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For AirAsia's Tony Fernandes, Indian sky is out of bounds

By Arindam Majumdar
July 25, 2020 09:00 IST
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With cash shortage and plans going awry, the AirAsia owner is looking to cash out of the venture he built with Ratan Tata in 2013.

Arindam Majumdar reports.

Last September, Tony Fernandes, owner of AirAsia, had a round of meetings with the Tata Sons management.

The Tatas proposed a fundamental change on how the joint venture would operate in India.

Fernandes was not comfortable with the idea. This was not his style of running a business. He likes to be in total control.

 

So far, Fernandes had been calling the shots in the partnership venture, even with the Tatas holding 51 per cent in AirAsia India.

But, under the scanner of investigative agencies for violating FDI norms, the airline had failed to get permission for foreign operations, prompting the Tatas to take some quick action.

The  September meetings followed.

Some three months later, on December 30, the two partners mutually amended a controversial agreement,  giving control of crucial departments of AirAsia India to the Malaysian airline.

According to the new agreement, sales, distribution, revenue management, network planning,catering, in-flight services, finance, customer experience, engineering, and leasing contracts now came under the sole discretion of AirAsia India.

The shareholders’ agreement was amended on February 4, giving Tata Sons another lever - the right to appoint five out of eight directors on the board.

“As long as Tata Sons holds a majority of the share capital of the company, it shall retain the right to appoint majority of the directors,” the revised pact stated.

The start

Years before AirAsia India was conceptualised, Fernandes had wanted to start a car company and had approached Ratan Tata for a tie-up with Jaguar Land Rover.

No car firm  materialised, but out of that relationship, AirAsia India was born.

Although typically big business groups want to be in control of  companies where they have a majority stake, AirAsia India was different from day one.

“It was clear from the beginning that it was purely a financial investment for the Tatas,” said a person of the founding team of the airline.

“The Tatas trusted Tony and expected him to replicate the Malaysian success,” the person added.

“Staying in control is integral to Fernandes’ plan for the group,” he pointed out.

Besides India, AirAsia group has four other affiliates - Thailand, Indonesia, Philippines and Japan.

These companies primarily complement the business model for the Malaysian parent.

The airlines pay a licensing fee to AirAsia for using the brand, route networks are conceptualised from Kuala Lumpur, and they use a single platform for reservation, distribution and website.

The affiliates have also been leasing aircraft from AirAsia’s leasing arm till it sold the entity last year.

Empire model

“The AirAsia subsidiaries are not supposed to be like a franchisee model.

"They are provinces of Fernandes’ empire. The strategy is that the subsidiaries would operate to ensure revenue for the Malaysian parent - that’s the One AirAsia vision,” said a former chief executive officer (CEO) of one of the airline’s affiliates.

The idea of being present in India was alluring for Fernandes.

With AirAsia already having a healthy presence in India, a feeder airline here was supposed to help the Malaysian parent expand to West Asia and beyond.

“What Tony strategised with an India affiliate was a larger play for the group,’’ the CEO quoted above said.

With AirAsia India’s international routes, he aspired to create a corridor directly from Kuala Lumpur to West Asia and beyond and from India to East Asia and beyond, he pointed out.

In retrospect, Fernandes seems to have horribly misread both - the competition as well as the regulatory environment in India, according to aviation analysts.

What went wrong

“Tony is celebrated in Malaysia, he has influence over regulators, can control public mood and often has his own way.

"It is different in India. There are very capable competitors and the regulations are strict,” an AirAsia India board member said.

Early this year, Fernandes was forced to resign as the AirAsia’s boss after being named in a bribery scandal involving aircraft manufacturer Airbus.

Fernandes got support from the country’s prime minister and in a month, he was cleared and reinstated.

About 85 per cent of AirAsia tickets are sold through its website, limiting agents' commission.

But, in India, about 75 per cent of tickets are sold through offline agents and portals.

In Kuala Lumpur and Bangkok, AirAsia flies to low-cost terminals and by virtue of being the monopoly airline, negotiates very low rates from airports.

India has no low-cost terminals and attempts to coerce Delhi and Mumbai airports didn’t work.

In Malaysia, AirAsia’s stress is on ancillary revenue. It sells tickets at rock bottom prices but charges for all services including seats and baggage.

Even before the first flight, regulator DGCA had forced AirAsia India to change its initial plan of no free baggage and lower its seat selection fees.

The CBI case in 2017 sealed the fate of his India business.

The investigative agency filed an FIR alleging that Fernandes had paid bribe to quickly get permission for international operations.

Soon after, the Tatas had contemplated merging the company with Vistara- the group’s other aviation venture but Vistara’s co-owner Singapore Airlines resisted the move, according to a source.

Tatas then started taking control in their own hands.

Banmali Agarwala, a veteran of aerospace major GE, was appointed  chairman.

Sanjay Kumar, a former IndiGo executive, was brought in to head its operations.

Kumar tried to revamp the airline’s network, increasing presence in metros.

He stepped up the ties with travel agents.

The airline gained market share but Kumar was hamstrung by Fernandes’ declining interest in India. He quit.

An analysis of the numbers shows the airline isn’t profitable even on a single route it operates.

The original break even target has been deferred twice.

“International operations of AirAsia India was the crux of Tony’s India plan.

"When he realised, it wouldn’t happen soon, the appetite for growth had slowed down.

"There was a plan to have 30 aircraft by 2018 but Fernandes wouldn’t approve,” the board member said.

The Tata imprint only got stronger.

The changeover

The commercial unit now has a full-fledged office in Gurugram and has established a crew training unit in Bengaluru.

Recently, the airline gave mandate to Navitaire - a technology company to build its own booking website - a first for any airline in AirAsia group.

Tata Consultancy Services (TCS) is working to build a crew scheduling software which till now was handled from Kuala Lumpur.

The pandemic has delayed some plans, but as and when it happens it will be a complete breakaway from Fernandes’ One AirAsia vision.

Meanwhile, things have become tougher for Fernandes at home too.

AirAsia’s current liabilities exceeded its assets, with coronavirus worsening the cash flow.

The board member quoted above said the cash crisis was acute for Fernandes and that he had indicated that infusing cash into the India unit would be difficult.

“That has been a bone of contention.

"Tatas may provide a one-time emergency funding, but increasing exposure in an airline with little chance of profitability in the near future is not on the agenda.

"We have been directed to shelve all growth plans and cut losses,” he said.

The AirAsia India spokesperson refused to comment.

CEO Sunil Bhaskaran, a former Tata Steel executive, is implementing Project Shikhar, a cost control project originally conceptualised by Tata Steel boss T V Narendran.

Fernandes has indicated that he’s contemplating to exit the venture but the pandemic has made his job difficult.

“Who in their right mind will buy his stake in an airline which has no strong management, no growth plans, no aircraft order book.

"If at all, it has to be a distressed sale,” an investment banker said.

For the part Goan Fernandes, who once called the country his ancestral home, India now makes little sense.

Photograph: Reuters

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Arindam Majumdar in New Delhi
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