India open to further reforms on airline investment: source

787 Dreamliners, including an airplane for Air India (R), are seen on the production line at the Boeing Commercial Airplane manufacturing facility in Everett, Washington February 14, 2011.

NEW DELHI (Reuters) - India is open to further reforms to lure overseas investors into its airlines, a government source said, after a dearth of interest following changes to investment rules left Kingfisher (KING.NS) and others still short of much-needed funds.

The aviation ministry will meet local carriers soon to ask what changes were needed in the policy, added the source, with direct knowledge of policy developments.

India changed its Foreign Direct Investment (FDI) policy in September to allow foreign carriers to buy stakes of up to 49 percent in domestic airlines, a move seen as a potential boon especially for debt-laden Kingfisher Airlines Ltd.

All three listed Indian carriers - Jet Airways (JET.NS) and SpiceJet (SPJT.BO) as well as Kingfisher - are said by some analysts to be on the lookout for investment from a foreign carrier, providing a new source of funding for the industry.

The fiercely competitive Indian aviation industry lost a combined $2 billion last year. All but unlisted IndiGo lost money, hurt by high state taxes on jet fuel, expensive airports and regulatory uncertainty.

But since FDI rules were changed, no carrier has publicly expressed an interest in buying a stake in Kingfisher or any other airline in India, one of the fastest growing markets in the world.

"We are also surprised why there is no activity. It's a fact that no foreign airline has approached us yet," the source told reporters speaking on condition of anonymity.

"We will ask these (local) airlines why FDI failed to pick up. What are the issues they are facing, if they are talking to someone," the source added.

India's high tax on aviation fuel was the biggest issue discouraging foreign carriers wanting to invest in Indian airlines, the source said. State taxes make jet fuel in India about 50 percent costlier than the global average.

India is talking to states to cut taxes on jet fuel, the source added.

"(The) crux is that you need to bring growth to the sector ... We have to create the environment to attract investments." (Writing by Matthias Williams; Editing by David Holmes)