India agrees to remove all procedural problems to set up AirAsia India

PETALING JAYA: A day after AirAsia bought a 49% stake in the Philippines' Zest Airways, the Indian authorities say they will remove all procedural problems to pave the way for the setting up of AirAsia India, a deal that could see AirAsia covering most of Asia with its six hubs.

“We can now stretch and cover all of Asia with all our hubs,'' AirAsia head honcho Tan Sri Tony Fernandes told StarBiz.

With the venture in the pipeline, he also expects the airline to carry about 40 million passengers this year from 33.8 million last year and 29.8 million a year earlier.

“We will do 40 million this year. Our sales are very strong, and for the last few days (our sales) have been amazing,'' he said. The airline has launched several promotional activities in the past few weeks to lock in passengers in forward bookings.

India will be AirAsia's newest hub after Japan, but on Monday, the airline bought a 49% stake in its rival, Zest Airways, and this will see AirAsia Philippines becoming a bigger player in a market where air travel is picking up.

“It gives us the scale we need,'' he said.

This is also AirAsia's first acquisition after the aborted deal to buy Indonesia's Batavia Air; on hindsight, a blessing in disguise because Batavia Air has since been declared bankrupt.

“The Zest deal took us six months (to conclude). It is a nice clean deal, and it has a good balance sheet,'' added Fernandes.

Under the deal, Zest Air promoters will hold 15% equity in AirAsia Philippines, and the rationale to buy Zest Airways, apart from it being a rival, are its three hubs, with the most important being the Ninoy Aquino International Airport in Manila, the main gateway in and out of the Philippines.

AirAsia Philippines started operations last year but from Clark airport, which is a two-to-three-hour drive from the capital.

Zest Air operates 11 aircraft on 10 domestic and 10 international routes and has hubs in Manila, Kalibo and Cebu in central Philippines, which are major tourist destinations.

M&A Securities, which has a “buy” call on AirAsia with a fair value of RM3.22 a share, believes the deal with Zest Air allows the AirAsia Group to strengthen its presence in the Philippine market.

However, it wrote that the acquisition of Zest Airways had no impact on AirAsia Group's earnings since its equity interest in AirAsia Philippines had been reduced to zero. In yesterday's trading, AirAsia shares fell three sen to RM2.79.

Apart from the hub in the Philippines, AirAsia has hubs in Thailand, Indonesia and Japan. Its main base is in Kuala Lumpur, with India as its latest addition.

Asked if AirAsia was looking at more hubs and acquisitions, Fernandes said “no, that's it.”

It is consolidation time, as setting up a venture in India is going to be very challenging amidst a highly competitive market place. However, Fernandes said “our cost is going down.”

It is a known fact in the aviation industry that AirAsia's cost is one of the lowest, although he declined to elaborate, merely saying “ours is really volume-related.” But a low-cost base would help the airline in a very competitive Indian market, where airlines reduce fares whenever they felt like it.

“India is going to be amazing for us,” he enthused.

Yesterday, India's Planning Commission deputy chairman Montek Singh Ahluwalia said that inter-ministerial differences would be sorted out to pave the way for Tata Sons to set up an airline with AirAsia. Tata Sons controls Tata, one of India's biggest industrial conglomerates.

“I don't know what the detailed differences are. I am sure they will be sorted out. If Tata and an international airline want to set up an Indian airline, they should be allowed to, as long as the latter holds up to 49% equity.

“The intention of the policy, as far as I know, is quite clear that they should be allowed to do so,” Ahluwalia was quoted in The Economic Times.

Last week, AirAsia was given the nod by the Foreign Investment Promotion Board to invest in India. However, questions were raised on whether the rules amended in September allowed for new ventures.

In September, India relaxed the rules to allow for foreign ownership of up to 49% for existing airlines because some of its airlines were in dire need of investment.

AirAsia will hold a 49% stake in AirAsia India, Tata Sons 30% and property tycoon Arun Bhatia the remaining 21%.

AirAsia India's base will be in Chennai, and the launch is expected to be mid-year.

The Centre for Aviation said that while its ventures grew in India, the Philippines and Japan, the focus this year for AirAsia was to grow the Malaysian, Thai and Indonesian operations. These three are expected to take delivery of 25 aircraft this year, bringing the total fleet of A320 to 138.

too much good news perhaps?