The Tata group is joining AirAsia Bhd, Asia’s largest low-fare carrier, and a local investor in seeking to enter the aviation market, 13 years after the conglomerate’s bid to buy a stake in Air India in partnership with Singapore Airlines Ltd collapsed in the face of political and corporate intrigue.
Malaysia-based AirAsia will hold a 49% stake in the proposed joint venture (JV), in which
Tata Sons Ltd will have 30%, and Arun Bhatia of Telestra Tradeplace Pvt. Ltd, which is associated with AirAsia founder Tony Fernandes at the Queens Park Rangers football club, will hold the rest. Fernandes is the club chairman.
The airline will be managed by AirAsia, and Tata Sons, the group holding company, will not have any operating role in the proposed venture, a Tata spokesperson said in an email.
AirAsia said in a release that its investment arm AirAsia Investment Ltd has submitted an application to the Foreign Investment Promotion Board (FIPB) seeking approval to invest 49% in the venture.
“Subject to FIPB approval, the proposed joint venture company will make an application to Indian aviation regulators for the air operators permit,” the company said. “The parties have signed a memorandum of agreement that details high-level terms with regards to the proposed partnership.”
The new venture comes at a time when India’s airline industry is laden with heavy debt and years of accumulated losses, laid low by rising costs and intense competition.
The AirAsia application is the first seeking approval to form a new airline after the liberalization of India’s overseas investment rules in aviation. The proposal comes as the United Arab Emirates carrier Etihad Airways PJSC is said to be close to buying a 24% stake in Jet Airways (India) Ltd.
In September, the government allowed overseas airlines to pick up a stake of as much as 49% in domestic carriers.
The Tata group, where Cyrus Mistry took over as chairman in late December after the retirement of Ratan Tata, will be trying to enter the aviation market after abandoning a 2000 attempt in a venture with Singapore Airlines to buy a 40% stake in Air India—an airline which the group founded as Tata Airlines in the 1930s before it was nationalized in 1953.
Political resistance and corporate rivalries were blamed for the Tata group abandoning the project. In November 2012, before his retirement as group chairman the following month, Ratan Tata claimed that he had been advised by an industrialist to pay a bribe to a minister. He mentioned no names, and said an individual had been responsible for blocking the group’s attempt to enter aviation.
The Tata group owns nearly 6% stake in SpiceJet Ltd, India’s second largest low-fare carrier. However, the group has said that it is just a financial investor in that airline.
The new project also won’t see the Tatas play an operational role.
“When AirAsia approached Tata Sons with the proposal for a stake in the venture, Tata Sons concluded that given its reputed business model, AirAsia could be a relevant and successful service provider in the domestic sector,” said the Tata group spokesperson. “That is the reason for Tata Sons’ investment in the AirAsia venture. The benefits to the domestic market will include: a) AirAsia’s reputed service, which will further grow aviation as a mode of transport in what is a relatively underserved market and b) employment generation.”
AirAsia is Asia’s largest low-fare carrier with 118 planes and more than 350 on order.
“AirAsia believes Indian aviation has enormous long-term growth potential and is expected to produce tremendous upside for first movers,” the statement said. “The joint venture plans to operate from Chennai, Tamil Nadu, focused on providing domestic tier II/tier III city connectivity to Indian travellers. Currently, AirAsia, through its operations based in Thailand and Malaysia, already connects Chennai, Bangalore, Tiruchirappalli, Kochi and Kolkata to Asean.” Asean stands for the Association of Southeast Asian Nations.
Founder and group chief executive Fernandes, who is of Indian extraction on his father’s side, said, “We have carefully evaluated developments in India over the last few years and strongly believe that the current environment is perfect to introduce AirAsia’s low fares, which stimulate travel and grow the market.”
Telestra Tradeplace, the third partner, has a presence in aerospace with a group company called Hindustan Aerosystems Pvt. Ltd, which manufactures and supplies precision components for the industry. Arun Bhatia’s son Amit Bhatia serves on the board of directors at Queens Park Rangers football club in the UK alongside Fernandes, Air Asia said. Fernandes is the majority owner of the club.
AirAsia wants to replicate its success in Malaysia, Thailand, Indonesia and other JVs.
On 25 January, Mint reported the AirAsia group as saying that it will continue to explore opportunities in India in the light of the FDI (foreign direct investment) policy change. On 7 December, Mint reported that AirAsia planned to focus on big Asian markets such as India through JVs, citing posts by Fernandes on Twitter.
Currently, AirAsia operates 45 flights weekly from India to Kuala Lumpur.
Amber Dubey, partner and head (aviation) at consultancy firm KPMG, said, “The Tata-AirAsia deal is in line with our estimate that the (September) policy change will lead to equity deals in two to three existing airlines and one to two fresh start-ups. This will enhance competition, expand spread of air connectivity to tier III to IV cities, and bring down air fares for the Indian passenger.”
Dubey also expects consolidation in line with what is happening in the US and the European Union. “India, with its low flyer base, regulatory challenges and high cost structure, cannot afford more than four strong national airlines,” he said.
Craig Jenks, president of Airline/Aircraft Projects Inc., a leading New York-based air transport consulting and advisory services firm, said the deal makes commercial sense. He expects the new airline to develop new markets between India and South-East Asia.
“Up to now, Indian private airlines have followed Air India’s footsteps. They see gold mines in Dubai or Singapore, and their strategy is then to get into that already existing gold mine. The mind-set of AirAsia has been 100% opposite, and to develop a market where none previously existed. So I don’t think it is primarily an ultra low-cost attack on what is already there. I think it is probably about creating new markets,” Jenks said.
He added that Fernandes has been dealing with governments in many countries.
Fernanades spoke of his emotional ties to India in a May 2010 interview. “My father is an Indian citizen. The first flight I took was to Kolkata. I remember arriving in Dum Dum airport when everyone was clapping. I was very depressed…buses were lined up..., but people were amazing. When India plays cricket, I support India. It is another matter that Malaysia doesn’t have a team,” he said.
Indian conditions won’t be as friendly as those in Malaysia, said executives at rival carriers.
“Certainly, the entry of AirAsia will change the landscape of competition in India. But it is not going to be smooth for AirAsia as it enjoys significant infrastructure advantage, including separate low-cost terminals. India is a different market as it is facing huge infrastructure shortage,” said a senior executive at a low-fare airline, requesting anonymity.
The executive said AirAsia won’t be able to rely just on secondary Indian airports as the airline may not get sufficient passenger traffic.
Nawal Taneja, professor emeritus at the department of aviation at Ohio State University, said, “One brand, multiple production units” is the new trend. “It started with Lan Airlines in Latin America and then spread to Asia with AirAsia and in Australasia with Jetstar. It is the way of the future.”