February 11, 2013
Jens Flottau Frankfurt and Jay Menon New Delhi
Etihad Airways' expected investment in Jet Airways has the potential to fundamentally change India's air transport industry. Struggling Indian carriers are hoping other foreign investors will follow.
Several international airlines are showing an interest in Indian carriers, especially low-cost airlines such as Spicejet, GoAir and IndiGo. Unconfirmed reports indicate that Japan's All Nippon Airways (ANA) is in talks with at least two Indian carriers. Air Asia has also been rumored to be contemplating setting up camp here, but it is unclear whether this would be through a start-up with local investors or by buying into an existing carrier. Some industry analysts are predicting that SpiceJet could be the next Indian airline to take on a foreign shareholder.
If Etihad does procure a share of Jet Airways, it would be a boon for India's troubled airline sector, according to the Associated Chambers of Commerce and Industry (Assocham). The sale would put the Indian airline in a position to regain the market share it lost over the last several months, and help it conquer its mountain of debt.
Assocham points out that a capital injection from Etihad will go beyond improving the financial stability of Jet Airways. “The good thing is that in the last few months several initiatives have been taken to increase the comfort level of the global investors,” Assocham states. It adds that after the Etihad-Jet deal, renewed efforts should be made to revive the grounded Kingfisher Airlines, although it is difficult to see how that airline could attract foreign investment. The carrier is showing no signs of reviving its business almost four months after it grounded its fleet following labor unrest.
Several industry experts caution that investing in India is still a high-risk proposition. A fractious regulatory framework, legislation changes, infrastructure constraints, high taxation and the straitened finances of most of the country's airlines have dissuaded some potential investors, but the temptation of access to this promising market may still be very tempting for others with deep pockets.
State-run Air India, which fears stiff competition from Etihad on domestic routes as well, has warned the government that any deal between Etihad and Jet could prove disastrous to the flag carrier's growth. Air India has been surviving on government aid for years and its local competitors have cried foul about market distortion related to these subsidies.
Late last year, the Indian government significantly altered airline investment laws and now foreign entities are allowed to own up to 49% of an Indian carrier. Etihad would be the first airline to take advantage of the new regulation in spite of the well-identified risks. According to the guidelines for foreign investors in Indian airlines, the new entity will initially have to seek approval from the Foreign Investment Promotion Board. It will also need to ensure that the CEO is Indian, as are a majority of board members, and that the joint venture company is registered in India.