It?ll take time for benefits to flow in: Analysts

The government proposal to allow 49% foreign direct investment (FDI) in Indian airlines is likely to benefit Indian carriers only in the long term. Experts told FE that even though valuations of Indian carriers are attractive, policies governing the sector might prove to be a deterrent. Former executives also say that foreign carriers will only be interested in a controlling stake.

All relevant ministries have agreed on allowing foreign carriers to pick up a 49% stake in Indian carriers. The decision, however, needs to be cleared by the Union Cabinet.

Airline stocks tumbled on the BSE in the past year, bringing down their valuations. Between January 3, 2011, and January 17, 2012, the Jet Airways scrip shed 67% of its value, Kingfisher Airlines lost 62% and SpiceJet lost 72% of its value.

?The current valuation of the Indian carriers and the positive outlook of the sector in the long term make equity investment in Indian carriers an attractive proposition for foreign carriers,? said Amber Dubey, director of aviation at KPMG.

?Definitely, the valuations of airlines have gone down since the heydays,? said Dhiraj Mathur, executive director, PricewaterhouseCoopers. ?But the fact is that if they need to raise money, they will have to go ahead with shedding stake at current levels.?

Consultants say despite the attractive valuations, foreign carriers will come into India slowly. ?The decision on FDI is definitely good for Indian airlines, but in the long run,? said PwC?s Mathur. ?The decision would be an enabler. Don?t expect dollars to flow in immediately after the decision.?

?Airline promoters do not have to sell their entire 49% equity in one go,? said Dubey. ?They can always enter into agreements to phase it out over a longer period to get fair valuation.?

Mathur added that cash-rich airlines like Singapore Airlines, Lufthansa, Air France-KLM and British Airways may be some of the foreign carriers looking to pick up stakes in domestic airlines.

?Cash-rich Middle East carriers, a leading Southeast Asian airline and some European airlines may be interested in Indian carriers,? said KPMG?s Dubey. ?It will help them offer seamless travel solutions to potential flyers in tier-II and tier-III cities in India and to enhance the hub traffic in their respective countries.?

However, when FE spoke to Singapore Airlines and Lufthansa in November 2011, both had shown no interest towards buying stakes in Indian carriers. Both said that their plans haven?t changed after the government?s Monday announcement. British Airways? holding company, International Airlines Group, welcomed the move and said that the liberalisation of the sector is a positive sign.

Richard Branson-promoted Virgin Atlantic, which had earlier expressed interest in Indian carriers, did not respond to The Financial Express at the time of going to press.

Mathur added that SpiceJet, Kingfisher and GoAir may be keen to hunt for investments from foreign carriers.

Former executives are also sceptical of the foreign carrier?s interest in India. ?Logically it seems there is no reason why they would want to invest in loss making airlines unless they get a controlling stake,? said former Jet Airways? executive director, Saroj Datta. ?May be these comments do not apply to cash-rich airlines like Emirates, Qatar and Etihad. But does the country want a Gulf-controlled aviation industry in India??

?The only reason the foreign airlines may be interested in investing in Indian carriers would be to take advantage of the opportunity to channel segments of the huge and growing Indian market,? he added.

?Foreign airlines will look for a controlling stake,? said a former executive from a Gulf carrier. He did not wish to be named. ?Even cash-rich Emirates has learnt its lesson after the Sri Lankan Airlines venture went bad, and they also would prefer to control any airline where they invest.?

Emirates had to sell off its stake in the Sri Lankan national carrier for $53 million in 2010. Emirates had initially bought 40% of the then Air Lanka in 1998 for $ 70 million. The Dubai-based carrier ended a 10-year management agreement with Sri Lankan Airlines in 2008 when it valued its stake at $150 million. The contract was ended after a row over ticketing issues broke out between the then chief executive of Sri Lankan Airlines and the Sri Lankan government.

Issues relating to aviation policies, which are hurting Indian carriers, could deter foreign carriers to enter Indian skies. ?It is a fact that the aviation policy in India, with high taxation on aviation turbine fuel (ATF) and high airport charges could deter foreign carriers,? said PwC?s Mathur. ?But at the end of the day, everybody wants to be a part of India?s growth story and aviation is very closely linked to the economy.?

?Ease of business is obviously high on the minds of anyone investing in India,? said the former Gulf carrier executive quoted above. ?India?s aviation policies are very restrictive and foreign carriers will keep it in mind before making any investment decision.?

Others, however, say that the long term picture is positive. ?In spite of a challenging policy environment, Indian aviation market has grown fastest in 2011, throughout Asia,? said KPMG?s Dubey.

He added that the industry is also expecting more policy interventions in terms of ATF taxes, bilaterals, cargo and maintenance and repair operations. This, according to him, forms a great opportunity for global airlines to enter the ninth largest aviation market of the world.

Allowing foreign carriers to invest up to 49% in Indian carriers would also mean that foreign institutional investors (FIIs) will have an option of selling their stake to foreign carriers.

Ambit Corporate Finance?s director Vinod Vadhwani explains that the foreign investment limit in aviation will not be changed.

?Foreign airlines being allowed to take up to 49% stake will not mean it?s over and above the FII limit,? he said. ?Ownership of the airlines will continue to be in Indian hands.?

FIIs have withdrawn sharply since September 2010. Between September 2010 and September 2011, FII holding in SpiceJet has gone down from 14.48% to 6.17%, in Jet Airways it has gone down from 7.10% to 4.67% and in Kingfisher Airlines it has come down from 5.54% to 2.11%.