Few seen betting on India’s aviation story

For any investor to put money, there has to be a business case.

Does India’s aviation sector have one? All it has is a plethora of structural issues that 49% foreign direct investment – which was allowed on Friday after being kept in abeyance since 1997 — can’t solve, said experts.

India was the worst performer among aviation markets globally as domestic air traffic fell 1.1% in July, reflecting a flailing economy, according to the International Air Transport Association.

The total accumulated losses of the Indian aviation sector stood at a whopping (from 2006-March 2012) $8.5 billion and the number is likely to touch $10 billion this year.

“FDI is not a panacea for the industry. The first obstacle is valuation,” said an analyst with an international brokerage.

The industry is heavily dependent on crude oil prices and foreign currency exposure and unless these issues are resolved, FDI will not help, is the refrain.

Amrit Pandurangi, senior director at Deloitte India, described the announcement as a positive development, but said it will not really help in resolving the current issues, which are high fuel cost, intense competition and rising airport taxes.

Among airlines, Jet Airways and SpiceJet were cautious while lauding the decision, while the doddering Kingfisher, which has the worst business case with debts and loans of over Rs12,000 crore, the most gushing.

Experts say SpiceJet and Go Air could be beneficiaries but few else.

“Given the underutilisation of capacities, huge losses and reduction in market share, it is very difficult for any foreign carrier to invest in the airline (Kingfisher),” an analyst said.

“Why would any investor want to put Rs10,000 crore – he can happily start a new airline and have lots of cash to spare,” this person said.

Kapil Kaul, CEO, South Asia, at Centre for Asia Pacific Aviation (CAPA), an aviation consultant, said some of the airlines will benefit and could see a couple of deals.

He said FDI will be extremely beneficial for the airlines in the medium and long term, but added that the sector needed stability from regulatory point of view.

Also, analysts said despite the FDI permission, the foreign airlines will still have to go through several scrutinies before it finally picks up a stake.

Nevertheless, a section of analysts feels that the decision is positive for the industry as it can help it wriggle out of the current situation.

“The decision will help in reducing the industry debt. It is a good decision in long term,” said an analyst with a domestic brokerage.

He said the decision will benefit airlines such as Indigo, SpiceJet and GoAir as they have been exploring the opportunities of investment from foreign carriers.

However, it might not really help Jet Airways as the airline will have to bring down the current promoter holding if it opts for FDI, he said.

Currently 80% of Jet is held by promoters.