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India’s Aviation Industry Awaits Foreign Investors

  • Anjana Pasricha

An IndiGo Airlines aircraft and JetKonnect Boeing 737 aircraft taxi at Mumbai's Chhatrapathi Shivaji International Airport on February 3, 2013.

An IndiGo Airlines aircraft and JetKonnect Boeing 737 aircraft taxi at Mumbai's Chhatrapathi Shivaji International Airport on February 3, 2013.

India's financially strapped airlines have been looking for alliances with foreign carriers, after the government liberalized rules for overseas investment in the aviation sector. But they have been slow in coming, although India is expected to be the world’s third largest aviation market by 2020.

When India’s aviation industry totaled its losses in the last financial year, they amounted to a whopping $2 billion. That is why several struggling Indian carriers have been hoping to sell a stake to foreign investors after the government allowed overseas carriers to buy up to 49 percent stake in Indian carriers six months ago -- a move that was expected to bring in much needed foreign investment into the aviation sector.

But it has yet to materialize. The most-talked about deal is between Jet Airways and Abu Dhabi-based Etihad Airways, which plans to buy up to a 24 percent stake for about $300 million. This would be the first foreign investment in the aviation sector, but it has yet to be clinched. Malaysia-based airline, Air Asia, also plans to own a 49 percent stake in a joint venture airline with India’s Tata group.

But operating in India presents bigger challenges than in most other markets, said Sanat Kaul, the chairman of the New Delhi-based International Foundation for Aviation and Aerospace Development. Foreign carriers will have to cope with the core problems which have made it difficult for India’s carriers to turn in profits -- high operating costs and fierce competition.

“The problems which Indian domestic carriers have remain the same, which is high cost of air turbine fuel and so many other taxes which is making domestic travel an expensive proposition and the margins are thin, making it a very difficult and unviable proposition,” Kaul said.

Still, with only three percent of India’s one-point-two billion population currently flying, the aviation market is expected to grow hugely in the years to come. Aviation Minister Ajit Singh said that India could be the worlds’ third largest aviation market by 2020, handling 336 million domestic and 75 million international passengers annually.

Much of the future growth will lie not in the big cities, but smaller towns, say analysts. And that is why Air Asia plans to operate its proposed airline to small towns around the southern city of Chennai, Kaul said.

“They will start in Chennai and do a regional service where the economic GDP [gross domestic product] is higher and people will accept air travel. The other thing is that the three or four metro cities, which constitute bulk of our domestic traffic, is now getting saturated. Regional, smaller, airports are the next place where the growth will take place,” he said.

Foreign investors with deep pockets are expected to enter into alliances with Indian operators in the coming years, hoping to make profits in the long term. The International Air Transport Association this week called India a great potential market, but says it faces huge hurdles.

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