The opening up of the aviation sector to 49% investment by foreign carriers has raised interest from private equity funds but the sector?s structural problems and flawed business models could deter big investments.
Indigo Partners, a private equity player with investments in several low-cost airlines around the world, is keen to invest in India but is cautious of the domestic aviation industry?s problems.
Indigo Partners has investments in Singapore’s Tiger Airways, Spirits Airlines of the US and Hungary’s Wizz Air.
?I would like to invest in India but right now there is just too much regulation,? said William Franke, managing partner of Indigo Partners. ?Also, the business models are not correct. At the end of the day, the business model is to make money.?
?But what happens in India is that the model keeps getting confused, which is why the industry has lost billions of dollars.?
Franke, former chief of America West airline, said a true low-cost model is missing in India.
?The market does not need another full service carrier,? he said. ?In emerging markets like India, low-cost is the way to go but the basic underpinnings of the low-cost model is missing because of over regulation in the industry.?
Indigo Partners has held talks with Captain Gopinath, SpiceJet and IndiGo but so far nothing has materialised.
Despite the structural issues, interest from private equity funds has grown in the sector since the opening up of FDI.
In August, FE had reported that allowing global carriers to invest in domestic carriers will be one of the ways to attract private equity investment in airlines, after speaking to six large PE funds that manage roughly $7 billion.
?The environment has changed,? said Neil Mills, chief executive officer of SpiceJet.
The low-cost airline owned by Kalanithi Maran has received several offers of investment from private equity investors.
?Private equity interest has gone up because the ability of the other (foreign carrier) is now there.?
Hong Kong-based Bravia Capital, which has invested $5 billion in aviation including the Chinese airline Hainan Airlines, is ready to invest in India.
Last week, the firm?s managing director Hal Hayward told news agencies that Bravia Capital will invest in India without disclosing the name of the firms involved. Reports suggest talks are on with SpiceJet.
The Hong Kong-based fund was also said to be in talks with Kingfisher Airlines. Consultants said the government must resolve issues with fuel taxes and airport charges before investment activity truly begins.
?FDI was a good reform measure but they also need to free the sector from high fuel taxation and high airport charges before the aviation business becomes more viable to invest in,? said an consultant with a global audit and consultancy firm on condition of anonymity.