* Ministry recommends foreign airlines hold up to 49 pct stakes
* Move seen providing lifeline to debt-laden carriers
* Airline shares surge ahead of announcement
By Anurag Kotoky and Aniruddha Basu
NEW DELHI/MUMBAI, Jan 17 India's beleaguered airline industry was thrown a potential lifeline on Tuesday when the Aviation Ministry said it would recommended that the government allow foreign airlines to buy stakes of up to 49 percent in Indian carriers.
India currently bars foreign airlines from buying into Indian airlines, although foreign investors are allowed to hold a cumulative 49 percent.
"The question was to allow other airlines to participate in FDI (foreign direct investment). I discussed it with the finance minister and he agreed," Civil Aviation Minister Ajit Singh told reporters. "We realised that FDI is one of the factors that will help the industry survive the current financial problems."
Shares of Indian airline companies surged by 7 to 12 percent ahead of a meeting earlier in the day between Singh and Finance Minister Pranab Mukherjee.
India's loss-making airlines are grappling with high jet fuel prices, low fares and an economic slowdown.
The total debt of the industry is expected to rise to $20 billion for the fiscal year ending in March, according to an Aviation Ministry report.
A decision to open up the sector would be especially welcome to debt-laden Kingfisher Airlines, which has long lobbied for the change.
"It is strongly welcomed. It has been long long overdue," said Kapil Kaul, regional head of the Centre for Asia Pacific Aviation, an aviation consulting firm.
"This will lead to capital, strategic expertise. This will also lead to foreign and domestic fund flows to the sector." Kaul told Reuters.
U.S. billionaire Wilbur Ross briefly invested in budget airline SpiceJet in 2010, making it the only Indian carrier to get major foreign investment in recent years.
British Airways has been speculated as a possible candidate to pick up a stake in Kingfisher, which said last month that it would join the global oneworld alliance from February to help boost its competitiveness and finances.
"The current losses of the airlines make the valuations attractive," said Amber Dubey, director of aviation at KPMG.
An analyst at a Mumbai brokerage, who did not wish to be identified, said airlines such as Kingfisher and Jet Airways, with large founder stakes, would be comfortable with diluting their shares to allow investment by foreign carriers.
The Chairman of State Bank of India, the country's largest lender, said on Tuesday that his bank would find it difficult to lend more to Kingfisher as the bank considers its loans to the airline to be non-performing.
SBI is the leader of the consortium of lenders to Kingfisher.
All but one of India's six main airlines are loss-making as they engage in aggressive price competition.
India's airlines are expected to lose up to $3 billion in the fiscal year that ends in March.
State-owned Air India, operating on government life support, is expected to account for more than half of that, the Centre for Asia Pacific Aviation has said.
Shares of Jet Airways India's biggest airline, closed up 10.3 percent ahead of the announcement.
Budget carrier SpiceJet, whose CEO has said his airline would consider selling stake to a foreign carrier if the government changed the FDI rules, rose 10 percent.
Kingfisher ended up 4.8 percent.
Despite heavy losses, domestic air traffic increased 17.6 percent to 55 million passengers in the first 11 months of 2011, government data shows.
"India is one of the fastest growing markets today and nobody wants to miss out on the growth story," said Sharan Lillaney, aviation analyst at Angel Broking.
A group of ministers will meet soon to work on the debt restructuring Air India, Singh said.
The meeting will also discuss whether to allow direct imports of jet fuel, a demand Kingfisher Airlines has been making as it seeks to ease its fuel bill.
Taxes make jet fuel in India 60-70 percent more expensive than the global average.
Singh also said the government would release 1.5 billion Indian rupees ($29.2 million) to Air India to pay overdue salaries of its pilots. The government owes a total of about 6 billion rupees to the carrier, he said.