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PMO pushes for higher FDI in airlines

The move is expected to lead domestic airlines to adopt global best practices,besides opening new funding vistas.

The Prime Minister’s Office (PMO) has pushed for allowing foreign airlines to pick up stakes in Indian carriers along with a significant say in their management. It has asked the civil aviation ministry to support Indian airline companies’ plans for rapid fleet and route expansion with such a policy action.

The PMO has specifically told the ministry in a recent letter to promptly include the proposal on the agenda of the group of ministers (GoM) on aviation,official sources told FE.

The move is expected to lead domestic airlines to adopt global best practices,besides opening new funding vistas at a time when air traffic growth has peaked. The PMO initiative also coincides with the improved liquidity position of many foreign airlines which went through a bad patch during the economic downturn of the last two years.

Currently,FDI up to 49% is allowed in domestic aviation,but foreign airlines are barred from investing on the grounds of national pride and security. The proposal is to allow at least 26% FDI by foreign airlines,which would entail their presence on the airlines’ boards. Sections of the government including the department of industrial policy and promotion,the nodal agency for FDI policy,have pitched for an even higher stake of 49%.

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While India’s No.1 private airline Jet Airways has opposed the move to allow foreign airlines to invest in domestic carriers,others like Vijay Mallya-controlled Kingfisher Airlines have lobbied hard for such equity infusion.

Civil aviation minister Praful Patel had earlier this year said that government was considering divestment in Air India as one of the options to help the national carrier tide over the financial crisis.

“The PMO has written to us asking to take up several issues including relaxation in investment norms for foreign airlines with the GoM. The issue of higher sales tax on aviation turbine fuel (ATF) would also be on the GoM agenda,” a civil aviation ministry official told FE. The ministerial panel is headed by finance minister Pranab Mukherjee.

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The PMO note is expected to help the aviation ministry’s case for allowing foreign airlines to invest in domestic carriers. In a recent meeting with DIPP officials,the aviation ministry proposed to allow foreign carriers to buy 26% stake in local carriers.

The move is significant since the aviation ministry had earlier opposed any relaxation in FDI rules for foreign carriers,arguing it would not be in the interest of domestic airlines. After taking a protectionist stand for several years,the ministry only in August 2009 proposed to allow investment up to 20% in local airlines. “Who will invest if he is not allowed to pick up controlling stake,” the official quoted earlier wondered.

“Relaxing the FDI rule for foreign airlines would give domestic airlines access to capital as well as best practices (in the industry). It’s high time government liberalised the policy. The economy is on a high-growth path and air traffic growth has peaked. This requires airlines to invest in fleet and route expansion,” Amber Dubey,director (aerospace and defense) at the Indian arm of global consulting firm KPMG said.

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Buffeted by soaring fuel price,weak demand and irrational pricing,airlines have only now started to recover from one of the worst liquidity crunches to hit the sector.

Helped by a robust economy and peak season demand,domestic airlines carried 211.38 lakh passengers during January-May,up 22% over the corresponding period last year. With strong demand for air travel,Indian carriers have started expanding their domestic and international network. Opening new routes requires significant investment as break-even takes time,varying from route to route.

“FDI for airlines should not be guided by national pride. It should be driven purely by economic considerations. In Europe,there are several cases where the airline of one country has acquired the carrier of another country. German carrier Lufthansa acquired Swiss International Airlines. Air France bought Dutch carrier KLM,” said an industry analyst.

First published on: 23-06-2010 at 10:14:18 am
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