The Indian airline industry is going through serious financial stress because of factors including the economic downturn of 2007-08, the Mumbai attack and the fluctuating price of Aviation Turbine Fuel (ATF). Besides Air India, which seems to have developed a terminal illness, even airlines like Jet Airways and Kingfisher are haemorrhaging. Perhaps their initial business model of a full service airline has proven to be a disaster, and low-cost carriers (LCC) have taken over the majority of traffic.

Many of the industry?s current problems lie in the tenets of the Chicago Convention of 1944 and its allied agreements. These accords provided for the nationality of aircraft and airlines with a provision of ?substantial ownership and effective control? by the nationals of the country where the airline was registered. This implies that majority ownership shall remain with the nationals of the given country. Hence, worldwide, FDI cannot exceed 49% in an airline. Domestic airlines are considered to be local issues and majority foreign ownership in domestic airlines is a taboo worldwide, barring a few recent exceptions.

Under current agreements, airline industry players are unable to merge and acquire each other, unlike other industries. The airlines started to adopt new measures and mechanisms to bypass this problem. This was done through a new concept of code sharing, joint ventures, profit sharing and global alliances. While anti-competition laws have become very assertive, the excessive growth of airline fleets leading to financial difficulties has not been considered by the International Civil Aviation Organisation (ICAO) or the International Air Transport Association (IATA) so far.

IATA was formed in 1945 as a cartel for fixing international ticket prices, which led to some stability, but under the anti-trust legislation of the US, this cartel was broken up. In India, the Directorate General of Civil Aviation, under the Aircraft Act, provided for the approval of airline ticket prices. Eventually, the liberalisation in air traffic services brought about the system of free floating ticket prices that vary from day to day. This was done as a part of the free market approach in the hope that it would benefit the consumer by lowering prices. This has proven generally correct, especially with the coming of LCCs, especially during peak season. At such times, with a limited number of aircraft, ticket prices shoot up and become unaffordable for the common man. Another thing that happens with liberalisation is that as competition grows, more aircraft capacity is created, leading to reduced occupancy per aircraft and lower profit margins, which in turn leads to financial troubles for airlines.

Bilateral intergovernmental air service agreements have led to the uneven growth of civil aviation. In fact, many states imposed restrictive policies on their national airline, not understanding the harm that caused to their own growth. Aviation has been a major driver of economic growth over the last few decades, and many countries like the UAE and Singapore have grown on a proactive civil aviation policy. In the cargo sector, about 40% of cargo (in value terms) travels by air. Trade and tourism directly depend on efficient air services. Improved technology in aircraft, including longer endurance and point-to-point service is leading to major growth both in international trade and tourism. Countries that have realised this and liberalised their skies have benefitted from it.

As a result of the insufficiencies of bilateralism in the growing international travel industry, and also globalisation, whose major engine was civil aviation, the US insisted on limited open skies, which became better known as the Bermuda-type agreements. These agreements allowed unlimited flights between two or more international destinations.

Nationality rules are discretionary and may be waived. Foreign ownership restrictions are not unique to aviation and exist in broadcasting, telecommunications, electric and nuclear power production, shipping and banking. But they are based on the internal policies of the country and not on international conventions. In fact, exemptions are made as and when convenient. This can be on a case to case basis. For example, the US waived the nationality requirement when Iberia Airlines gained control of Aerolinas Argentinas. The US did not object to the fact that Spanish citizens owned and controlled the Argentine carrier, after Argentina opened the bilateral agreement to expand traffic rights for US carriers. Conversely, when British Airways sought to gain effective control of US Airways, the US stalled until the issue of Heathrow access under Bermuda-II was resolved. Hence, the presence of an ownership and control restriction can be an effective lever to pry loose concessions that would be otherwise unattainable.

As in the maritime trade, the elimination of foreign ownership restrictions would enable the creation of ?flags of convenience? in international aviation, with owners of airlines shopping for countries with the least burdensome labour, safety and security laws and regulations.

This practice could compromise national security and reduce reliance on the civilian commercial airline fleet for airlift capacity in times of national requirement, such as the US Civil Reserve Air Fleet programme. It could also eliminate competition in the city-pair markets dominated by the acquired and acquiring airline.

Going forward, airlines must be treated in a more independent manner and allowed the advantage of cross-border mergers and acquisitions so that they are not hampered by outdated conventions and legislation. The EU has taken steps in this direction by allowing all forms of cross-ownership within the EU. This is possible because the EU is emerging more as a single country in all forms. That may not be the case for India, where security concerns are high. At the same time, the partnership sought in 2001 by Air India with Tatas and Singapore Airlines would have provided us with the synergies and efficiencies of both groups, and Air India would not be in the condition that it is in today. All countries will also need to ensure that any airline coming into their country is not owned or even controlled by anti-social elements of dubious reputation.

In India, there is no restriction on foreign ownership in airlines as long as they came under the overall restriction of ?substantial ownership and effective control by nationals?. However, when the issue of the Tata-Singapore joint domestic airline came up, an order was passed by the Cabinet that no foreign ownership would be permitted in domestic airlines. When divestment of Air India was under consideration in 2001, limited foreign ownership in the strategic partner was allowed.

While security considerations should not be undermined in the ownership of airlines, limited foreign ownership for strategic purposes could be advantageous.

The author is chairman of International Foundation for Aviation and Aerospace Development, and previously India?s representative to ICAOsanat_kaul@hotmail.com