AirAsia JV approved. Aviation ministry officials seek policy clarification

by Devesh Agarwal

India's Foreign Investment Promotion Board (FIPB) today gace an in-principle approval to the Joint Venture (JV) company proposal of AirAsia, the Tatas and the Bhatias. The stated goal of this JV company is to form and operate an airline most likely AirAsia India, based out of Chennai.

As per a report, the JV will initially invest about Rs. 80 crore (approx $14.5 million), well above the minimum Rs. 50 crore requirement to start an airline. The JV will now have to approach the aviation regulator The Directorate General of Civil Aviation (DGCA) for obtaining a permit to start and operate an airline.

On the same day there is a report of senior aviation ministry officials clarifications from the Department of Industrial Policy and Promotion (DIPP) on whether the JV proposal complies with the Government's guidelines on FDI in Indian carriers by foreign carriers.

Bangalore Aviation readers will recall, just about two weeks ago, I had raised this very point in my article.

When the cabinet approved the policy on September 14, 2012, the press statement said

"......there has been a need to consider financing options available for private airlines in the country, for their operations and service upgradation, and to enable them to compete with other global carriers. Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions, and a vital gap in the country’s infrastructure"

The doubt stems from the lack of clarity in the guidelines on whether the revised FDI policy also allows investments in to fresh start-up airlines, in additional to the stated policy of existing airlines.

If allowed to invest in start-ups, it will enable foreign carriers to bypass infusing funds into existing Indian carriers, thus defeating a stated goal of the policy.

Then it will be the Indian tax-payer finally bearing the debt burden of these Indian carriers, who are largely financed by tax-payer paid "public sector" banks.

It will be interesting to see further developments, though I feel the proposal will go through. The Tatas are an extremely methodical, competent and powerful company. Behind the scenes, they will have worked tirelessly to ensure no embarrassment due to a public rejection.

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Opinion: Approving AirAsia-Tata airline will derail goals of FDI in aviation policy

by Devesh Agarwal

The announcement that AirAsia is joining hands with the Tatas and Bhatias with the intention to start a new airline in India will put the a significant policy dilemma in front of the Government of India related to foreign direct investment (FDI) in civil aviation by foreign airlines, and might just land-up derailing the goals of the fledging policy.

While the policy is not explicit, so as to avoid any problems before the Competition Commission of India (CCI), the policy is framed to help the weak balance sheets of existing India airlines, and more importantly the banks, many of them government owned, who have already loaned vast sums of money to this sector.

When the cabinet approved the policy on September 14, 2012, the press statement said

"......there has been a need to consider financing options available for private airlines in the country, for their operations and service upgradation, and to enable them to compete with other global carriers. Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions, and a vital gap in the country’s infrastructure"

Two weeks after the policy was announced, India's civil aviation minister, Ajit Singh, told the Business Standard

“We are not giving licences for greenfield airlines. As of now, FDI (foreign direct investment) in aviation can come only through existing airlines."

Indian civil aviation minister Ajit Singh.

The statements and policy are logical.

Thanks to years of regressive policies of the Indian government, and the ludicrous taxation structure, especially on aviation fuel, Indian carriers carriers' balance sheets are awash with red ink.

Air India has over $10 billion (over Rs. 55,000 Crore) in liabilities, while Kingfisher Airlines is in for over $3 billion ($16,000 Crore).

Even the country's more "financially stable" carriers like Jet Airways and SpiceJet has are stress situations with skewed financial ratios, and growth strongly hampered by a lack of capital.

With much of the money being siphoned in to Air India, and the financial implosion of Kingfisher, Indian financial institutions neither have the funds, nor the appetite, to lend any more to the airline sector. FDI is needed.

However, if foreign airlines are allowed to set-up new greenfield airlines, they need not risk investing in the existing airlines. They can start fresh, with no liabilities, benefit from not making or suffering past mistakes of operations or policy, bring in expertise and massive financial strength, and blow away the fledgling domestic sector.

We have already seen this happen in the international sector, where the government in its infinite "wisdom" required Indian carriers to operate for five years before they could fly international, while allowing even newly formed foreign carriers to operate to India, thus giving foreign carriers time to establish themselves with nil to minimum competition. Today, Indian carriers are restricted to the sidelines, while the unofficial national carrier of India is not Air India, but Emirates; with India contributing over 11% of the airline's total capacity. No small feat, considering Emirates is the world's third largest airline by seat capacity.

India's largest private carrier, Jet Airways, is negotiating with Abu Dhabi based Etihad to sell them a 24% stake for about $300 million (Rs.1,600 Crore), which is a premium considering Jet's total market capitalisation (mcap) is just Rs.4,575 Crore. Just as a comparison, AirAsia Berhad mcap is Rs. 12,842 Crore.

Jet leads Indian companies with a sky-high debt to equity ratio of 84 times, almost 1,000% of the next company in the list, or 4,300% of the 1.95 of AirAsia). Its total debt is in excess of Rs 11,030 crore. Thanks to losses over the years, the company's reserves have depleted almost 50%, thus declining equity, and leading to the increase in the company's debt to equity ratio. The airline needs to raise equity capital by inviting FDI from foreign airlines.

Earlier this week, the Chairman of Etihad, Sheikh Hamed bin Zayed al-Nahyan, delayed the deal citing concerns on policy flip-flops by the government. How will Etihad view an approval to an "India AirAsia"?

