Indian skies inviting, but no takers for airlines

BEIJING, June 12 Tue Jun 12, 2012 3:34pm IST

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BEIJING, June 12 (Reuters) - With a potential air market of hundreds of millions of people, airlines ought to be hammering on India's door - yet global airline executives say it would be madness to invest in a domestic carrier there, even if they were allowed to.

Although India's economy is not the investor darling it was some years ago, the 1.2 billion population includes a sizeable middle class with increasing disposable income and the desire to go places. It's a sprawling nation, trains are packed and their safety record is poor, so the potential for air travel is huge.

But there was little enthusiasm for India at a major airlines summit in Beijing this week.

"Anybody who is looking at India now is going to say it's going to be an extremely difficult proposition. There is a reward, access to a vast market, but the execution of that is the question," Tim Clark, president of Dubai's Emirates Airlines, told Reuters.

"You cannot afford to let civil aviation be a lame duck, not in something the size of India. You will have to find a way to make it work."

A notable absentee at the International Air Transport Association (IATA) meeting was larger than life Indian tycoon Vijay Mallya, whose Kingfisher Airlines is ensnared in dramatic losses and has been suspended from the group's international settlements systems.

Other Indian airlines like Jet Airways and Spicejet are also in the red.

Foreign airlines are not allowed to take a stake in a domestic Indian airline but the government has been sitting for years on a proposal to allow them to take a maximum 49 percent share. The move could be passed by parliament later this year.

The big issues are the high cost of jet fuel and airport charges, which are the highest in the world. Then there is the lack of political will to push through economic reform, alongside strangling red tape and a lumbering bureaucracy.

On top of all that is state-run Air India. The carrier is hard hit by a pilots strike but is in line for a $5.8 billion taxpayer bailout, and recently slashed fares.

"You have got to address that big white elephant Air India," said Azran Osman, the chief executive of Malaysian low-cost carrier Air AsiaX, which suspended its India operations recently.

"If it continues to behave the way it is, you can make it 100 percent foreign ownership, and no one's going to be attracted."

Willie Walsh, chief executive of IAG, the owner of British Airways and Iberia, said he does not see reforms on foreign ownership taking place in India.

"But even if they do, so long as you have a state that continues to provide funds to an airline that is inefficient and is dragging down the rest of the industry I think it would be madness to invest."

POTENTIAL INVITING

It's not all gloom and doom however - India does have some supporters who say what works in its favour is a market size just about a fifth of China's.

"Today what airlines have tapped is very, very small relative to the size of the population," said Kiran Rao, an executive vice-president at Airbus and president of Airbus India.

"What you will see is that India's economic story will continue to succeed. It may go through its ups and downs, but the long term potential for India is very strong."

"A lot of airlines across the world are interested to join the Indian market ... India is still a very young market. Five years down the line, competition will dictate that these issues get sorted out," Rao, whose firm builds three-quarters of India's aircraft, told Reuters.

If and when rules are relaxed, foreign airlines are likely to set up a new carrier with an Indian partner, rather than sink money into an existing concern, industry insiders said.

India's airlines are reeling under a debt load of $20 billion, and overall lost more than $2 billion in the fiscal year that ended in March.

"Foreign airlines do not necessarily have to invest in an existing carrier. They can always invest in a new carrier and that is very much a part of their plans," said a source familiar with foreign airlines' plans.

"Look at Indigo. Just a few years back, it started from a plain clean paper, without any debt load. Look where it is now - right at the top," said the source, who declined to be identified because the plans are private.

Indigo - the only airline making money in India - recently toppled Jet Airways to be the biggest airline in India in terms of a single brand's market share.

Jet, with its low cost arm, JetKonnect, had a market share of 28.2 percent as of April, while Indigo enjoyed a share of 23.8 percent. JetKonnect contributed 6.8 percentage points to Jet Airways' market share.

Kuwait Airways, which held a stake in Jet before the government barred foreign ownership in 1997, will evaluate opportunities to own a stake in a local carrier when new rules come into force, its deputy planning director of international affairs said.

"We have 500,000 Indians living in Kuwait, that's out of a 3 million population. It's a big number ... if we have the facility to fly more flights, we will do that," Saud A Al-Mokhaizeem told Reuters on the sidelines of the IATA meeting.

"India is a very big market, not only to the Gulf, but also to Europe and U.S.A. Despite the yields not being that big because of competition, the volume business is high."

Airlines want to invest in a country which is growing at a fast pace, has a huge population and an "unbelievable market potential," and tend to ignore the negatives, said Dinesh Keskar, a senior vice-president at Boeing who oversees Asia-Pacific sales, including India.

"At the end of the day, you are going with your eyes wide open. It will hopefully will get only better from here on, and if they can make money in this environment, they can make money in any environment."

But the sceptics appeared to be far greater in number. Many industry insiders believe that without the government relaxing taxes, airport charges, and bringing in other reforms, it will be difficult for Indian carriers to attract any foreign investment.

"Lifting the foreign investment limit is obviously a move in the right direction. But that, in itself, is not going to be an answer to everybody's prayers," said Tony Tyler, the chief of the International Air Transport Association, which represents more than 80 percent of the global airline traffic.

"You need to be think about this as a business. What do businesses need? They need capacity, (but) they need to be affordable."

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