The Telegraph
Monday , April 1 , 2013
Since 1st March, 1999
CIMA Gallary

Tata-AirAsia faces rough flight

New Delhi, March 31: The lobbying war, which had stalled the Tatas’ airline plans in the 1990s, erupted again when the Cyrus Mistry-led group decided to join hands with Malaysia’s AirAsia. The initial skirmishes ended with the venture getting foreign investment approval, but problems remain.

The civil aviation ministry, which will sit over the joint venture’s proposals to actually set up the airline, get slots at airports and secure permits to bring in aircraft, is promising to be more than difficult in the days to come.

Battlelines seem to have been drawn between the North Block, home to the finance ministry, and the Rajiv Gandhi Bhawan, which houses the civil aviation ministry.

In the run-up to the Tatas getting the investment clearance, it appeared that the two ministries were not part of the same government.

The North Block, presided over by finance minister P. Chidambaram, welcomed the plan as it would bring in precious foreign exchange at a time the country needed dollars to plug the gap in its external payouts. However, the Ajit Singh-led aviation ministry fought the proposal tooth and nail whenever it came up for discussion or approval.

The civil aviation ministry’s first line of defence were the clauses of Press Note 6, which allow foreign investment in airlines. The officials initially said the provisions did not allow the investment as neither of AirAsia’s Indian partners had any experience in aviation.

When this was discounted by the fact that most airlines were launched by business groups which had never ever flown an aircraft before, the ministry came up with an interpretation that allowed foreign airlines to invest in existing airlines and not new ones.

Civil aviation minister Ajit Singh had told reporters “I am not opposed to the (Tata-AirAsia) alliance. The idea of the policy was to increase investment in Indian carriers. It would have been nice had the Tatas, with their kind of resources, started a new airline.”

North Block officials said they had to argue hard to explain that when the cabinet allowed foreign airlines to invest in Indian carriers last year, it did not intend to limit them to buying financially sick airlines.

“We told them not everyone wants to buy sick airlines… nor was selling sick airlines our sole reason for changing the FDI rules,” top officials told reporters.

Ultimately, an ingenious interpretation of the Press Note was given to convince the civil aviation ministry to withdraw its objections. The ministry proved to be a bad loser. Its officials told reporters they had doubts about whether a no-objection certificate needed by the new entity to start operations could be given under the current rules.

Others voiced objections to any future plans of the airline such as buying “too many” aircraft or starting “price wars which could bleed the already loss-making sector”.

Ominously, the ministry recently disbanded an aircraft acquisition committee, which had at least one independent member, the chairman of the Airports Authority of India besides ministry officials. New aircraft purchases will now be cleared by the director general of civil aviation, a bureaucrat reporting to the ministry.

Impact of lobbying

Many saw lobbying by rivals as the main cause for the civil aviation ministry’s unfriendly stance towards the airline newbie.

The Tatas were mauled when they tried setting up an airline in 1997 in collaboration with Singapore International Airlines (SIA).

The Naresh Goel-led Jet Airways emerged as a smart rival who managed to thwart every attempt by the Tatas to get a toehold in the sector, which had high capital costs, low profitability and could be hardly described as lucrative.

The then civil aviation secretary M.K. Kaw claimed in his memoirs An Outsider Everywhere — Revelations by an Insider that lobbying by Jet on airline FDI rules stymied efforts to set up the Tata-SIA airline.

“The history of civil aviation in this country would have taken a different trajectory if Tata-Singapore Airlines had been allowed to float an airline,” wrote Kaw.

“The minister (C.M. Ibrahim) did not clear the file, despite several attempts on my part,” he said.

Kaw wrote in his book that when the privatisation of airlines was permitted, Jet Airways had started with 40 per cent equity contribution by two Gulf-based airlines.

“The Tatas had mooted a proposal for a private airline with 40 per cent equity contribution from Singapore Airlines. As this would have been a formidable competitor, Jet tried hard to upset the rules regarding foreign equity contribution.

“One of the last decisions taken by the outgoing Deve Gowda government had been to disallow such contribution in new proposals. This would block the Tata proposal effectively. Jet was given a time of six months to buy back the equity from its foreign contributors,” Kaw wrote.

For the Tatas, a return to aviation marks an “emotional” reconnect with a business they had pioneered. But for their rivals, it’s a bleeding business which can suffer few new competitors, especially those like AirAsia, which has grown on a policy of aggressive fare wars.