The investment of Etihad Airways in India through its US$600 million deal with Jet Airways may be positive for both carriers, but a slew of challenges in the Indian aviation sector remain.
The deal is unlikely to trigger a queue of foreign investors trying to enter the Indian aviation market, according to analysts.
"FDI [foreign direct investment] in this sector would only help scheduled airlines to stay afloat for a little longer," said Sanjay Kaul, the president of the University of Petroleum and Energy Studies, which has a centre for aviation studies. "However, issues like abnormally high aviation turbine fuel [and] airport charges, need to be addressed for sustainable growth.
"The Indian scheduled airline segment is suffering from a combination of decreasing operational margins worsened by rising debt levels and high interest rates, low investor confidence, crises management and a short-term business approach of airline companies."
India's domestic air traffic shrank by 2.1 per cent last year compared with global growth of 4 per cent, according to figures from the International Air Transport Association (Iata), which cited factors including high taxes.
"The scheduled airline business is cash-flow intensive, where an excessively large amount of money flows through, but the margins are very thin," Mr Kaul adds. The country's airlines have struggled with profitability and collectively they are carrying billions of dollars worth of debt.
Etihad last week became the first foreign carrier to take a stake in an Indian airline after the government in September opened up the aviation sector to investment of up to 49 per cent. Etihad confirmed that it had agreed to buy a 24 per cent stake in the Mumbai-based Jet for $379m. It said it would also invest an additional $220m in the partnership.
Saj Ahmad, the chief analyst at StrategicAero Research, agreed that there were serious problems in the industry. He said that with Etihad having snapped up a stake in Jet, there remain barely any viable options for foreign carriers looking to take advantage of the relaxed foreign investment rules. The budget carrier AirAsia is planning to launch a "no frills" venture in India with Tata.
"This Jet-Etihad affair may certainly make investors look at India again, but with Air India in the gutter, Kingfisher virtually dead and Indigo and SpiceJet not exactly falling over themselves to get foreign investment, there might not be a slew of deals in the offing," Mr Ahmad says.
"If investment does come, it will be by one player for another - do not expect anyone queuing up to invest in Indian aviation just yet. Regulation, corruption, red tape, backward policies and slow progress all put investors off."
Analysts say that the government-owned Air India is likely to face increased competition in its international service. To sweeten the Etihad and Jet partnership, the UAE and India signed a bilateral agreement to increase the number of seats available each week on flights between India and the Emirates to 50,000 from 13,330 over the next couple of years.
"I think that Air India will be hit in terms of international traffic for sure," says Sharan Lillaney, an aviation analyst in Mumbai.
India has defended the move to increase the number of seats.
"Everyone has been criticising revision of bilateral traffic rights between India and Abu Dhabi," Ajit Singh, India's civil aviation minister, told the Economic Times. "We looked at passenger convenience in doing it and, therefore, revision of bilateral rights is important.
"Why should everyone come to Delhi to catch a flight? Why can't we have a direct overseas flight from Muzaffarpur? Increase in competition among foreign airlines and cheaper operations from regional airports, where state governments are ready to offer a lot of tax benefits, will ultimately help bring fares down.
"Air India's problem is high costs, which they will have to cut. They have offices and staff all over the world without having even a single flight at some places."
Kamal Sen, the president of Cogitaas, an analytics and planning consultancy, said he believed that while investment opportunities in the aviation sector might be limited, Etihad's move could boost confidence for investment in other industries.
"I find the stake sell to Etihad one of the bigger successes in foreign direct investment in the last two years," he said. "Pessimism was building up on India's FDI attractiveness. I believe that the Etihad deal will lift up sentiments among foreign investors looking to enter various sectors of Indian industry.
"In the aviation sector itself, I believe that Jet Airways was an attractive prospect, but I am not sure whether more attractive partners exist for foreign investors," Mr Sen added.
"The government in principle is committed to increasing FDI and liberalising policies, but it still remains a slow and cumbersome process for investors."
The consensus is that for Jet Airways, the alliance is a shot in the arm, while for Etihad, it opens up a market that has enormous potential.
"Jet Airways' previously fragile position is greatly enhanced," says Sydney-based Capa, the Centre for Aviation. "The size and scope of the agreement also means that Etihad will seek to ensure that the partnership will work to their mutual benefit."
But there were still hurdles that could deter other foreign investors.
"India has a sad reputation when it comes to practical implementation of foreign investment measures introduced by its relatively forward-looking leaders, so Etihad and its government owners were anxious to ensure that this major addition to the airline's armoury would not be unravelled by the usual prevarication and obstacles," Capa said.
"The UAE had previously fallen foul of India's waywardness," it added, referring to the telecoms corruption scandal that led to Etisalat's withdrawal from the country. [Etisalat left India after a court revoked a wireless licence held by a company it had purchased; Etisalat itself was not implicated in any wrongdoing.]
"And so [the UAE] was seeking an investment protection treaty; however, because these can take a long time to negotiate it was eventually dropped as a precondition, but remains on the agenda," Capa says.
