FDI in aviation: Win-win for govt, cos & consumers: Experts

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FDI in aviation: Win-win for govt, cos & consumers: Experts

CNBC-TV18 catches up with GR Gopinath, managing director of Deccan Charter and Giorgio De Roni, chief executive officer of Go-Air to get a low-down of their expectations from the cabinet meet on FDI in aviation.

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The aviation minister will be moving a cabinet note today seeking 49% FDI by foreign carriers in domestic airlines. The Group of Ministers will also take up the issue of direct ATF imports and discuss plans to revive the aviation sector. Meanwhile, Jet Airways is up 11% and Kingfisher up close 9%.

CNBC-TV18 catches up with GR Gopinath, managing director of Deccan Charter and Giorgio De Roni, chief executive officer of Go-Air to get a low-down of their expectations.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Just to start off with your preliminary thoughts on this cabinet note on 49% in FDI, whether you think there are many international takers right now for a stake in Indian aviation companies?

Gopinath: I think it is a good move. It should have been done long ago, but because of internal lobbying against it, it was stalled. As you know in India, for long, no rules were made keeping individual airlines in mind. We made rules for Air India first, then we made rules for Jet Airways. Now it appears it was made or triggered by the Kingfisher crisis. Though I do not know how much it will help Kingfisher itself per se, it is definitely good for aviation because more investments will come in, more aircrafts, more capacity... Maybe new players will start airlines now because they will have a strategic player with whom they can partner, which is all good for the consumer. I mean that should be the bottom-line - is it good for the consumer? Is it going to a large consumer base? Bring down the prices? Air fares are now quite high because of the reduced capacities, almost like a price cut is there. So I think it will be good from that point of view in the long-term.

Q: Which of these two is more likely in your eyes for an overseas carrier which is looking at the Indian market - to come in and start a fresh airline with a global brand in association with a strong domestic industrial house as an equity partner or do you think they will want to take on the beleaguered balance sheets of an existing operator?

Gopinath: The airlines which are really in huge debt, there may not be any takers. If you see Lufthansa for example, a year ago, it bought Austrian Airlines which had a debt of USD 1 billion and they bought it very cheap. So the foreign airlines, the really big carriers are themselves bleeding. But there are a few who are in profit like Emirates and Singapore on the full service. But other large carriers are themselves under huge financial strain.

However, there are a lot of low-cost airlines which are in profit and they may want to join hands with new entrepreneurs who maybe little weary of starting on their own since it's not an easy sector.

So it's more likely the new airlines will come in and the government must continue the reforms in the aviation sector because only 3% of India is traveling by air. For an economy as robust and vibrant as us, 97% of civil is traveling by train. If you compare it with the international and emerging markets or even the developed economies, Norway for a population of 4 million, 20 million tickets are sold; Ireland for a population of 5 million, 25 million tickets are sold. Even in Malaysia, for population of 30 million, 18 million tickets are sold, and in India for 1.1 billion, we have just 50 million tickets sold last year; domestic is less than 3%.

So there is a huge inexhaustible consumer base and that should be attractive for people. Though this sector is not an easy sector, there are airlines which have made money consistently in the west like AirAsia has made money; in Europe, RyanAir has made money for the last 15 years. Southwest Airlines in US, which is a low-cost airline, has made profits without missing a quarter for last 38 years! So it requires also a change in the mindset and the business model of Indian carriers. It is not enough just to get a foreign carrier into the country. You need to build models for India.

Q: Would Go-Air be interested in getting a strategic airline in or a global airline in with a strategic stake if it's permitted?

De Roni: Well, I think that FDI by a foreign airline is definitely a good step in the right direction. First of all, it corrects the anomaly that allows only non-airline FDI. It will create a great effect on capital and will create a stronger platform for best practice. It is already implemented abroad.
India is definitely a big market with huge potential for growth in the airline business and it's pretty easy to expect a great interest from foreign airlines to invest in India. Attention however should be paid to avoid the risk that foreign airlines buy the Indian market and India becomes purely an attachment market.

India needs strong Indian airlines to achieve these results, and in India, we need to invest to improve infrastructure and to make the cost of structure more efficient.

Captain Gopinath mentioned RyanAir and I would just like to add some figures. Last year, RyanAir and EasyJet, two successful budget airlines; budget airlines rather than low-cost airlines; these two carriers carried 130 million passengers at an average fare that is roughly 30% lower than the average fare in the domestic market in India. Why? Well, there are many answers to this. For instance, air fares in Europe is not taxed. Airlines in Europe and in States and worldwide are allowed to charge ancillary revenue.

By the way, this approach to unbundle service allows the customer to choose exactly what he wants. So it's a freedom for the customer, and then again, where the condition in winter for instance in Europe does not greatly impact operation or the interruptions due to falls or due to snow....

Q: To your mind what kind of formats would the money be attracted to? Would they for instance be more interested in the budget airlines, something like a Spicejet companies like yours or do you think they could be interested in formats such as Jet and Kingfisher which are more surely in need of capital?

De Roni: I think they might evaluate both opportunity to invest, in budget airlines and in international carriers. The reason is that Indian market is extremely important with 1.2 billion people living here, and with growing purchasing power, growing disposable income in the household, there is a huge potential. We are just to solve a mismatch between the demand growing at the highest level at 18%- there are very few markets worldwide with this growth rate, and the fact that over the road due to many reasons the cost structure of Indian airlines is very inefficient.