Will the skies open up?

Will it be fourth time lucky for Tata Sons and Singapore Airlines (SIA)? After three abortive attempts spread over two decades, the two companies have applied to the Indian Government once again for setting up a ‘full service’ airline joint venture in India.

What has surprised many is the timing of the proposed venture, in which the Tatas will hold 51 per cent and SIA the balance 49 per cent. The reasons for it have to do with the fluid situation that exists when it comes to allowing Foreign Direct Investment (FDI) in the country’s domestic aviation sector.

Before the courts

To begin with, the Delhi High Court is yet to take a view on a public interest litigation filed by BJP leader Subramanian Swamy, challenging the Government’s decision to give permission to a parallel venture of Malaysian low-cost carrier AirAsia where Tata Sons is a 30 per cent partner.

Swamy’s plea here is the same as the red flag that the Ministry of Civil Aviation had itself originally raised – that the September 2012 decision to allow 49 per cent FDI in domestic airlines was intended only to infuse capital into existing financially-strapped airlines. It was not meant for new airline start-ups.

The MCA’s objections were, however, overruled following inter-ministerial consultations and an interpretation of rules by the Finance Minister, P. Chidambaram. It led to the Government taking a view that the FDI liberalisation applied to both existing as well as greenfield projects.

It was based on this interpretation by the Finance Minister that the Foreign Investment Promotion Board (FIPB) – the apex body for facilitating foreign investments into the country – gave its nod to the Tata-AirAsia proposal.

However, with Swamy’s PIL in the Delhi High Court, there is still uncertainty over the Tata-AirAsia venture.

Amid all this, the Tatas now coming up with a new proposal for yet another greenfield airline project - this time involving SIA – is raising further eyebrows.

A lot will depend on the decision to be taken by the High Court, which has sought a response to Swamy’s petition from the Government by the end of next month.

Cross-holding issue

Apart from the ‘existing-versus-greenfield’ interpretation, there is also the issue of cross-holding itself. Do the current rules really allow the Tatas to set up two airline ventures involving foreign carriers?

For the moment, Civil Aviation Minister Ajit Singh has left it open ended saying that cross-holding should not be an issue, even while adding for effect that the final stand will depend on the view that the Ministry of Corporate Affairs and the Securities and Exchange Board of India (SEBI) take.

At the same time, there is nothing stopping a company operating a low-cost as well as full service airline. For instance, Jet operates a full service carrier and low cost JetKonnect. So, the Tatas operating a low-cost airline with AirAsia and a full-service airline with SIA, once all the permissions are in place, would not be an issue.

More to come

The latest Tata-SIA proposal is also a vindication of the Government’s policy, which was premised on the stance that opening up the sector will lead to more players coming in (something we have not seen in multi-brand retail or nuclear energy post the Indo-US deal).

Since September last year, when norms were liberalised to allow foreign airlines to acquire up to 49 per cent in domestic carriers, Tata-SIA is the third FDI proposal that the Government has received. These, apart from the Tata-SIA and Tata-AirAsia ventures, also include Jet Airways’ proposal to sell 24 per cent stake to Abu Dhabi-based Etihad Airways. More proposals are in the offing with other domestic airlines – including the Wadia Group-promoted GoAir – also announcing their intention to offload equity to foreign partners.

If the Tata-SIA and Tata-AirAsia proposals go through, it will mean some amount of bad news for existing airlines in the country.

SIA, after all, comes in with a very good service reputation and a huge international network that the proposed new joint venture will be able to tap into.

Further, the two ventures would provide Tata Sons a share in both the pies – low-cost and full-service operations.

Optimists, on the other hand, say that there is no reason for even existing players to panic. The Indian market is big enough to accommodate more players, including existing ones willing to partner with those with deep pockets and global experience – the likes of Etihad or Singapore Airlines.

The above optimism springs from a number of indicators, including a recent Planning Commission study. Among other things, it points to the abysmally low air travel penetration levels in the country and the fact that China’s domestic traffic is five times the size of India’s despite having a population that is only a tenth more. So, there is a big market and more players will only provide better connectivity.

In one sense, the Tata-SIA proposal would also be a test case for the Government’s seriousness in attracting FDI in not just the aviation space but also other sectors.

Getting mired in interpretation and devising of rules – brownfield versus greenfield airlines or cash-and-carry versus front-end retail – is a sure-shot way to drive away foreign investors from Indian shores.