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18 Jun, 2007

Indian Aviation Industry Heading for Private Equity Hands

MUMBAI: Plagued by excessive capacity, over-competition, low yields and massive airline losses, India’s aviation industry is on its way to falling into the hands of foreign investors and private equity funds, according to several speakers at an aviation summit here last week.

Companies such as Rothschild, the Citi group, Istithmar, Goldman Sachs, Temasek and Indigo Partners, many of which already have stakes in existing airlines, are waiting for the consolidation now under way to gain steam as bleeding airlines “rationalise” capacity through a series of mergers and acquisitions.

Three years after instituting policy changes that fast-tracked aviation growth, it is now turning out that what was in the short-term interests of consumer travel and economic development is not necessarily good for the long-term survival of the companies.

Although the huge seat capacity and massive competition to fill it based almost purely on low-fare pricing has enabled more people to travel than ever before, the airlines are making it clear that further growth will not be sustainable unless they start making money. They want some “sensibility” restored to the process.

Vijay Mallya, chairman of Kingfisher Airlines, told a summit organised by the Centre for Asia-Pacific Aviation (CAPA) here last week, “Airlines previously decided that low fares would be the way to catalyse traffic growth; and it worked, as the figures show. But how much of the growth was due to a demand for connectivity and air travel and how much was of it was stimulated by unsustainably low fares? The days of discounting and cut-price ticketing are over. Airfares are going to reflect the actual costs of operation. All of them.”

Now under way is the process of consolidation which, according to a CAPA report, will occur through a process of closure or mergers/acquisitions of existing airlines, leaving around two to three full service carriers, three to four large national low-cost carriers, and three to four niche, regional operators.

As India has no social safety nets to protect against joblessness, the government realises that this consolidation could become a serious political liability. One example occurred right during the CAPA summit itself when unions of Indian (formerly known as Indian Airlines) went on strike, causing massive disruptions to the traveling public.

To facilitate survival of the airlines, the government is making further policy changes. There is now talk of allowing more privately-owned airlines, including the domestic operators, to fly abroad by lifting a restriction that required them to be in business for at least five years.

As a first step, domestic privately-owned airlines are to be given permission to fly on the highly lucrative routes to the Middle East, previously the exclusive domain of the government-owned airlines on the Indian side and the various Middle East airlines on the opposite side.

The government is also moving to decongest the main metro airports of Mumbai and Delhi. The upcoming opening of new greenfield airports in Bangalore and Hyderabad within the next two years is expected to play a major role in that effort.

It is also approving 100% foreign direct investment in selected provincial airports as part of a nationwide policy to ensure that every Indian is no further than 50 km from a commercial airport by the year 2010.

All the growth will require capital, lots of it. While there is plenty within India itself, foreign investors are clearly aware of the opportunities.

One area expected to come under pressure is a restriction on foreign airline ownership, now capped at 49% for institutional investors and individuals and no more than 25% by a foreign airline. While some investors say they are comfortable with that, others are making clear that they would want further control if circumstances so require.

Also requiring capital will be associated businesses like maintenance and repair organisations, air traffic control, catering, training schools and many more. At the same time, it will not be a one-way street. Civil Aviation Minister Praful Patel says that Indian airlines will soon be seeking to invest in foreign airlines.

In November, Mr Patel is organising a meeting of Chief Ministers of the various states to get them to understand the economic benefits of aviation growth, and facilitate airline access, both foreign and domestic.

CAPA, whose studies, summits and research, has played a major role in creating the growth atmosphere, has just announced the creation of a vehicle to channel private equity investment into the Indian aviation.

However, the entire scenario could change overnight in the event of an economic downturn or slowdown triggered by international crisis in the oil-producing Gulf region.

Arab Air Carriers Organization Secretary General Abdul Wahab Teffaha made it clear in his presentation that although aviation regulatory and financial changes similar to those in India were under way in the Middle East, the only threat to future growth prospects was the “cauldron” of various conflicts in the region.

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