India’s beleaguered aviation industry is hoping to be more profitable if the government allows foreign airlines to invest in the sector. So far, massive passenger growth has not translated into profits.
By the end of the financial year in March, India’s domestic airlines will have piled up losses of an estimated $2.5 billion. Coming on top of losses sustained in previous years, the aviation industry is deep in debt.
But the cash-strapped sector has finally heard some good news. A group of ministers this week agreed to allow foreign airlines to buy stakes of up to 49 percent in domestic carriers. The proposal - being seen as a lifeline for the industry - is expected to get formal approval in the coming weeks.
The Indian aviation industry is among the fastest growing in the world with traffic increasing by over 17 percent last year. But the industry continues to lose money.
That is largely because aviation fuel prices - already high due to local taxes - have risen sharply. However airlines have been unable to offset those costs by raising fares due to cut throat competition in the sector.
“Because of certain carriers undercutting, the other carriers have no option but to match those prices, so sometimes you do have a ridiculous situation where you have flight tickets which are almost the cost of a train journey which itself defies logic," explained Amber Dubey, director of aviation at consultancy KPMG in New Delhi. "So breakneck growth happening but at the same time it is not profitable because it is actually coming on the back of ticket prices which are not sustainable.”
Five of India’s six main carriers, including state owned Air India, have posted losses. Banks, to which they already owe large sums, are unwilling to make more loans.
But hopes have risen that foreign airlines will provide a much-needed cash infusion under the new law.
Foreign airlines have been eyeing the Indian market for some time.
Dubey says that India’s huge growth potential makes the aviation sector attractive despite its problems.
“The long-term opportunity is what the foreign airlines are going to punt on. Right now if you look at the global traffic that is not growing beyond three, four, or even five percent, it is low single digit growth," Dubey said. "It is countries like India, China, where the real growth is coming, this is where the populations are. And if you look at air travel penetration, we [India] are not even four per cent, it is not even the tip of the iceberg… So the long term outlook for India great, the economy is growing, the per capita incomes are growing, and with that comes the propensity to go for air travel.”
Buying stakes in local airlines will give foreign airlines access to smaller towns in the heart of the country. So far they can only fly into major metropolitan areas. In exchange, Indian airlines will get access to global routes.