AirAsia's India foray good news; see more competition: KPMG

Asia's leading low-fare airline AirAsia Bhd is looking to enter the Indian aviation market along with the Tata group and Telestra Tradeplace, the firm said on Wenesday. This comes in the backdrop of the Indian government easing rules to allow overseas carriers to invest upto 49 percent in local carriers late last year.

Amber Dubey, head (aviation), KPMG India told CNBC-TV18 that he is extremely positive on AirAsia's plan to invest in India. "After the policy (FDI) change in September, we had predicted that there will be at least two-three equity infusions in existing airlines and there could also be one or two start ups," Dubey says.

Dubey feels that the deal will expand connectivity into regional routes on the tier 3-tier 4 sectors. "Passengers will see yet another fare war and ultimately over the next one or two years we may also see some consolidation in the Indian aviation sector," he told the channel.

Below is the verbatim transcript of Amber Dubey's interview on CNBC-TV18

Q: What is your reaction to the news involving the Tata Group as well as Air Asia?

A: Extremely positive. Not unexpected. When the policy change happened around September, we had predicted that there will be at least two-three equity infusions in existing airlines and there could also be one or two start ups. One or two start ups, because it is easier to start an airline on a clean sheet of paper rather than investing into an existing airline where there could be various challenges and debt issues.

When you go beyond 24 percent in an existing airline, there has to be an open offer and instead of pumping money into the airline, the money will have to be paid to the existing shareholders. A start up always makes more strategic sense and this is just fantastic and now there will be some exciting competition. We will expand the connectivity into our regional routes on the tier 3-tier 4 sectors.

Passengers will see yet another fare war and ultimately over the next one or two years we might also see some consolidation in the Indian aviation sector given that our flyer base is very small and the regulatory challenges, our cost structures are very high. Unless some of those regulatory changes are made, we might see some consolidation. Some airlines may not survive in this battle for the fittest. Just like the US and Europe, we will see consolidation over the next one-two years.

Q: Looking at the way the whole Jet-Etihad deal is happening, there is so much time involved in this deal. What needs to be changed given the low cost carriers (LCC) and how this joint venture (JV) is going to work because it still seems that Air Asia is going to hold 49 percent? What needs to be clarified if they will go ahead and seek the foreign policy initiative (FPI) approval?

A: A lot of backroom homework must have already been done by both the airlines. Both Air Asia and Tata are responsible and famous companies. They know the lay of the land and have been around and are operating. They are doing about 63 odd flights every week to India. Now that the policy is there, there is no way this can be prevented because the government would encourage only equity investment in the existing airline. But nowhere in the fine print it is mentioned that this policy change was only for existing airlines.

Any new company can be set up. It will take some time and that's why we have projected that it will take at least 6-12 months for some of these deals to fructify and flights to start. Whenever there is a regime check, such delays and clarifications will be required. The biggest issue here would be the 5/20 rule. Very often we have been raising the issue that when we open up the FDI, this 5/20 rule should be scrapped as in five years and 20 aircrafts because for this 5/20, the original objective was to keep flying by night operators. Here we have a global brand and global airlines, very well renowned airlines with a perfect track record.

If they come to India, surely we cannot make them wait for five years and 20 aircrafts fleet to start flying. Also the aircrafts, pilots, engineers, everybody is going to be certified by the Directorate General of Civil Aviation (DGCA) so what's the reason to keep them from flying. These are some of the clarifications which over a period of time, the ministry, DGCA and some of the other agencies will clarify and this deal should go through.

Q: While several low-cost carrier (LCC) names have been doing the rounds, whether it is GoAir, or Indigo saying that they are looking for foreign direct investment (FDI) approval, you are saying this international LCC coming into India and seeking to connect India, do you think it will open the market up? How will things change for other LCCs in India?

A: Definitely. This will now create the second wave of LCC resolution. The first round started about 4-5 years back when the LCC culture first came in India pioneered by Captain Gopinath, but this will be second round and will open up new centers in tier-3, tier-4 cities. It will create point-to-point rather than all flights coming to those metro hubs.

AirAsia will bring in all the wealth of knowledge, information and experience that is gathered in other equally comparative markets in India. That coupled with Tatas who have been around for centuries who have the presence of the entire country, I think it will be a fantastic deal. In this competition given the low flyer base in India, regulatory challenges and the fact that we have a very high cost structure will lead to some consolidation, because India cannot afford more than four strong national airlines given the constraints at the moment.

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