Skies are protected all over the world

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: Although not opposed to FDI in the aviation sector, I believe the present 49% cap is a substantial foreign holding in a domestic carrier. Raising this to 100% will not benefit the Indian traveller or the aviation industry. Foreign participation in India’s civil aviation sector should be leveraged in areas where both the need and the opportunity is greater, such as in the maintenance, repair and overhaul, and non-core functions.

Across various sectors, FDI is increasingly regarded as crucial to create a competitive environment and ensure a superior quality of product and service for the consumer. Be it manufacture, telecom, insurance or banking, FDI has helped challenge the status quo and support new entrepreneurs. The Indian aviation industry, however, is an exception to this process as no less than a dozen homegrown airlines—including full-service airlines, low-cost carriers and value-based airlines—are competing in the Indian skies, providing a range of services and flying experiences.

Since 2003, when Deccan was launched, over half-a-dozen new airlines have joined the fray, supported by capital and a burgeoning consumer base. In 2007, 432.89 lakh people took to the skies, registering a 32.5% growth from 326.68 lakh travellers in 2006. Almost all airlines registered growth in passenger volumes ranging from 11-145% in 2007.

According to estimates, India will need as many as 800 additional aircraft over the next two decades, worth more than $72 billion, to meet the growing demand for air travel. The International Air Travel Association estimates the Indian and Asia-Pacific region to be the fastest-growing markets in the world, and domestic traffic in India’s aviation sector will continue to grow at approximately 35% in the next decade.

Clearly, the airline industry in India is passing through its most competitive phase to date, where both state-owned and private airlines are wooing travellers at the high-end and affordable-fare segments. Despite the growth, the airline industry continues to grapple with infrastructure bottlenecks and cumbersome regulatory controls, ranging from unavailability of parking slots in metro airports to long queues at security and baggage x-ray and a shortage of technical manpower. The route expansion plans of Indian carriers have already resulted in excess supply over a deficient infrastructure, leading to congestion on the ground and in the skies.

The high-powered Naresh Chandra Committee on civil aviation, in its report submitted way back in December 2003, had officially proposed a hike in the FDI limit for domestic aviation. The resultant increase of FDI from 40% to 49% in October 2004, along with 100% FDI clearance for airport development, was expected to usher in root & branch reforms in the aviation sector. The means and the ends, however, have been on the lines of wishful thinking.

Foreign investments have fallen short of moving beyond metros to Tier-II and III cities where airport development and infrastructure upgrade continues to be neglected in the face of insufficient capital. The importance of domestic civil aviation is not restricted to creating efficacies of transport, but also an instrument of wider connectivity and inclusive economic growth— something foreign investments in domestic airlines do not promise to deliver.

A further FDI allowance in domestic airlines would adversely impact the financial health and future of India’s homegrown carriers and the civil aviation sector as a whole. The key challenge for India’s civil aviation sector is not more airlines, but better infrastructure in order to expand in a sustainable manner and develop on par with world standards.

Globally, contrary to the trend of FDI in other sectors, the aviation industry is protected by several restrictions in terms of operations, ownership and control. Most countries have imposed a 49% ownership limit in the airline industry. This is true of Singapore, China and a host of other nations across Asia and Europe.

The US, one of the freest economies in the world and home to the largest air travelling population, is even more restrictive. Foreign ownership of domestic US airlines is capped at 25% and current legislation does not allow foreign ownership of voting stock in US airlines to go up from 25% to 49%. In fact, the US Congress and department of transportation have thwarted all attempts to allow greater foreign ownership of US carriers, that includes turning down Richard Branson’s initiative to create a foreign-owned, US-based, low-cost airline.