Alliances with foreign companies

The linking of domestic companies into global supply chains has a demonstrated impact on Indian companies as well. This is clearly visible in those domestic carriers that have foreign airliners as shareholders.

Like a royal princess, the Indian aviation industry sits pretty as foreign airlines vie for her hand in alliance. In a bid to boost international air travel, the government liberalised grant of traffic rights to Indian carriers two months ago. The policy decision to allow 49 per cent foreign direct investment (FDI) in aviation was hailed by the Union Civil Aviation Minister Ajit Singh as “the single most important policy decision” which will transform the country’s civil aviation scenario. Indeed it has. And how!

Inroads by Foreign Carriers

Though European carriers continue to show interest in buying a stake in India’s airlines, the action now is between airlines from West Asia which are competing with South East Asian carriers for a chunk of this meaty pie. Clearly, Indian aviation has never had it so good. Consider this—most domestic carriers are in the red. Indian carriers lost an estimated Rs. 10,000 crore in 2011-12 over a loss of Rs. 19,000 crore in the last three years. Domestic airlines debt burden will soon touch $20 billion. And yet, it is the tremendous growth potential of the Indian aviation sector, as it moves to becoming the third-largest aviation market in the world by 2020, that has generated a buzz of activity. Traffic at Indian airports is estimated to touch 450 million by then. In 2013, international passenger traffic in and out of India was 43 million, up by 5.5 per cent over the previous year. Projections for New Delhi alone are 90 million passengers per annum.

There seems to be a buzz around news of airline alliances. The lead was taken by a South East Asian tiger when Malaysia-based AirAsia Berhad, Asia’s largest low-cost carrier (LCC) announced a tie-up with the Tata group and a local investor. There is great expectation that this venture will develop new markets between India and South East Asia. Industry experts feel that new start-up airlines such as AirAsia India could turn out to be the preferred route for foreign airlines to gain entry into India. AirAsia’s high profile entry is expected to boost India’s aviation sector and above all, help break current Indian airlines’ pricing, commercial and marketing strategy. Anyone who has flown AirAsia is aware of its key differentiators in pricing and connectivity. But AirAsia India’s expected start in October 2013 is likely to get delayed on account of the public interest litigation (PIL) by the former Member of Parliament Subramanian Swamy. Security clearance for the new Chairman S. Ramadorai came through just recently. Reports indicate AirAsia will probably roll out in early 2014 instead of December as it takes three months to secure an operating permit under the new rules.

After AirAsia India came the whopper mega aviation deal announced in April 2013, the largest foreign direct investment (FDI) ever in the Indian aviation sector. The Jet Airways-Etihad alliance saw Etihad Airways, UAE’s national airline, moving forward to pick up 24 per cent in Jet Airways for Rs. 2,058 crore. After some controversy, the big-ticket deal has now got the Foreign Investment Promotion Board nod. Aviation experts believe Etihad may well emerge as a big player following the deal with Jet though Etihad is not among the top ten international carriers operating to India.

According to the Minister of Civil Aviation, the new traffic rights have opened up several fresh international sectors and increased the traffic entitlements of Indian carriers by approximately 60 per cent.

In India, Emirates has 185 flights a week from ten cities, Qatar Airways has 95 flights per week from 12 cities and Etihad Airways has 63 flights a week to nine cities, a figure which is likely to increase soon. Further to the India-Abu Dhabi bilateral agreement, UAE carriers now have entitlement to operate 1,20,000 weekly seats to India. Reports in the media from the industry sources indicate that Emirates and Qatar have sought around 50,000 seats each weekly, while 20,000 seats have been sought by Air Arabia. Other West Asian carriers have requested allocation of 20,000-30,000 seats.

An Underserved Market

International air traffic from India has been growing at nine per cent and as things stand, international flights to the country fall short of demand. Sensing the growing demand for air travel, several airlines have expressed interest in expanding operations here. Among these is Turkish Airlines, which flies to 100 countries and has the largest global network. Turkish Airlines believes it has not penetrated the Indian market well enough. According to recent news reports, it wants to add Bengaluru, Kolkata, Ahmedabad, Hyderabad and Amritsar to its list of destinations. From its current 14 flights per week from Delhi and Mumbai, Turkish Airlines aims at 70 flights per week. Despite the onslaught of airlines from the Middle East, according to company officials, the vast network of Turkish Airlines is a clear advantage. The main factor here is easy access to Europe - Indians on the airline can fly easily into Europe with flying time to most European cities from Istanbul being a little over three hours. If Turkish Airlines can increase the number of flights in India while keeping costs low, it could well be a game changer.

