The Indian government has recently approved a bailout package for Air India. The struggling national carrier’s bailout is a sign of the ailing Indian aviation sector, riddled with imprudent purchasing policies, severe fuel taxes, and fierce competition from foreign airlines —particularly from the Gulf region. The Indian government is also considering allowing foreign carriers to invest and hold stakes in local companies in order to avoid imminent insolvency. Current rules don’t allow foreign airlines to invest in domestic carriers although other foreign investors can hold up to 49% stakes.
Faced with the reluctance of local investors to provide funding, companies such as Kingfisher Airlines and SpiceJet are in desperate need of foreign capital infusion. Despite a combined debt of $20 billion, high fuel prices and strict regulations, industry experts expect that an Indian decision to ease restrictions on foreign investments would attract foreign investors to what is perceived as a very lucrative market. Internal flights between New Delhi, Mumbai and Bangalore are among the busiest routes in the world, both in terms of seat capacity and number of flights.
India’s airspace is especially attractive for Gulf companies. Indians constitute the largest expatriate community in Gulf Cooperation Council (GCC) countries with a workforce estimated at around 5 million workers, most regularly commuting between India and their host countries. At a time when western carriers are facing financial constraints and choosing to sacrifice certain destinations, Gulf airlines are geographically well-placed to replace them and serve the rapidly growing Asian market. American Airlines, Lufthansa, KLM, Air France, Austrian Airlines, and Qantas Airways have recently chosen to interrupt or cut down flights to India. This means connectivity between Europe and Asia, as well as between Asia and Australia and the Americas, which were far from saturated routes, now present additional opportunities.
Until recently though, Indian authorities have sought to contain, not encourage, Gulf airlines’ rapid expansion of services in the Indian subcontinent all in an effort to protect the national carrier, Air India. However, as demonstrated by Air India’s bailout, protective policies often do not prove successful in such an environment. The rising costs of operations at Indian airports, particularly Delhi and Mumbai, put them among the most expensive airports in Asia.
A recent decision by India’s Airports Economic Regulatory Authority to increase airport charges by a massive 346% starting this month, means that New Delhi’s airport is well set to become the world’s most expensive airport. Many carriers cannot afford this and are pulling out. Financially-strong Gulf airlines, backed by their local political and financial authorities, have the means to fill this void. Although crucial, profitability is not the only element taken into consideration: as a symbol of sovereignty, national carriers also aspire to project their country’s influence and the rapidly expanding Gulf airlines are aware of that.
According to the International Air Transport Association, India has registered the second-best air traffic growth in the world after Brazil. It also offers a vast potential for growth given that only 2% of Indians fly today, according to the Centre for Asia Pacific Aviation. That’s a largely untapped resource and next-door Gulf airlines have both the ability and experience to serve and benefit from a potentially very lucrative market in what would constitute a win-win situation for both parties.