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The Government of India has notified foreign direct investment of up to 49 per cent by foreign carriers
in the Indian aviation industry. This move will, in the long run, draw more serious global players into the
sector, given the size of the Indian aviation market and its growth potential. However, addressing issues
relating to taxes and levies on aviation turbine fuel will be critical to attract substantial FDI in the sector.
Government allows FDI by foreign carriers in
domestic airlines
Sep 27, 2012
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On September 14, 2012, the Government of India announced that it would allow investment by foreign carriers into the
Indianaviation industry to the tune of 49 per cent. Thishadhitherto not beenpermitted mainly because ofissues related to security
and the possibility of foreign players virtually taking over small Indian carriers. Until now, foreign direct investment (FDI) from foreign
entities (non-airlines) to the tune of 49 per cent and 100 per cent through NRIshad beenallowed.
Move to open up sector is a step in the right direction....
The Indian aviation industry has recorded a robust growth over the past 5 years, driven by economic growth and improving airport
infrastructure. Domestic passenger traffic has expanded to 61 million passengers in 2011-12 from 35.8 million passengers in
2006-07, registering a CAGR of 11 per cent. Although growth will be slower in the short term due to the economic slowdown,
CRISILResearch expectsthe sectorto continue to clockhealthygrowth in the long run,withpassenger traffic estimated to reach 90
million by 2016-17.
Domestic air passenger traffic trends and outlook
E: Estimated; P: Projected
Source: DGCA, CRISIL Research
The sizeand growth potential of the Indian aviation market is expected to attract global carriers, few of which have already shown
interest in forming alliances with Indian players. We believe that the first set of beneficiaries of this rule are likely to be airlines that
currently have little or no investments from foreign entities.
In addition, this move to allow foreign direct investment is expected to provide a much needed source of funding for debt-laden
carriers that are highly levered. Jet Airways Ltd. has a gearing of 3.8 times in 2011-12, while the networth of SpiceJet Ltd. and
Kingfisher Airlinesare in the negativeas ofMarch 31, 2012. Private carriersalone had adebt burden of Rs 400 billion as on March
31, 2012 (the collective debt burden of the Indian aviation industry stood at around Rs900 billion as on March 31, 2012).
Opening up the aviation sector isalsoexpected to help bring global best practices to India with respect tobetter flying experience for
passengers, andimproved technology andsafety aspects.
....but structural issues need to be addressed first
No part of this Report may be published/reproduced/distributed in any form without CRISILs prior written approval.
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While this is a positive and important step forward for Indian aviation, we believe that allowing FDI by itself will not be sufficient to
address the numerous structural challenges, especially relating to duties and levies on fuel.
Aviation turbine fuel (ATF) cost isthe largest cost component for airlines(accounting for 45-50 per cent of costs), and hence,is a
key determinant of operating profitability for carriers. However, these costs are largely beyond the control of airlines as they are
driven by fluctuations in global crude oil prices. In India, national sales tax on ATF (25-30 per cent on average) is an additional
burden for domestic carriers. This tax structure makes Indian ATF prices about 50 per cent more expensive vis-a-vis other countries.
In an industry like airlines -where the price-sensitive nature of customersand severecompetition restricts players' ability to pass on
any increase in costs -this results in severe pressure on the carriers' financials. Consequently, Indian carriers (including Air India,a
100 per cent government owned carrier)clocked accumulated losses of around Rs 450 billion in 2011-12.
These issues must beaddressed in order to facilitate foreign investments, and thus ensurea substantial positive impact on airline
financials and the investment climate in the Indian aviation sector.
No part of this Report may be published/reproduced/distributed in any form without CRISILs prior written approval.
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