Feb 21, 2013 01:12 PM IST | Source: CNBC-TV18

Betting on partners, expertise & govt support: Air Asia

AirAsia, CEO, Tony Fernandes explains to CNBC-TV18 that he is betting on 1 billion people, his 11-year expertise and govt support to make the joint venture a hit.

AirAsia, CEO, Tony Fernandes explains to CNBC-TV18 that the he plans to start operations with 3-4 planes and will scale up as per market needs. "We have plenty of aircraft deployed in the market and not deterred by Indian regulatory climate, the high ATF rates and airport charges in India. A progressive government keen on a growing economy is key and we will operate differently from other airlines in India."

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Fernandes hopes to get all clearances and is confident the government will move as quickly as it can while refraining to comment on the timeline for clearances.

"We have got two illustrious partners and it too early to say what role Ratan Tata will play in the joint venture. I have a lot to learn from Ratan Tata and would love him to play whatever role he can in the JV."

Indian parties will play major role in running the airline and board representation will be proportional to investment. "We hope to start operations with USD 30-50 million and the big opportunity for us would be to devise a cost structure that will stimulate market.We are here to create a new market and address new routes."

Though the airport charges in some airports were very high, Fernandes asserts that the Indian aviation market is not all gloom and doom.

Below is the edited transcript of the interview on CNBC-TV18

Q: Why did you decide to go the start-up route? There are low-cost carriers in India like SpiceJet who are waiting for foreign carriers to invest in them.

A: Our philosophy has always been to build organically, create a culture organically and most importantly, establishing a unique cost structure. Right now I don’t think any Indian airline has the right cost structure to really create the right fares to stimulate the market. That’s why we took this route.

Q: And why the decision to tie-up with the Tatas and Arun Bhatia? When Ratan Tata stepped down he said that the Tatas have no plans for the aviation business as he felt it this destroyer of wealth and capital. How did you manage to convince the Tatas to get on board in a foray into aviation business?

A: Firstly, our effort in getting two Rolls Royce partners is a fantastic start for the joint venture. How did I persuade the Tatas? I think we won them over with our model which explained our plan try and create new demand in India and build new routes. The fact that we have been successfully doing it for 11 years in other parts of Asia, also helped I think.

Q: What is Ratan Tata’s role in this joint venture? The Tatas announced that they will be  minority investors and will not be involved with operations or running of the airline in anyway and will only have two nominees on the board.
A: These are early days and the JV hasn’t really formed at all. We would love to have him play whatever role he would like as he has got a tremendous experience. Add to this that he is a pilot and knows the aviation industry very well. So there is much I can learn from him. But it is early days to exactly say what role he will play.

Q: The JV will be three-way partnership between you, Arun Bhatia and the Tatas. You have also applied to the FIPB for clearance with the aviation minister having welcomed your decision. But have you held any discussions with regulators and government officials regarding the clearance?

A: We didn’t march in blindly. Only after holding discussions and examining if the environment was suitable for us did we decide to enter the Indian market. But we will have to wait for necessary approvals from the government regulators.

Q: In terms of ownership, this will be a venture that will be majority-owned by Indians but if AirAsia is going to manage the operations, the question of foreign control is going to be looked at very closely by Indian regulators. How do you intend to convince the authorities concerned that control will rest with the Indian board or ownership?

A: We have two very successful families and companies in the Indian corporate scene who are very proactive. From an operational point of view, in the Tatas' joint venture with Starbucks, it makes a lot of sense for Starbucks to run some of the operational bits. But in terms of finance control and all the key board decisions, the Tatas’ will play a major role. That is how we conduct  all our joint ventures.

Q: Can you give us details about the representation and constitution of the board? The Tatas are to have two members on the board but how many members will the Bhatia family and AirAsia have on the board?

A: I don’t know. It will be in order of the shareholding of the investment being putting together.

Q: So what kind of investments are we talking about initially? How quickly do you believe you will be able to get started as and when you do get the requisite approvals from the government?

A: We will be able to start fairly quickly as soon as we get approvals. The required capital to generally start an airline with will be USD 30-50 million and in India it would be no different.

Q: I understand that your hub will be at Chennai. Will the airline run on a low-cost model and mirror what Air Asia’s global model? How you intend to structure operations, what are the routes you are looking at and what is your big opportunity in India?

A: The big opportunity is the population of 1 billion people, the routes that have been hitherto ignored, and devising a cost structure to stimulate the market. Why Chennai? Because that’s the region where we fly regularly and we know the South Indian market well because we have operating there for a number of years.

Q: What will be the size of the fleet?

A: It is early days at the moment. We will generally start with three or four planes and scale up depending on how successful we become and the manner in which the market takes to us. We have 300 aircraft on order so we have plenty of aircraft to deploy into the market. But we will take it step-by-step.

Q: What is going to be the strategy in terms of the routes that you intend to focus?

A: I am not going to declare that so soon. Let’s give it a bit of time. We are here to create a new market. We see tremendous opportunity and lots of routes that have never been flown before which is AirAsia’s mainstay. If you look at our network right now, 50 percent of the routes that we fly are new routes.

Q: Are you not perturbed by the Indian regulatory climate, extremely high prices of aviation turbine fuel (ATF) and exorbitant airport charges?

A: No. We have been in the aviation business for 11 years. People laughed when we started in Malaysia and said that it will be very hard to make money. The key to India is its population of a billion people and a progressive government looking at ways to stimulate the economy. Impediments like high ATF prices have been placed on the table and will be discussed.

Regarding airport charges, I would agree that the charges at some airports are high. But I think that even private airport operators are looking for partners and low-cost terminals. There are also plenty of secondary airports in India that are under-utilised and plenty of old airports that may be available in years to come. So, I am not so worried.

Certainly, we will not be able to fly to some airports because I don’t think it makes sense in the same way we would never fly to some very expensive airports in Asia as well. So, there is plenty of scope. We are going to do it very differently from many of the other airlines that have operated in India. And that is where we see the sweet spot.

There is a market in India- it is not all doom and gloom. There are a million people using the train every day. I was told that it takes some 40 hours to go from New Delhi to Chennai and was shocked to hear the airfare that people are ready to pay on the New Delhi-Chennai route. And I think that was right in middle of the sweet spot we are looking at. We are trying to create a market and create new people to fly.

Q: The aviation minister said he hoped to expedite clearances, but what’s your own sense of how quickly you will perhaps be able to get past the regulatory approvals that you require?

A: Really, that’s not something I can comment on. But I have to say as I mentioned earlier, I found the Indian government very supportive, very proactive in trying to get business done. So, I am sure that they will move it as quick as they can and we are ready as soon as they give the necessary approvals.

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