India Allows Foreign Airlines to Buy Local Carrier Stakes

India ended a ban on local airlines selling stakes to overseas carriers, opening a new possible source of funding for Kingfisher Airlines Ltd. and other operators struggling to turn rising travel demand into profits.

Foreign airlines will be allowed to own 49 percent in local carriers, Commerce Minister Anand Sharma said in New Delhi today. India’s aviation ministry will frame rules regarding the investments, Sharma said.

Kingfisher and other carriers jumped in Mumbai trading ahead of the announcement, which had been held up for months by political deadlock that also hindered efforts to let overseas retailers such as Wal-Mart Stores Inc. open local shops. The airlines are seeking funds after years of industrywide losses caused by price wars and high fuel costs.

“Relevant investments can come through this,” said Nikhil Vora, Mumbai-based managing director at IDFC Securities Ltd. “There may be near-term challenges in the aviation sector, but India’s population and economic growth offer potential over a period of time.”

Non-airline investors from overseas are already allowed to hold as much as 49 percent in local carriers. India has been planning the policy change on investment by airlines for more than three years as industrywide losses hinder companies’ efforts to raise funds for expansion. The government today also allowed Wal-Mart and other overseas retailers to own 51 percent of supermarket chains in the country.

Easing of Tensions

The ending of investment bans may also signal an easing of tensions in Prime Minister Manmohan Singh’s coalition government. The leader of partner party Trinamool Congress, Mamata Banerjee, has led political opposition to opening up Asia’s third-largest economy.

Amid the gridlock, India’s economic growth potential may have fallen to as low as 6 percent a year, below the Reserve Bank of India’s 7.5 percent estimate, according to JPMorgan Chase & Co. Foreign direct investment fell 67 percent to $4.43 billion in the three months ended June from a year earlier, government data show.

The nation’s airlines have lost money because of high fuel costs and a price war even as rising disposable incomes boost travel. Domestic passenger numbers rose 17 percent in 2011 to 61 million, based on Directorate General of Civil Aviation data. Carriers in the country will need 1,450 new aircraft worth $175 billion through 2031, according to Boeing Co.

Kingfisher (KAIR), which has posted at least five straight annual losses, jumped 7.5 percent to 10.80 rupees, the highest since July 10, at close of Mumbai trading. SpiceJet Ltd. gained 4.4 percent while Jet Airways (India) Ltd. rose 2.1 percent.

Planes Grounded

Billionaire Vijay Mallya-controlled Kingfisher is seeking funds to maintain services after a cash shortage prompted it to slash two-third of services and ground planes. Some potential investments depend on the change in foreign ownership rules, Chief Executive Officer Sanjay Aggarwal said March 20.

“Kingfisher will now be able to re-engage with prospective airline investors in a more meaningful manner,” Prakash Mirpuri, its spokesman, said in a mobile phone text message after today’s government decision. The carrier will now be able to “move towards re-capitalization and ramp up operations.”

Assets Pledged

The carrier, based in Bangalore, has pledged assets ranging from its brand to office furniture for loans of 64 billion rupees ($1.2 billion). Its market share has slumped to sixth from second after cutting flights and losing passengers amid disruptions caused by delays in paying salaries and fuel bills.

Jet Airways, India’s biggest carrier, has also been planning to raise funds through a rights offer for more than two years. The carrier and Kingfisher plunged more than 65 percent in 2011. Jet said last month that it plans to sell and lease back some planes to pare debt by about $400 million.

“Allowing 49 percent stake to foreign airlines will create access to capital, global connectivity, technology and best practices,” said Amber Dubey, a partner at KPMG in a statement.

Jet and SpiceJet (SJET), India’s only listed discount carrier, both posted profits in the three months ended June 30 after five straight quarters of losses. State-owned Air India Ltd. has been losing money for at least five years.

India in February allowed carriers to directly import jet fuel to help them avoid paying local taxes. Buying the fuel from overseas may help airlines cut their biggest expense as they would no longer have to pay fuel taxes imposed by state governments that average 24 percent.

Government’s Help

In November, chiefs of Indian carriers met Prime Minister Singh as they sought the government’s assistance to stem losses. The nation’s airlines will probably lose $1.4 billion in the year ending March, compared with $2 billion a year earlier. according to CAPA.

In the federal budget for the year started April 1, the government allowed airlines to borrow overseas for their working capital requirements.

Indian carriers’ debt may have reached close to $20 billion in the year ended March 31, based on a December report by the aviation ministry. Working capital loans and dues to airport operators and fuel companies account for half of this amount, according to the report.

To contact the reporters on this story: Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net; Abhijit Roy Chowdhury in New Delhi at achowdhury11@bloomberg.net

To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net; Neil Denslow at ndenslow@bloomberg.net

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