More Asian tigers are roaring too. With the news that the Singapore-based low-cost Asian carrier Tigerair is seeking a commercial tie-up with budget carriers in India, there is likely to be more action on this front. Tigerair, which has a tie-up with Scoot, the low-cost arm of Singapore Airlines, is believed to be in talks with SpiceJet and IndiGo; but it appears that as of now, there are no plans for an equity stake in Indian carriers. Tigerair aims to boost its network in India through the tie-up while at the same time carrying more Indian travellers to Asian destinations.

India is the seventh largest international market from Malaysia but it is relatively underserved, partly because of the pull-out of AirAsia X, which dropped Delhi and Mumbai in early 2012 as part of network restructuring. Lion Air Group’s Malaysian affiliate Malindo Air was launched in March 2013, before which it was able to secure from Malaysian authorities most of the traffic rights to India that were previously held by AirAsia X. This accounted for about 8,200 weekly return seats in the market. It has been reported in the media that Malindo Air has been preparing for several months to launch India services but is still waiting for final approval from Indian authorities. The airline is hopeful of starting its India operations in the next few months. It initially plans to connect Kuala Lumpur with Delhi, Mumbai, Kochi and Tiruchirapalli, all high passenger traffic segments.

Air India too seems to have pulled up its socks. It is the only Indian carrier with the Boeing 787 Dreamliner in its fleet. The airline aims to emerge from the red and is optimistic about the performance of the Dreamliner on previously loss-making routes to Frankfurt and Paris that have now been showing high profit margins. While Air India’s plans to operate on Tokyo and Seoul routes fell through, it has big plans for the Dreamliner on the Australian sector. Latest unconfirmed news reports indicate that Qatar Airways is considering a minority stake in Wadia Group promoted LCC GoAir, valuing the airline at $550 million.

Exciting Times Ahead But…

While most believe the entry of AirAsia will change the landscape of competition in India, it is clear that the journey is not going to be quite so smooth for the airline. India faces infrastructure shortages whereas in its existing region of operations, AirAsia enjoys significant infrastructure advantage, including separate low-cost terminals. Secondary Indian airports might get new energy with the entry of AirAsia but again, the airline may not garner sufficiently high levels of passenger traffic from these cities.

There are some white elephants too such as Kingfisher Airlines, which had once reset the narrative of domestic private airlines in India but is now not seen as a potentially attractive investment. Any further dilution in IndiGo, India’s most profitable carrier, is also unlikely as 48 per cent of the airline is already owned by a US company. Interestingly, observers believe that a suggestion by a committee set up by the government in 2011 of a stake sale by Air India, appears quite possible. Investments from a few more foreign airlines are expected in the next few years and as such, one can look forward to exciting times ahead.

But some experts remind us of policy flip-flops that have been seen in the aviation industry before. In the 1990s, private carriers were allowed on domestic routes, with up to 40 per cent FDI, including by foreign airlines. Riding piggyback on this, Jet Airways saw rapid growth with Kuwait Airways and Gulf Air each picking up 20 per cent stake in it. But in 1996, it was announced by the government that FDI by foreign airlines would no longer be permitted in domestic carriers following which Jet had to buy back its foreign investors’ shares.

For now, things are looking up in the aviation sector. Industry has hailed the decision by the government to raise the FDI limit to 49 per cent as this is the shortest route to induction of new technologies and the best management practices. In addition, the linking of domestic companies into global supply chains has a demonstrated impact on Indian companies as well. This is clearly visible in those domestic carriers that have foreign airliners as shareholders.

Experts strike a note of caution that the huge debts the Indian carriers are under, the overall unstable business environment and the industry’s structural instability might make for a not-so-rosy picture. But the tremendous growth potential of international air passenger traffic to and from India might well propel the industry towards healthy growth.