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Feb 21, 2013 10:27 AM IST | Source: CNBC-TV18

New airline coming soon! AirAsia, Tatas to fly together

While everyone's attention has been focused on the Jet-Etihad FDI deal, the Tata Group has moved quietly to re-enter the Indian aviation space.

While everyone's attention has been focused on the Jet-Etihad FDI deal, the Tata Group has moved quietly to re-enter the Indian aviation space. In an application to the foreign investment promotion board (FIPB), Malaysia-based AirAsia has applied to form an Indian joint venture with Tata Group and one more Indian entity and proposed an initial investment of USD 15 million report CNBC-TV18’s Sunanda Jayaseelan and Arvind Sukumar.

The new chairman of the Tata Group seems to have moved quickly to bring in a new strategy. In a volt-face from former chairman Ratan Tata's December 2012 statement saying the group would not look at re-entering the aviation space which it quit in 1946, the group has announced a joint venture with Malaysia-based AirAsia to set up a loc-cost carrier in India.

If the application to the FIPB is approved, AirAsia will hold 49 percent in the JV, Tata Sons will hold 30 percent and Telestra Tradeplace, which owns Hindustan Aerosystems will hold 21 percent.

With Chennai as its hub, this new airline will connect to other Tier II and III cities. Adding to its current destinations like Chennai, Bangalore, Tiruchirappalli, Kochi and Kolkata.

Sources say India will serve as a hub to drive air traffic to Malaysia and Thailand as well. AirAsia's statement says it has a fleet of over 118 aircraft, and has ordered over 350 more. AirAsia believes Indian aviation has tremendous upside for first movers, and is confident that it can replicate its unprecedented success through superior operational performance by emphasising a focused and disciplined cost structure which will tremendously benefit the Indian consumer.

CNBC-TV18 also learns that while AirAsia will look to on-ground operations, the Tata Group and Bhatias of Telestra Tradeplace will only provide local support and expertise. Now Tata Sons has refused to provide details on their share of investment in the project, but a company spokesperson said, "Tata Sons will nominate two Non-ex-directors on the proposed venture's board. These two directors are not from among the apex leadership of Tata Sons."

Telestra will also have a non-executive representative on the board. This will be nominated by Arun Bhatia, who runs Telestra. Incidentally, Bhatia's son Amit Bhatia is married to steel magnate Lakshmi Nivas Mittal's daughter, and is on the board of AirAsia.

AirAsia hopes to begin operations by the end of this year and civil aviation minister Ajit Singh has welcomed this proposal.

But there are several issues which need to be tackled. Commerce ministry sources say DIPP has sought clarity from the aviation minister on sectoral rules that are needed before FDI from airlines can be cleared and that the aviation ministry and the DGCA are working on this front.

These rules will also deal with the functioning of a scheduled airline once FDI comes in, and issues related to board control. Further, current rules dictate that no airline operating permit can be granted till all directors on the airline's board get clearance from the ministry of civil aviation and this could delay FIPB approval for AirAsia's proposal. But no one is disputing that a new airline could shake things up for a struggling sector.

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