AirAsia to invest up to $60 million in new Indian airline with Tata

Tata group, which started India’s first airline in 1932, is set to return to the industry as new Chairman Cyrus Mistry plans a budget carrier with Tony Fernandes’s AirAsia Bhd.

Southeast Asia’s biggest low-cost airline will own 49 percent of the venture. Tata Sons Ltd., the holding company of India’s biggest business group, will control 30 percent, while the balance will be owned by Arun Bhatia, whose son is married to the daughter of billionaire Lakshmi Mittal. Fernandes and Mittal own Queens Park Rangers Football Club.

Partnering with the $100 billion conglomerate, which controls Corus Plc and Jaguar Land Rover, will help AirAsia gain a foothold in a market that’s set to triple to 159 million passengers annually by 2021. The venture is the first to be announced after the government allowed foreign carriers to buy stakes in local airlines in September.

“We couldn’t have picked a better partner,” AirAsia Group Chief Executive Officer Fernandes said in an interview from London yesterday after the venture was announced. “We have a product which will have extremely low costs, have extremely low fares and will stimulate the market.”

AirAsia plans to invest as much as $60 million initially in the venture, Fernandes said in a conference call today. The new carrier will hire 300 people and may start operations by end of the year, he said.

The airline will operate from Chennai in south India and will provide services to smaller cities in the country, AirAsia said in the statement. A carrier must complete five years of domestic operations before it can start overseas flights, according to Indian aviation rules.

‘Smart Move’

“Partnering with Tata is a very smart move by AirAsia,” said Mahantesh Sabarad, an analyst with Fortune Equity Brokers India Ltd. “India is poised to drive a lot of international traffic and can be a hub in the future. That interests carriers like AirAsia” and Etihad Airways PJSC, he said.

AirAsia India will compete with billionaire Kalanithi Maran’s budget carrier SpiceJet Ltd., IndiGo, Go Airlines India Pvt. and Jet Airways (India) Ltd.’s JetKonnect. IndiGo, the low- cost carrier that placed an order for 180 Airbus SAS A320 planes, has grown to become India’s biggest airline, with a 27.3 percent market share in November.

SpiceJet slumped 6.6 percent, the most in almost six months, to 37.80 rupees at close of trading in Mumbai today. Jet Airways fell 4.2 percent. AirAsia rose 1.9 percent to 2.65 ringgit in Kuala Lumpur.

“Life will become very competitive for Indigo and SpiceJet,” said Sabarad.

Return to Aviation

Chairman Mistry, who took over from Ratan Tata in December, returns the group to aviation after former Chairman J.R.D. Tata started an airline that later became state-owned Air India Ltd. In 1932, Tata Airlines began meeting Imperial Airways’ London- to-Karachi flight and then continued to Madras, now called Chennai, via Mumbai.

It used a de Havilland Puss Moth monoplane, which had a cabin instead of an open cockpit. J.R.D. Tata piloted the inaugural flight, which hauled mail.

More than a decade ago, Tata Group had teamed up with Singapore Airlines Ltd. to bid for a stake in Air India when the then-government sought to sell shares in the state-owned carrier. The plan was later dropped because of political opposition.

Debt and Losses

The plan to allow foreign carriers to buy stakes in local airlines was revived and implemented by Prime Minister Manmohan Singh’s government to help an industry mired in debt and losses, prompting Jet Airways to start discussions with the Middle East’s Etihad Airways. Liquor baron Vijay Mallya’s Kingfisher Airlines Ltd. was forced to ground his carrier in October because of widening losses and debt.

“This shows that confidence is somewhat back in the sector,” India’s Civil Aviation Minister Ajit Singh said in an interview.

The deal will be Mistry’s first venture since taking the helm at the company, which also has a partnership with Starbucks Corp., owns Tata Consultancy Services Ltd., India’s biggest company by market value, runs the nation’s biggest hotel operator and also makes salt. AirAsia will operate the venture, according to a statement from Tata Sons.

Mistry’s group and Bhatia’s Telestra Tradeplace Pvt. won’t have an operating role, the companies said in separate statements. The Indian partners will have five of the nine seats on the airline’s board, Fernandes said today. AirAsia looked at many Indian airlines to form a venture before deciding on Tata, he said without naming any carriers.

Malaysian Roots

AirAsia is among the 50 low-fare airlines that started in the Asia-Pacific region in the past decade to compete with full- service carriers as first-time travel surges in India, Indonesia and other developing economies. Singapore Airlines started Scoot and Tiger Airways Ltd. while Qantas Airways Ltd. started Jetstar Airways Pty.

AirAsia has set up ventures in the Philippines, Japan, Thailand and Indonesia as part of a strategy to expand in the region from its Malaysian roots. In December, the carrier ordered 100 Airbus SAS A320s valued at $9.4 billion, in addition to the 200 it had agreed in 2011 to purchase.

The Malaysian carrier has applied to India’s Foreign Investment Promotion Board for approval and will apply for an air operators permit from the regulator, AirAsia said in the statement.

“India was not ready for a true low-cost carrier,” Fernandes said. “It is now.”

–With assistance from George Smith Alexander and Vipin V. Nair in Mumbai and Barry Porter in Kuala Lumpur. Editors: Vipin V. Nair, Arijit Ghosh

To contact the reporters on this story: Siddharth Philip in Mumbai at [email protected]; Bhuma Shrivastava in Mumbai at [email protected]

To contact the editor responsible for this story: Anand Krishnamoorthy at [email protected]