Wilbur Ross, the US billionaire who made his fortune taking over struggling steel and oil companies, has ploughed 3.45 billion rupees (£40 million) into SpiceJet, India's second-largest cut-price carrier.

The move represents a striking vote of confidence in the long term prospects of low cost air travel in India from an investor noted for swooping on assets that have hit rock bottom.

The Indian aviation sector has boomed in recent years but is now suffering a steep downturn. Mr Ross, who is expected to take a seat on the SpiceJet board, said: "We believe in the long-term validity of the low-cost airline model in India, and that fuel prices eventually will stabilise."

Shares in SpiceJet have plummeted about 60 per cent this year on the back of high oil prices and jitters over India's economic prospects. Across the board, Indian airlines have been cutting routes amid lacklustre demand, feeding predictions that the domestic industry will post losses of as much as £1 billion this year.

Just months ago in India, where passenger volumes surged 30 per cent last year, the talk was of airlines that could not recruit enough pilots to meet demand.

News of Mr Ross's investment, which analysts said would allow SpceJet to maintain its budget model partly by helping it honour commitments to expand its fleet by buying new planes from Boeing, sent shares in SpiceJet up as much as 16 per cent in Bombay.

It is understood that Mr Ross will buy foreign currency convertible bonds held by Istithmar, the Dubai government's investment agency Istithmar, and Goldman Sachs.

The SpiceJet investment follows the news that Air India, the state-run carrier, is seeking a £270 million rescue finance package from the Indian government to ride out widening losses.

It is understood that officials from the National Aviation Co. of India Ltd (Nacil), which runs Air India, told India's aviation minister that the group has wracked up losses of as much as £230 million over the past financial year, a figure it reckons is on course to double this year.

Air India, which has poor reputation on issues such as customer service and punctuality, has suffered in recent years at the hands of a new breed of private rivals.

However, India's most successful private carriers are also struggling under the burden of record-high oil prices, soaring wages and sinking demand amid fierce competition. Jet, the country's largest private airline, lost about £80 million last year. Its rival Deccan Aviation lost about the same sum in the first nine months of its financial year.

Vijay Mallya, the billionaire behind the Kingfisher brand of beer and airline, had also been in talks with SpiceJet.

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