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Corporate Mar 2, 2013

Tata meets Ajit Singh but new airline far from taking to skies

By Sindhu Bhattacharya

New Delhi: On a day when Ratan Tata met Civil Aviation Minister Ajit Singh, presumably to discuss setting up an airline that the Tatas propose with AirAsia, it became apparent that the new budget airline will have to face several hurdles before it sees the light of the day.

Firspost spoke to a cross section of senior government officials and the consensus view was this: the new airline may get an in-principle nod from the Foreign Investment Promotion Board (FIPB) as early as 6 March but it is unlikely to get either the scheduled operator license (SOP) or permission to even establish an airline from the Ministry of Civil Aviation in a hurry. In short, AirAsia's Tony Fernandes and Tata should be prepared for long procedures and many rounds of the ministries concerned in the summer of 2013.

Ratan Tata. PTI

Ratan Tata. PTI

AirAsia has already submitted a proposal to the FIPB in which it has clarified Tata Sons and the Bhatias will together own 51 percent majority stake in the new airline while AirAsia itself will own only 49 percent. Through this airline, the Tatas are seeking a third entry into the aviation sector, having failed the last two times. So it comes as no surprise that the new airline will not be granted approval anytime soon.

One senior government official we spoke to said it would have been easier had AirAsia taken stake in an existing airline instead of wanting to begin a new one.

"Now that a new airline has to be set up from scratch, there are a number of things we will need to examine. These include source of funds, how many aircraft, which kind of aircraft, which routes does this airline want to operate. Then, we will need to examine the constitution of its board of directors and whether the airline will be run by Indians. We don't even have a business plan from AirAsia till now."

Another official made it clear that while FIPB can approve the proposed joint venture company, it was for the Director General of Civil Aviation (DGCA) to provide it with a scheduled operator permit (SOP). "What if the FIPB approves the JV but then it fails to get the license? This is actually a chicken and egg kind of situation where the various arms of the government are a little confused over which one should grant this proposal clearance first."

The senior official quoted earlier made it clear that the new airline, if and when it is allowed to take to the skies, will be barred from several things:

1) It cannot use the name AirAsia in India, the new airline will need to have a new name, even if it is AirAsia India.
2) It cannot fly overseas, in keeping with existing norms which require five-year mandatory domestic operation before flying abroad.
3) Since it will not be allowed overseas operations, there is no way the new airline will gain access to cheaper jet fuel - something which could be critical to its operation as a budget carrier in the cut throat Indian market.

So this is how it works: FIPB may, if it is satisfied, clear the AirAsia proposal in-principle at its meeting on Wednesday. Thereafter, the action will shift to the Ministry of Civil Aviation where the new company will have to first fulfill criteria like having five aircraft within one year to even become eligible for applying to DGCA for a flying permit.

The officials quoted earlier also made it clear that despite proclamations of AirAsia about its ultra low cost model in India, they do not see how its cost of operation would be any lower than the Indian LCCs such as IndiGo and SpiceJet.

"So there is no question of AirAsia distorting the market with ultra cheap fares. Anyway, the Competition Commission of India will look into any predatory pricing," they warned.

AirAsia plans to invest as much as $60 million initially in the venture. India is one of the fastest growing aviation markets in the world but high fuel prices and operating costs have also made it one of the most challenging. Last year, Indian airlines posted combined losses of $2 billion.

by Sindhu Bhattacharya

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