Cabinet soon to consider proposal of allowing foreign airlines to invest in domestic carriers

The union cabinet will soon consider the recommendation of allowing foreign airlines to invest in domestic carriers. The move could give extra support to the aviation sector as domestic carriers are facing financial problems. After receiving civil aviation ministry’s in-principal approval, the commerce and industry ministry has circulated a draft cabinet note for the inter-ministerial consultation. 'Though the aviation ministry has given an in-principle approval, the sectoral cap will be decided by the Cabinet,’ an official of the Department of Industrial Policy and Promotion (DIPP) said.

The aviation ministry wants the cap on foreign airlines’ holding to decrease to 24% from 26%, however, the DIPP, which is the apex body for framing policy on the Foreign Direct Investment (FDI), wants it to be 26%. A holding more than 25% gives the right to block a special resolution.

Currently, India allows 49% FDI into the airline companies; however, it had banned investment in the sector from the foreign airlines. As per the current policy, no foreign airline would be allowed to participate directly or indirectly in the equity of an air transport undertaking engaged in operating scheduled and non scheduled air transport services except cargo airlines.

As per the industry estimates, during the April-September 2011, the private domestic airlines have occurred the loss of more than Rs 3,500 crore. Few of the domestic airlines urgently need capital to pay off debt. Majority of players in the sector have occurred losses in the first six months of 2011-12.

Experts are of the view that the current situation may remain the same for coming quarters, because of the increase in supply from the los cost airlines, competition and high fuel prices and rupee depreciation. Most of the domestic players may make loss for the current financial year.

However, the domestic traffic has been increasing. It has increased by 20% because of the increase in the middle class, some of the domestic airlines have been faring poorly and because of the restrictive FDI policy, they are facing difficulties in raising funds.

Earlier, the resistance to FDI in the aviation sector has come from some private airlines. During mid-1990s, an application from a venture of Tata and Singapore Airline was put on hold by the successive governments. And in 2001, both of them had also abandoned a joint effort to pick up a stake in Air India.

However, this time, the aviation ministry has favorably answered to DIPP’s letter to allow foreign airlines to pick up minority stakes, but it wants the rule to be more restrictive. However, the DIPP official said any cap below 26% would serve no purpose and no foreign firm would be interested in investing. The department, under the industry ministry, is keen on allowing at least 49% FDI in all sectors and had even floated a discussion paper on the issue earlier.