By JASON NG And SANTANU CHOUDHURY from Wall Street Journal
More than 80 years after former Tata Group head J.R.D. Tata piloted the first scheduled flight in India, the conglomerate is seeking to re-enter the sector by investing in a low-cost airline.
AirAsia Bhd, the largest discount carrier in Southeast Asia by fleet size, said Wednesday it has signed an initial agreement with Tata Sons Ltd. and another Indian investor, Arun Bhatia of Telestra Tradeplace Pvt. Ltd., to establish a budget airline in India.
Overcrowding Clouds Indian Aviation
The proposed partnership comes after a September decision by the Indian government to open the aviation sector to direct investment of up to 49% from foreign carriers.
AirAsia said the three parties have applied to India’s Foreign Investment Promotion Board–the government agency that clears foreign investments–for the Malaysian carrier to hold 49% of the proposed Indian joint venture company. Tata Sons will have a 30% stake, with Mr. Bhatia holding the remaining 21%. AirAsia plans to hold the stake via its investment arm AirAsia Investment Ltd.
If the government gives its approval, the proposed joint venture will seek an operational license from India’s aviation authorities.
Officials at the Foreign Investment Promotion Board didn’t respond to phone calls.
The venture plans to operate from the south Indian city of Chennai and proposes to link smaller cities to the metropolis.
“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,” said Tony Fernandes, AirAsia’s founder and group chief executive.
AirAsia has a fleet of 118 planes with more than 350 on order. The company said it “believes Indian aviation has enormous long-term growth potential and is expected to produce tremendous upside for first movers.”
The establishment of an airline will herald the culmination of years of efforts by the Tata Group to re-enter the aviation business–primarily due to its cherished lineage in the sector.
J.R.D. Tata–who founded India’s now-state-run carrier Air India–is considered the father of civil aviation in India. On Oct. 15, 1932, he flew a single-engine Puss Moth aircraft manufactured by the erstwhile de Havilland Engine Co. of the U.K. from Drigh road airport in Karachi, Pakistan, on his flight to Mumbai via Ahmedabad.
The Indian government nationalized Air India in August 1953 and appointed Mr. Tata its first chairman.
The group’s recently retired chairman, Ratan Tata, is also a qualified pilot and flies both planes and helicopters.
In a 2011 interview with The Wall Street Journal, Mr. Ratan Tata said one of his first goals would be to get the group back into the airline business. He is now the group’s chairman emeritus.
The group with businesses ranging from salt to software had planned a venture with Singapore Airlines C6L.SG -0.27% . But, Mr. Ratan Tata said during the interview that aviation ministry bureaucrats held up his application for several years despite his constant prodding. In 1998, he withdrew the application after seven years of waiting.
The group’s plan to re-enter the business comes at a time when most local airlines are making losses, hurt by high fuel costs and airport charges as well as inadequate infrastructure.
The AirAsia announcement is the second investment proposal in India’s aviation sector after the government in September allowed foreign carriers to hold stakes in local airlines. India allowed such investments following lobbying by local carriers, which argued the entry of foreign airlines would allow them to raise much-needed cash.
Jet Airways (India) Ltd., one of the country’s largest carriers, and Abu Dhabi-based Etihad Airways have said that they are in talks for a potential alliance. Etihad plans to buy a 24% stake in Jet for about $300 million, people close to the talks had said recently.
Analysts say for foreign airlines like AirAsia and Etihad, the attraction of India is its large population and the increasing number of Indians living abroad.
The Indian domestic market for air travel is witnessing a downturn this year as airlines have raised fares to offset higher costs, amid a slowing economy. Local air passenger traffic declined 2.9% during January to November 2012–the most recent period for which comparable numbers are available–to 53.41 million, according to government data.
AirAsia currently operates flights from Thailand and Malaysia to five cities in India, including to Chennai.
The proposed low-cost airline will likely be competing with existing budget as well as full-service carriers in India such as InterGlobe Aviation Ltd.’s IndiGo, SpiceJet Ltd. 500285.BY -2.25% and Jet Airways.
Tata Sons, which controls the Tata Group, said it will only be an investor in the joint venture. “The airline will be managed by AirAsia, and Tata Sons will not have any operating role,” a company executive said in a statement.
Explaining the reason for the Mumbai-based group to partner AirAsia, the executive said: “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.”
The executive said the Indian aviation market will grow further with the entry of AirAsia, and will lead to creation of new jobs.
Telestra Tradeplace said it would be purely a financial investor and wouldn’t have any representation on the proposed venture’s board.
It said its participation was due to the Bhatia family’s close relationship with Mr. Fernandes, the AirAsia founder who serves on the board of London-based football club Queen’s Park Rangers alongside Mr. Bhatia’s son, Amit Bhatia.
—Rajesh Roy in New Delhi contributed to this article.
Write to Jason Ng at email@example.com and Santanu Choudhury at firstname.lastname@example.org
In Malaysia, we all know Air Asia has difficulty in its financial capacity and seeking out a victim to inherit its debts. It looks like TATA group is not that strong after many turbulence of hijacking and sabotaging upon its administration. These collaboration will inherit all Air Asia’s debts and it will end with bitter court fight between TATA group, Arun Bhatia group and Tony Fernandez. In one way or another; the Indian society is not a big fool.
However, our advice to TATA group still – be wary of poisonous snake bites from Tony Fernandez where TATA group and Arun Bhatia may end up inheriting all debts incur by Tony Fernandez – Air Asia.
Stay tuned to malaysiaairlinesfamilies as we are about to expose Tony Fernandez’s gimmicks in Indian aviation industry to save its Air Asia that is about to go bankrupt in Malaysia.