On 20 September 2012, the Indian Government announced a change to its foreign investment policy, which will allow foreign airlines to take a stake of up to 49% in any of its domestic carriers. Prior to the rule change, foreign airlines were not allowed to invest directly in Indian airlines for security reasons, although up to 49% of foreign direct investment by nonairline players was allowed.

The reaction of foreign carriers to this change of policy has been muted to date – most foreign airlines are adopting a ‘wait and see’ approach, although there are rumours that a couple of Indian carriers have been holding preliminary discussions with foreign airlines to attract investment. Gulf carriers, Etihad and Emirates, are the only foreign carriers so far to have made any positive statements, but they are reacting cautiously to the reform. An Emirates spokesman said:

“We always welcome any reform which liberalises markets, including FDI rules. India is one of the world’s most important aviation markets.”

One aviation analyst commented that: “Most foreign carriers will be cautious. India is a complicated market where many regulatory issues have to be sorted out”.

The consensus however is that the rule change could be an important first step towards rescuing cash-strapped domestic carriers like Kingfisher, which has estimated debts of US$1.3 billion.

Aviation analysts think that SpiceJet and GoAir would be the two preferred airlines to attract the attention of foreign airlines, and if, as rumoured, the Indian Government goes one step further in relaxing the rules on allowing domestic carriers to fly overseas routes, other Indian domestic airlines could be interesting investment propositions for foreign airlines. Currently, domestic Indian carriers have to complete five years of domestic operations and must have a fleet of 20 aircraft before they can fly overseas.

There are bigger challenges in the Indian aviation industry though, which may make it difficult for domestic Indian carriers to attract investment from foreign airlines.

In July of this year, IATA declared India’s aviation industry to be “in crisis” and said that it is crippled by high costs, exorbitant airport charges and taxes. India’s major airlines lost close to US$2 billion in the last financial year ending March 2012, and are carrying debts of over US$20 billion going forward.

IATA’s director general, Tony Tyler said: “India’s aviation is in a multi-faceted crisis. Before the aviation sector can deliver greater benefits to the Indian economy, this crisis must be resolved. The financial situation of Kingfisher is dire and Air India is on government life support.”

Tyler called for “tough decisions” to be made by the Indian Government to restore Air India back to solvency, and pointed to the example of state-run Japan Airlines, which cut 50 routes and over 16,000 jobs in order to emerge successfully from bankruptcy. He warned that “if critical problems are not addressed, investors – foreign, domestic, aviation or otherwise – will not be lining up to put their cash into Indian airlines”. Of India’s six main carriers, only privately owned Indigo is making money. A combination of over expansion, cut-throat competition, high fuel costs, exorbitant airport charges, service taxes on tickets, and inadequate infrastructure have caused the nosedive in fortunes of what was once one of the world’s fastest growing and most successful airline markets.

Opening the door to foreign airlines taking a stake in Indian carriers is an important step, but not a panacea. Until the Indian Government cleans up all the junk that sits the other side of the door with a co-ordinated policy framework that addresses issues such as crippling taxes and inadequate infrastructure, foreign airlines will not be rushing to invest in Indian airlines, simply because it is impossible to see that investment delivering a return in the current environment.