AirAsia takes Tatas back to skies in three-way JV for budget airline

Feb 21 2013, 02:50 IST
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SummaryAlmost 60 years after exiting the aviation business with the nationalisation of Air India, the Tata Group is entering the sector once again.

Almost 60 years after exiting the aviation business with the nationalisation of Air India, the Tata Group is entering the sector once again. Tata Sons, the promoter of the Tata group of companies on Wednesday said it would invest in the airline business in a three-way joint venture, where the majority stake of 49% would be held by Malaysia’s largest budget carrier AirAsia. Arun Bhatia of Telestra would also be a partner in the venture with 21% stake while Tata Sons would hold 30%.

Tata Sons said that it will be “merely an investor” in the proposed joint venture and will not have any operating role. However, it will nominate two executive directors to the board of the proposed joint venture company. Further, the proposed airline would not use the Tata brand name.

The development marks the first major decision of the group under its new chairman Cyrus P Mistry.

“AirAsia Berhad through its investment arm, AirAsia Investment has submitted an application to the Indian Foreign Investment Promotion Board to seek approval for AAIL to invest 49% into a proposed joint venture together with Tata Sons Ltd and Arun Bhatia of Telestra Tradeplace Pvt Ltd,” the Malaysian low-cost carrier said in a statement to the Kuala Lampur stock exchange on Wednesday.

AirAsia said the joint venture will approach the Directorate General of Civil Aviation for an air operators permit once the FIPB approves its application.

“The parties have signed a Memorandum of Agreement that details high-level terms with regards to the proposed partnership including the proposal to execute definitive agreements such as a shareholders agreement, a brand licence agreement and other related documents in the event that FIPB approval is obtained,” AirAsia said.

As per the arrangement, Tata Sons will pick up 30% stake in the joint venture while Arun Bhatia, who runs aircraft component maker Hindustan Aerosystems, will own 21%.

“When AirAsia approached Tata Sons with the proposal for a stake in the venture, we concluded that given its reputed business model, AirAsia could be a relevant and successful service provider in the domestic sector,” a Tata Group spokesperson said. “The benefits to the domestic market will include AirAsia’s reputed service, which will further grow aviation as a mode of transport in what is a relatively under served market and employment generation.”

In mid-1990s, Tatas had tried to launch an airline with Singapore Airlines but the plan failed to materialise because of regulatory hurdles.

The proposed airline will be a low-cost carrier. Sources said AirAsia would be putting in place an Indian management team to handle the operations of the Indian airline.

“The joint venture plans to operate from Chennai focussed on providing domestic Tier II/Tier III city connectivity to Indian travelers,” AirAsia said.

AirAsia's announcement comes after it had denied showing an interest in buying a stake in low-cost carrier SpiceJet. The airline's billionaire boss Tony Fernandes had visited India in late 2012. The low-cost carrier had been looking for the right partner to enter India even as it kept maintaining that market conditions were not right for it to make an investment.

“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 in a statement.

AirAsia Berhad, which is listed on the Kuala Lampur stock exchange, reported a profit of 157 million Malaysian Ringit or Rs 275.66 crore on revenues of 1.2 billion Malaysian Ringit or Rs 2,161.80 crore for the fiscal 2012 third quarter ended September 30. The airline's fiscal year is the same as the calendar year.

AirAsia's cash reserves as of December 31 also stood at 2.2 Malaysian Ringit or Rs 3,842.90 crore.

If AirAsia manages to secure FIPB approval before Etihad and Jet Airways reach an agreement, it will be the first investment by a foreign carrier in India.

Civil aviation minister Ajit Singh welcomed the announcement stating, “We hope the FIPB approval comes soon.”

AirAsia has been on the lookout for right partners in India since the government allowed foreign airlines to hold 49% stake in Indian carriers.

“Securing the right local partner could resolve many of the challenges AirAsia has faced in serving India from its home markets,” CAPA said in a report in 2012 after the low-cost carrier pulled operations from New Delhi and Mumbai.

Consultants said following this announcement there could also be consolidation in the aviation industry.

“The Tata-AirAsia deal is in line with our estimate that the policy change will lead to equity deals in 2-3 existing airlines and 1-2 fresh start-ups,” said Amber Dubey, partner and head-aviation at global consultancy firm KPMG. “We may also see some consolidation in line with what's happening in the US and EU since clearly, India-with its low flier-base, regulatory challenges and high cost structure – cannot afford more than four strong national airlines.”

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