That will have to be gauged in the time to come, but, for certain, allowing foreign airlines to set up greenfield airlines will have a negative impact on the attractiveness of existing airlines, and by extension the health of their debts, and the health of the Indian financial sector.

Even as an unabashed believer in capitalism, in my humble opinion, while an "India AirAsia" will lead to lower fares and more competition, ultimately it will be we tax-payers who will be left holding the proverbial bag as the government will be forced to bailout the banks.

Allow foreign carriers to set-up greenfield airlines, but after a period of time, may be three years, for now, get them to invest in Jet, IndiGo, SpiceJet, GoAir, and if the government ever comes to a logical sensibility, Air India.

I am advocating the same approach as of Mr. Ratan Tata, a leading member of the "Bombay Club" which over 20 years ago, proposed a similar go slow approach on liberalisation.

As usual, your thoughts, comments, feedback and counter-views are welcome.

The video below is a panel discussion on FDI in civil aviation, soon after the policy announcement, from NDTV. If you cannot see it on mobile or on the RSS feed, please visit the main Bangalore Aviation website.

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AirAsia, Tatas and Amit Bhatia seek approval to start airline in India. Is SpiceJet the target?

by Devesh Agarwal

Malaysian low cost carrier AirAsia Berhad (Ltd.) through its investment arm, AirAsia Investment Ltd. (AAIL) has submitted an application to the Indian Foreign Investment Promotion Board (FIPB) seeking approval for AAIL to invest 49% into a proposed Indian joint venture together with Tata Sons Limited and Mr. Arun Bhatia of Telestra Tradeplace Pvt. Ltd. The expected holding in the JV is AirAsia 49%, Tatas 30%, and Arun Bhatia 21%.

Photo: Devesh Agarwal

This move comes amidst the backdrop of the September 2012 decision by the Government of India to open up the aviation sector to Foreign Direct Investment from foreign carriers.

AirAsia is one of the most successful low cost carriers in the world, and has created regional AirAsia airlines in Thailand, Indonesia, Philippines, and Japan in similar joint ventures like the one proposed for India.

The Tatas are a $100 billion conglomerate highly respected for their business values, and who used to own, then operate Air India prior to the government taking it over in the 1970s. The Tatas used to own close to 6% in Indian LCC SpiceJet Ltd., owned by the political heavyweight Marans who are related to DMK supremo Karunanidhi of Tamil Nadu. However, the Tatas claim their investment in SpiceJet is purely financial on with the two rounds of equity dilution at the airline, their stake is now down to less than 0.5%.

Mr. Arun Bhatia's son Amit Bhatia, is the son-in-law of one the richest men in the world, Mr. L.N. Mittal and serves serves on the Board of Directors at Queens Park Rangers Football Club in the United Kingdom alongside Tony Fernandes, the founder of AirAsia.

Subject to FIPB approval, the proposed joint venture company will make an application to Indian aviation regulators for the Air Operators Permit. The parties have signed a Memorandum of Agreement that details high-level terms with regards to the proposed partnership.

The airline, if formed, will be based out of Chennai, which will allow domestic connectivity to AirAsia's international operations.

This foray will mark a return of the Tatas to the airline and airport sector after almost 25 years. In the 1980s and 1990s, the Tatas had proposed a collaboration with Singapore Airlines to operate a domestic carrier and also to take over Air India. The Tatas had also collaborated with Changi Airport to develop the greenfield airport at Bangalore, which is now BIA. All efforts were thwarted by political opposition.

Our analysis

We are not sure how well this proposal will be received. India's civil aviation minister is on record with the Business Standard newspaper

“We are not giving licences for greenfield airlines. As of now, FDI (foreign direct investment) in aviation can come only through existing airlines."

Based on this premise, for the past few months, Jet Airways has been negotiating with Abu Dhabi based Etihad to sell a 24% stake in Jet for about $300 million. The Chairman of Etihad Sheikh Hamed bin Zayed al-Nahyan has already delayed the deal citing concerns on policy flip-flops. An approval to AirAsia will prove the Sheikh's point, and almost certainly scuttle the FDI initiative, announced by the government last year, which is essentially meant for rescuing India's debt-laden airlines and the banks who have already lent massive amounts to them.

We expect there will be strong, if not, insurmountable opposition especially with regards to existing Indian carriers like Jet Airways, SpiceJet and IndiGo, each of whom should not be discounted for their strong political connections.

So knowing all of this, why has this JV application been submitted? What do the Tatas, Bhatias, and Tony Fernandes know, that is not apparent?

Photo: Devesh Agarwal

If one was to go in to a conspiracy theory mode, the common point is SpiceJet.

From one side, the Tatas own a stake in the the airline. From the other side, Anthony Francis "Tony" Fernandes is in the very top Malaysian business tycoons circle, along with Mr. Ananda Krishnan, the Chairman of Maxis and Astro, both of which have been linked to the Maran brothers Dayanidhi and Kalanithi respectively, and Kalanithi Maran is the owner of SpiceJet, which has a need of funds for expansion.

Quoting from our Indian Aviation Review from earlier this year

Q400 operation is certainly a strong performer in SpiceJet’s tepid overall finances. The full order of 15 Q400s is now complete, and while SpiceJet has options to purchase 15 more from Bombardier, unfortunately it cannot find financing for the next 15 deliveries, which it desperately needs to expand the regional operation

May be Mr. Maran is wanting to exit the airline business?

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