to foreign carriers."

FIA also pointed out that "sovereignty and national interest are usually the reasons that most countries do not allow fair free open-market competition in their respective airline industries."

The current FDI guidelines clearly state that no Indian airline operator would enter into an agreement with a foreign carrier giving the latter "the right to interfere in the management of the domestic operator" or to have "effective
control in the management".

It also prohibits any foreign financial or other institution, seeking to invest in Indian airlines, to be in any way linked with airline business.

The International Chamber of Commerce (ICC), in a paper on the issue, has pointed towards concerns expressed by the governments, labour unions, pilots' bodies and others.

While governments have argued that foreign ownership of airlines could compromise national security, they have also opined that it would be "unwise to turn over the nation's principal earner of foreign exchange into foreign hands".

The ICC paper also quoted governments' concerns that in difficult economic times, "foreign owners would be tempted to discontinue vital air links, leaving the country vulnerable to a serious disruption in the availability of air services".

The principal concern of labour unions was that "job losses will follow once foreign owners take control of an airline. Union officials have also questioned whether the terms and conditions of their employment would be governed by foreign, rather than domestic labour laws."

It argued that foreign takeovers would run counter to bilateral agreements, most of which require "substantial ownership and control" by local nationals of the airline.

Some government officials have expressed doubts about confidentiality and the willingness of airlines to compete vigorously with one another when they have overlapping ownership and boards of directors, the ICC paper said.

It quoted pilots' organisations for raising doubts that foreign ownership could result in weakening of safety standards.

"These claims are frequently coupled with concerns that foreign-owned carriers which have their aircraft registered in other countries could be subject to less strict safety tests than airlines having aircraft registered in the country of designation," the ICC paper said.