AirAsia must first prove it can fly high on low-fare biz model

AirAsiaAirAsia is planning a three-way joint venture with Tata Sons. (Reuters)

Malaysian carrier AirAsia's strategy of offering the lowest fares in the industry and occasional free seats may stand in the way of getting a no-objection certificate (NOC) from the civil aviation ministry, two officials said. AirAsia is planning a three-way joint venture with Tata Sons and Telestra Tradeplace to start an airline in India.

After a Foreign Investment Promotion Board (FIPB) clearance, AirAsia must secure an NOC from the civil aviation ministry before approaching the directorate general of civil aviation for a scheduled operator's permit.

"The applicant must provide a detailed business plan including feasibility report for the routes it wants to fly on and prove its ability to fly on a sustainable basis," a ministry official said. "We will assess what kind of fares they plan to offer and whether it would be sustainable, given the tax and cost structure in the industry. We cannot have uncompetitive fares since it is bad for the health of the industry. Also, we cannot let the airline go into losses even if its promoters are rich," the official said.

The official said AirAsia was yet to seek an NOC. "I'm sure they are preparing a viable business plan. In principle, we are in favour of the proposal," he added.

Aviation ministry officials have been quoted as saying that AirAsia may face "procedural issues", without elaborating. The official declined to comment on whether existing airlines have expressed any concerns about AirAsia's entry.

AirAsia offers some of the lowest fares in South East Asia. Its cost of providing each seat or cost per available seat per km or CASK was the lowest globally at $4.1 in 2011. Indian rivals SpiceJet's CASK was at $4.7 while Jet Airways was at $7.9.

In order to replicate its success formula here, AirAsia must overcome India's high airport costs and fuel taxes. According to chief executive Tony Fernandes, AirAsia plans to do this by operating out of Chennai to Tier II and Tier III cities where airport costs are lower and to some states which offer tax sops for flying to smaller towns.

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