AirAsia, Tata plan budget airline

Malaysian firm to hold 49% in JV, Tata Sons 30% and Telestra 21%; Tata Group says it will just be an investor

Less than two months into his tenure as Tata Sons chairman, Cyrus Mistry on Wednesday made his first big move. Tata Sons decided to invest in a three-way joint venture with AirAsia, the largest discount carrier in Southeast Asia by fleet size, and another Indian investor, Arun Bhatia of Telestra Tradeplace, to establish a Chennai-headquartered budget airline.

The move comes 18 years after Mistry’s predecessor Ratan Tata’s failed attempt to set up an airline with Singapore Airlines in the face of strong opposition from some leading domestic private airlines. The Tatas still hold 1.98 per cent stake in SpiceJet, down from 5.82 per cent in 2007.

While AirAsia will hold 49 per cent stake in the JV — the maximum permissible under the FDI rules — the Tata group would have 30 per cent; the rest would be held by Bhatia. (Under Cyrus, Tata tries to give Ratan’s dreams wings)

The Tatas will have only two non-executive directors on the the proposed firm’s board . A Tata Sons executive said the group would only be an investor in the JV and would not have any operating role. “AirAsia has convinced us about the merits of the JV, as it sees a large underserved market for aviation in India. It is a big low-cost player in Southeast Asia and expects to replicate its success in India, too,” he said.

AirAsia has a fleet of 118 planes, with over 350 on order. The firm said it “believes Indian aviation has enormous long-term growth potential and is expected to produce tremendous upside for first movers”. It currently operates flights from Thailand and Malaysia to five cities in India. In a Bloomberg TV interview, its founder Tony Fernandes said he did not rule out inorganic growth in India later, though at the moment there was nothing interesting.

Telestra Tradeplace said it would be a purely financial investor and wouldn’t have any representation on the board. It said its participation was due to the Bhatia family’s close relationship with Fernandes, who serves on the board of London-based football club Queen’s Park Rangers, along with Bhatia’s son, Amit.

According to an application filed with the Foreign Investment Promotion Board (FIPB), AirAsia Investment will invest Rs 8.98 crore in the initial equity capital, while Tata Sons will pay Rs 4.85 crore. Bhatia’s share will be Rs 3.45 crore.

After the FIPB nod, the commercial launch would depend on the civil aviation ministry giving it an air operator’s permit. Minister Ajit Singh said: “They have yet to apply for a licence,” but did not comment on the likelihood of clearance. He had earlier said fresh licences would not be issued as there was a demand-capacity mismatch in the Indian skies.

Experts said, if cleared, the deal would bring the proposed airline into competition with IndiGo, which controls over half the low-cost market, and SpiceJet. As it brings 16 more aircraft this year, IndiGo is expanding its capacity quickly. So, for a new player, there would be a lot of catching up to do. Besides, IndiGo would also challenge a new player in tapping the regional market, since it is planning to set up a subsidiary to cater to smaller cities.

The establishment of an airline will herald the culmination of years of efforts by the Tata group to re-enter aviation — primarily due to its cherished lineage in the sector. The Tatas’ tryst with airlines business had started 80 years ago. It was J R D Tata who scripted India’s aviation history with the launch of Tata Airlines, which was nationalised in 1953. The government had named JRD as Air India’s first chairman.