All go in Indian news while China continues to lock out Airbus from its market: The ETS – The trade war is on…..

By Victoria March 16, 2012 16:27

All go in Indian news while China continues to lock out Airbus from its market: The ETS – The trade war is on…..

In a bid to address concerns of the civil aviation sector, Indian finance minister Pranab Mukherjee today proposed to allow domestic airlines to borrow up to $1 billion in external loans for a period of one year:

“To address the immediate financing concerns of the civil aviation sector. I propose to permit external commercial borrowing (ECB) for working capital requirement for the airline industry for a period of one year subject to a ceiling of $1 billion,” Mukherjee said while presenting the union budget 2012-13 to the Lok Sabha. ECB is of course a financial instrument used by the government to facilitate the access to foreign funds by Indian corporations and public sector undertakings.

Bad news is that there was no concrete announcement on the proposal for allowing foreign carriers to invest up to 49% in the domestic carriers this is, we are told “under active consideration” – but that was the same line in August, December and January.

For reducing the ATF (aviation turbine fuel) price burden, Mukherjee said the government has allowed the airlines to directly import jet fuel as actual end users thereby escaping the state value added tax (VAT), which ranges from three to 33%. But this might yet be undermined by local states raising taxation to compensate.

Mukherjee also stated: “The working group also decided that airlines should be asked to prepare their turnaround plans, which would be examined by the concerned departments of the government separately for each airline. Another recommendation was that fare structure should be reviewed by airlines so as to cover the cost of their operations,” the survey said.

While all this was going on shares Kingfisher Airlines rose 6.45% in morning trade today to 22.25 rupees, after chairman Vijay Mallya promised a full recovery plan for the carrier. This plays to the news we received Wednesday that additional funds are imminent. Indeed He said one foreign airline and two non-airline foreign investors have shown interest in buying a stake in the carrier so Kingfisher needs the Indian government to get going and agree foreign ownership revisions. “In a few days’ time, we will have a crystal clear roadmap how Kingfisher will move ahead,” Mallya told reporters late Thursday. “I hope issues will be resolved and we will come up with a firm schedule.”

Could it be that Vijay is seeing sense at last and making the moves required to save the airline brand? It looks like it – We know that you receive this service, so to you Vijay we wish you the very best of luck and hope that this works out.

Meanwhile it is sad to see that the European Emissions Trading Scheme (ETS) has indeed lead to a full blown trade war with China. China is already holding to ransom some 35 A330 orders and 10 A380s, and today they have decided to go one further with another 10 A330s being held to ransom after the EU yesterday backed the inclusion of all airlines in the ETS in a vote in the European Parliament.

“If Europe would decide not to implement the legislation just because of the pressure from third countries, that would set a very negative precedent also for other fields of politics such as regulation of the financial market or trade policy,” said Matthias Groote and Peter Liese, two members of the assembly who have followed the ETS closely.

Needless to say that this is damaging Airbus and damaging France’s export figures (or at least it will if not resolved). That factor alone should ensure that the matter is resolved at the very highest level, but the EU is well known to dig its heals in on regulatory matters and in this case I cannot see the EU doing u-turns any time soon, that said the ICAO could get everyone out of this mess and in the process align global emissions taxation that will be to the benefit of all but even they admit behind closed doors that they are a long way off anything that might be agreed.

Orders worth more than $14 billion are now at risk for Airbus and senior French diplomat was in the open yesterday saying “There is a hellish battle going on behind the scenes…We knew [the ETS] would provoke strident protests,” the official said. “Now we’re facing a real threat.”

But China, at the outset of ETS, also warned that measures would be taken against European airlines, this has not come to pass yet maybe due to the fact that in this area Europe could do just as much damage to China as it could do to Europe. We should worry though that Hong Kong might be dragged into all this. If traffic to Hong Kong is threatened then China will be blowing its own foot off as banks and indeed the Prudential Insurance Group of the UK will have to think hard about the risks of moving divisions to Hong Kong. It would also be a fact that Hong Kong citizens will start to feel that they are being quarantined by the Chinese Central Government and disquiet could follow leading to a further slip of the iron grip of the central government in Beijing.

While China attacks Airbus the stakes are high for France and for the Chinese airlines that will not have the aircraft they need in the future. If this mess is extended to airlines and/or if Russia gets involved, then we will indeed be in very dangerous and uncharted waters on a political front. Airlines within the EU should be drawing up risk assessments and planning for the worst. Russian airspace and the use of the same by EU airlines is one very dangerous factor to consider.

Whatever happens now it is impossible to forecast with any certainty the future for Chinese and EU airlines in 2012. My guess is that Airbus, if it has to, will fill the delivery slots that China as thrown back at them with ease – the Chinese airlines lose. Hong Kong Airlines has a business model that requires A380s for a start so they are right now in a bit of a situation.

This saga thus far highlights what we have been warning of for some years now, through the risks to maturing MTNs and the like, that China’s central government has no qualms whatsoever about forcing businesses to carry out their will at any time they choose whether they have direct involvement in the same or not. This is a warning to business and investors – China is very far from being capitalist in nature, very far indeed.

By Victoria March 16, 2012 16:27
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