AirAsia to invest $50 mn in proposed Indian airline

A new Indian airline, proposed to be launched by the Tata Group, AirAsia and another Indian investor, is likely to start operations by the fourth quarter of this year with about $50 million initial investment by the Malaysian budget carrier.

The airline, which would be based on the low-cost, no- frill model, would launch its operations with three to four Airbus A-320 aircraft and "scale up (the fleet) quickly thereafter," AirAsia CEO Tony Fernandes said in a global teleconference from Malaysia.

The airline would be based in Chennai and in the initial phase concentrate on destinations in South India where AirAsia already operates, he said.

AirAsia's initial investment in the airline, which would be run through a joint venture that includes the Tata Group and Arun Bhatia of Telestra Tradeplace, would be about $50 million.

Asked by when the new airline would take to the sky, Fernandes said "it is in the hands of the Indian regulator ... but most likely it will start by the fourth quarter" of this year or the winter season.

"It will have a fleet of A-320s. We plan to start with three to four planes and scale up quickly after that," he said.

While the board of the airline would be dominated by Indians, Fernandes said the name of the CEO would be announced in the next few weeks and that of the airline's senior management soon thereafter.

The Malaysian budget carrier had on Wednesday announced that its investment arm AirAsia Investment (AAIL) "has submitted an application to the Foreign Investment Promotion Board (FIPB) to seek approval for AAIL to invest 49 per cent in a proposed joint venture with Tata Sons and Arun Bhatia of Telestra Tradeplace".

The AirAsia chief said, "initially we will have a staff strength of about 300 people. But as we grow, we will add to the number. As a thumb rule, generally 20 people are employed with every new aircraft added to the fleet."

While AirAsia will hold 49 per cent stake in the JV, the Tata Group is likely to have 30 per cent and Hindustan Aerosystems of the Bhatias - 21 per cent.

Asked why Chennai was chosen as the proposed airline's base, Fernandes said, "It is the obvious place. We fly there already. We know South India quite well."

AirAsia, through its operations based in Thailand and Malaysia, flies to Chennai, Bangalore, Kochi, Tiruchirappalli and Kolkata from several destinations in the ASEAN region.

To questions relating to the ongoing airfare war, he said he had studied that airfare structure and "I think we can give a fair competition ... I think irrational competition has gone out of the (Indian) market. Now there are sensible businessmen running their (aviation) business sensibly."

Observing that pricing and costs were two major factors for airlines in India, he said the "purchase price (of tickets) will be the number one differentiator (from other airlines). Besides, the strong brand image and the wide network will also make a difference."

Regarding the costs in India, he spoke of high airport charges in Mumbai as well as the high taxes on jet fuel, saying "we will work hard to try and convince" the airport operators and state governments to reduce these charges.

Asked whether the entry of the new airline promoted by AirAsia would lead to the demise of some existing airline, Fernandes replied "businesses put themselves out of business.

It is not competition which puts them out. "If an airline is rightly capitalised, follows the right business model and the right people are running it, there should be no problem."

The chief of Air Asia, which recently denied it was bidding for a stake in SpiceJet, said "enough market exists in India for all of us. It is a question of finding the right structure and partners and we have chosen excellent partners."

He also said that this was a "renaissance period" in the Indian aviation sector, with the government keen on attracting investment for the domestic airlines.

This was the first concrete announcement of FDI flowing into the Indian aviation sector since the FDI policy for aviation was liberalised last September to allow foreign airlines invest in Indian carriers.

Fernandes said, "We strongly believe that the current environment is perfect to introduce AirAsia's low fares which stimulate travel and grow the market."

For the $100 billion Tata Group, this would be its second foray into the aviation segment after the late JRD Tata launched Air India before the Independence. The Tatas had also gone through the botched up process of Air India disinvestment in 2001, along with Singapore Airlines which walked out.

Besides investing in this new venture, the Tata Group holds nearly six per cent equity in SpiceJet and maintains that it was only a financial investor in the budget carrier.

Telestra Tradeplace is an investment holding company of Arun Bhatia and one of its group companies is Hindustan Aerosystems Pvt Ltd which manufactures and supplies precision components for the aerospace industry.

Bhatia's son Amit serves on the Board of Directors at Queens Park Rangers Football Club in the UK alongside Tony Fernandes, the founder of AirAsia. Amit is married to Vanisha Mittal, the only daughter of steel tycoon Lakshmi Mittal.