India today ranks among the world's top ten aviation markets. Total passenger throughput (arrivals and departures) at Indian airports during FY12 stands at 162 million, growing at a compound annual rate of 14 per cent over the last six years. Total cargo throughput during this period is 2.3 million tonnes, or 8.5 per cent CAGR since 2005. A growing economy and the resultant increase in disposable incomes and aspirations have fuelled this growth.

Significant challenges remain however. Indian airline industry is flying through turbulent times. Five out of six airlines have posted losses for the last several quarters. A large airline is inching closer to bankruptcy, and the national carrier is being sustained using taxpayers' money.

Most Indian air carriers are posting cash losses due to volatile oil prices, high fuel taxes, rupee devaluation, high interest rates and below-cost fares.

In an attempt to support the airlines, the Government of India is considering allowing 49 per cent foreign direct investment by foreign airlines in Indian carriers. The Group of Ministers has approved this and Cabinet approval is awaited.

FDI in Indian aviation is a significant decision and can play a crucial role in improving this sector.

Buying equity in Indian carriers, global airlines get to enter a potentially big market growing at a CAGR of 15 per cent, as compared to 4-5 per cent growth globally. Many of the other fast-growing aviation markets do not allow foreign airlines to take a stake in their domestic airlines. Hence, Indian carriers are an attractive option for foreign airlines looking for a global footprint. In FY12, India's international traffic stood at 40.8 million, which can expand significantly after connecting many more tier II/ III cities to foreign airlines' routes.

Domestic airlines stand to gain with the much-needed equity infusion into their weak balance sheets. It would also provide access to global routes and synergy benefits. Foreign airlines would also bring in best practices in operational and financial management; their global relationships can help improve the operational efficiency of the Indian carriers.

The poor financial record of the Indian carriers and the high cost of operation in India might act as deterrent for foreign carriers. The foreign carriers may also demand significant management control, for which the Indian carriers may ask for a premium. Nonetheless, the relatively lower valuations of the Indian carriers and the strong long-term growth outlook make the equity investment lucrative for foreign carriers.

India now stands at the crossroads. Recent policy decisions such as the 49 per cent FDI limit for global airlines is welcome and need to be implemented quickly.

The opening of bilateral rights to private carriers, direct import of aviation turbine fuel, external commercial borrowing for working capital, and removal of import duties on aircraft spares are the other key policy interventions.

With the right policies and a relentless focus on quality, cost and passenger interest, India would be well placed to achieve its vision of becoming a global aviation hub and the third-largest aviation market by 2020.

Amber Dubey is Partner and Head – Aviation, KPMG.

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