The joint venture will have three partners -- AirAsia, with a 49 per cent stake; Tata Sons, the holding company of the Tata group, with a 30 per cent stake, and Arun Bhatia, who owns investment firm Telestra Tradeplace, with the remaining stake.
The airline, which will be based out of Chennai, is likely to start operations by the fourth quarter, provided all approvals are in place, AirAsia said.
The partners will initially invest $30-50 million, or over Rs 250 crore, in the airline.
The Tata group will have no operational control and will stay on as a minority investor in the airline, which will operate under the AirAsia brand. The Tatas will be represented by two non-executive directors on the airline's board. "We bring the expertise in running the airline like the Tatas' joint venture with Starbucks," AirAsia CEO Tony Fernandes said.
In an exclusive interview with NDTV Profit, Mr Fernandes described the tie-up as "a marriage made in heaven". "They (the Tatas) know the Indian economy well. They are in most parts of the economy. They have a fantastic reputation and are good partners to be with. They understand partnership very well and I have a good relationship with Ratan Tata and now the new CEO," Mr Fernandes said.
The new airline will compete in the budget carrier space, a market currently dominated by IndiGo and SpiceJet. The AirAsia CEO said his focus will be on the "1 million people that travel by train".
The Malaysian airline's proposed entry into the Indian aviation space spells trouble for current operators like SpiceJet, global investment bank JPMorgan said. "After AirAsia it could be challenging to sustain higher yields and entry of a new player could put pressure on pricing." Shares in SpiceJet, India's No. 4 operator by market share, fell sharply today, closing 6.55 per cent lower on the Bombay Stock Exchange.
The new airline could also lead to industry consolidation and bring down airfares for the Indian passenger, global consultancy KPMG said in a note.
The AirAsia partnership is the Tata group's second innings in the Indian aviation sector. In 1932, Tata Sons operated its first flight with J.R.D. Tata, considered the father of civil aviation in India and founder of Air India, taking off from Karachi in a tiny, light single-engine de Havilland Puss Moth on his flight to Mumbai via Ahmedabad. The government nationalized Air India in the 1950s. In the mid-1990s, the Tatas floated a proposal to tie up with Singapore International Airlines for a domestic carrier in India but the proposal fell through.
India's aviation industry, which has seen continued losses due to high operating costs and regulatory uncertainty, was opened to foreign investors in September last year. Foreign carriers are now able to purchase up to 49 per cent of local airlines. No foreign airline has bought a stake in a local carrier since India relaxed investment rules. The UAE's Etihad Airways is in talks to buy a stake in Jet Airways, but no agreement has been reached. Sources previously said it makes more sense for foreign carriers to start an airline with a local partner so they don't have to assume the debt of an existing Indian airline.
With inputs from agencies