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FDI in Airline Industry

A Discussion Paper:

This discussion paper is extracted from 'A Note on FDI in Airlines' prepared by the Confederation of Indian Industry (CII)

The Airline Industry

The airline industry has remained an exception globally, to the process of economic liberalization. Globally, the airline industry remains subject to several restrictions – in terms of both operations and of ownership & control. All countries impose restrictions in this one sector; restrictions that benefit national entities; and debar foreign.

International practice

A majority of the countries - both in the developed and the developing world - have imposed a 49% ownership limit in the airline industry. This is true for Singapore, China and a host of other nations across Asia and Europe.

The US, otherwise a free economy, is even more restrictive in the Airline sector. US limits the amount of foreign ownership in its domestic airlines to a maximum of 25%. The US Congress has repeatedly opposed any changes in the current legislation that restricts foreign ownership of US airlines – thereby not allowing the foreign ownership of voting stock in US airlines to go up from 25 to 49 percent. In the past few months, the US Congress and Department of Transportation have thwarted attempts to allow greater foreign ownership of US carriers, and turned down Richard Branson’s initiative to create a foreign-owned US-based low cost airline.

Canada too has stayed with a 25% foreign ownership limit in Canadian airlines. Again, the Canadian Transport Ministry has rejected calls for any increase, saying that an increase would not benefit Canadian carriers.

Most other countries have similar protective provisions limiting ownership of their airlines. India imposes a 49% ownership limit in the airline industry.

Australia is perhaps the only notable exception. The Australian government allowed Richard Branson to start up an airline called Virgin Blue. In return for this permission however, Sir Richard had to agree that the airline would be incorporated in Australia under Australian law, and that it would be staffed and managed by Australians, and have an Australian board of directors.

IATA stand

The International Air Transport Association (IATA), which is the apex body globally for the airline industry, too recognizes that most countries have traditionally imposed limits on foreign ownership and control of airlines. While continuing to work towards increased liberalization in the airline industry, IATA believes that foreign ownership limits in the airlines is a choice of each sovereign nation; and needs to be decided by the individual state.

Restrictions even beyond FDI

Going beyond foreign ownership limits, even bilateral air service agreements contain restrictions on the number of airlines and frequency of services on many international routes. Open-skies bilateral agreements also do not remove nationality rules.

Sovereignty and national-interest are usually the reasons that most countries do not allow fair free open-market competition in their respective airline industries.

While FDI benefits industry sectors...

Given the experience in numerous other sectors of the economy – like manufacturing, telecom, banking among others – foreign investment is generally desirable and leads to efficiency and scale gains. FDI brings in competition, lowers prices and accords choice to consumers. All round liberalization in foreign investment rules also allows domestic companies to diversify and explore investment opportunities in other markets.

The airline industry in India is passing through its most competitive phase to date, where both the legacy and the newly entered low-cost carriers alike are engaged in fierce competition; and are adding capacity, adding routes, adding features & products and dropping prices. The aggressive route expansion plans of the Indian carriers have already resulted in excess supply over a deficient infrastructure – leading to congestion on the ground; and congestion in the skies.

A further FDI allowance in airlines in India would only impact adversely, the financial health and future of India’s own homegrown carriers; and also the civil aviation sector.

...Airline industry is an exception to free FDI, globally

Foreign investment in airlines should however not be a one-way street where a country offers access and makes foreign ownership allowance, without reciprocity from others. While Open skies is a desirable long-term outcome, it cannot be achieved by a single nation alone.

Airlines are an important part of the national economy and it is important that in making allowances and concessions to international players, the health of the Indian carriers be also kept firmly in sight.

It is important that India should seek reciprocal opening of Airline industry in other countries, before allowing open access of its market to foreign carriers.

India also currently does not allow direct or indirect equity participation by foreign airlines in Indian carriers. In an environment where restrictive foreign ownership in the Airline industry is the norm, this protects the foreign carriers from both targeting Indian carriers for acquisition; and also using bilateral air service rights to their advantage.

Aviation is more than just Airlines

The key challenge for India's civil aviation sector is not 'more airlines', but more infrastructure. India allows 100% FDI in greenfield airports and this is a good example of both proactive government policy and also a deep focus on 'national priorities'. Additional airlines and foreign owned carriers will certainly mean more aircraft & more congestion.
  • Foreign participation in India's civil aviation sector could be leveraged in areas where both the need and the opportunity, is greater. The government could consider opening up foreign investment in non-scheduled operations, charter flights, ground handling, Maintenance Repair & Overhaul (MROs) and other non core-airline functions of the aviation sector.
  • There is a need for building the avionics and aviation equipment capabilities of Indian industry. The government could provide special incentives allowing global majors and Indian industry to invest in avionics and equipment.
  • Given the acknowledged competence and expertise of skilled Indian manpower, which has brought global recognition (e.g. in the IT sector), aviation provides India an opportunity to build capacities and capabilities in Aviation; and to invest not only in pilot & ATC training but also growing the pool of technical & maintenance expertise in Aviation. There could be special incentives and FDI allowances for education and training in the Aviation sector. This would help not only in manning critical functions within the country, but also for creating employment opportunities for Indian personnel in global aviation markets.