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Tata Group, the pioneer of commercial air travel in India, is set to re-enter the country's aviation sector in partnership with Malaysia's AirAsia, Asia's biggest budget carrier, and Telestra Tradeplace.

AirAsia said on Wednesday it is seeking government approval to establish a joint venture with the two companies. Tatas Sons will be the minority investor with a 30 per cent stake and no operational role and Telestra Tradeplace will hold a 21 per cent stake while the Malaysian airline will have operational control with a 49 per cent stake. The Tatas will be represented by two non-executive directors on the airline's board.

The carrier expects to begin operations by the fourth quarter of the current year and will operate in tier 2 and tier 3 cities, and be based on the low-cost model.

"We have carefully evaluated developments in India over the last few years and we strongly believe that the current environment is perfect to introduce our low fares," AirAsia chief executive Tony Fernandes said in a statement.

The venture plans to operate from Chennai.

"Air Asia flies to the south of India. Naturally, we know south India well. We have to wait for the necessary nod from the Indian government," Mr Fernandes said in a conference call.

"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 startups. This will enhance competition, expand spread of air connectivity to tier 3-4 cities and bring down airfares for the Indian passenger," said global consultancy KPMG in a note.

"We may also see some consolidation in line with what's happening in the US and EU since clearly, India - with its low flyer-base, regulatory challenges and high cost structure - cannot afford more than four strong national airlines," the consultancy added.

AirAsia's planned entry into the Indian aviation space spells trouble for current operators like SpiceJet, global investment bank JPMorgan has said.

"After Air Asia it could be challenging to sustain higher yields and entry of a new player could put pressure on pricing," JPMorgan said in a report.

Budget carrier SpiceJet, India's number 4 operator by market share, may be the biggest casualty as competition increases. That's because SpiceJet has major presence in Chennai and tier II/III cities. AirAsia India will also be based in Chennai and will be serving smaller cities, adding to pressure in an already competitive market.

SpiceJet shares were down over 3.5 per cent as of 09.40 a.m. on the BSE. The stock underperformed other aviation stocks. Jet shares were down 1.1 per cent, while Kingfisher Airlines shares were up by their daily limit of 5 per cent for the fourth day in a row.

Near-term investors' reaction to this deal could be mixed or on the negative side, according to JPMorgan.

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.

(Also read: The opportunity that Ratan Tata missed)

Yesterday's announcement comes after the Malaysian carrier denied last year it was bidding for a stake in SpiceJet.

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.

AirAsia presently flies to four south Indian cities and Kolkata in addition to 20 countries across Asia and has indicated it plans to slow its overall expansion elsewhere.

AirAsia X, the long-haul carrier found by Fernandes, last year pulled out of India due to poor demand and profitability.

India's two biggest cities, Mumbai and Delhi, were taken off the AirAsia network last year due to a failure to access local distribution lines, according to market researcher the Centre for Aviation (CAPA).

"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.

With inputs from agencies

Story first published on: February 21, 2013 10:07 (IST)

Tags: AirAsia, Jet Airways, KPMG, SpiceJet, Singapore International Airlines, Etihad Airways, Tata, Telestra Tradeplace, Malaysia, Tata Sons

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