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Documents and email exchanges reviewed by Mint prove that AirAsia India is run by AirAsia Bhd, in contravention of Indian laws that say that while Indian airlines can allow a foreign airline to own up to 49% in them, they have to be controlled and run by the Indian partners.
This control could explain the churn at the top at AirAsia India, as well as the angst of one of the shareholders.
In 2013, AirAsia Bhd said it would partner with Tata Sons Ltd, and Arun Bhatia of Telestra Tradeplace Pvt. Ltd to launch an airline in India.
AirAsia Bhd was to own 49% shares in the firm, Tata Sons 41% and Bhatia the rest. Tata Sons announced on 28 March that it would buy out Bhatia.
The board of the Indian company is chaired by S. Ramadorai, a former chief executive officer (CEO) of Tata Consultancy Services Ltd. The board also includes Tata group representatives P.K. Ghose and R. Venkataramanan, besides AirAsia Bhd’s Tony Fernandes and Bhatia of Telestra
On 17 April 2013, AirAsia Bhd signed a brand licence agreement with AirAsia India Pvt. Ltd.
Tharumalingam Kanagalingam was the signatory to it on behalf of AirAsia Bhd, and Anthony Fernandes (Tony Fernandes) on behalf of AirAsia India.
The 62-page agreement says AirAsia India “will observe and comply strictly with the following operating requirements which are to be determined in AirAsia’s sole discretion”.
The compliance includes just about every possible area—ancillary revenues, branding, catering and in-flight services, customer experience, engineering, finance, flight operations, innovation, commercial and technology, marketing, network planning, people, quality and assurance, revenue management, safety, sales and distribution.
The agreement has never been made public. With good reason—it goes against the grain of the 2012 Indian policy allowing foreign airlines to be partners in Indian airlines as long as the local operation was controlled and managed by the Indian partner.
“How is it possible? Then where is the Indianness of this Indian operator going to go?” said former director general of civil aviation Kanu Gohain.
Effective control in an airline is maintained, he said, by having a board which has a substantial Indian ownership, and secondly, through “control of operational deliveries, engineering deliveries, control over its marketing, commercial deliveries”.
The documents submitted by AirAsia India to the directorate general of civil aviation to secure the airline licence were—and are—still posted on the regulator’s website.
The brand licence agreement of April 2013 is not part of that.
“If I would have been the DG I would have issued a show-cause notice—call those fellows, put them through an interrogation and ask them what are the specific background agreements,” Gohain said.
The current director general of civil aviation, M. Sathiyavathy, said the regulator was not aware of any such document and would investigate it if brought to its notice. “Nobody has brought on anything to our knowledge about other agreements,” Sathiyavathy said in an interview on the sidelines of the Hyderabad air show in March. “Till now, we have no knowledge of any other agreement which are with other parties. If someone can give us the documents, we will definitely get it examined.”
The civil aviation ministry has remained cautious on the subject of effective control. Aviation secretary Rajiv Nayan Choubey restricts himself to saying the matter is being heard in the courts. The airline is battling a public interest litigation filed in the Supreme Court in 2013 by politician Subramanian Swamy, seeking the quashing of the airline’s licence.
AirAsia’s founder-promoter Fernandes flew down on his private jet to attend the Hyderabad air show and admitted on 16 March that the two airlines do have a detailed brand licensing agreement. He declined to comment on whether this agreement gives control of AirAsia India to the Malaysian airline.
A spokesperson for Tata Sons declined to comment. The company forwarded Mint’s queries to a spokesperson for AirAsia India.
The AirAsia India spokesperson dismissed the whole thing as a conspiracy.
“AirAsia India rejects the contentions of your sources. We have said this repeatedly—and reiterate once again—majority ownership and effective control of the airline is with Indian shareholders. These baseless allegations are being peddled by vested interests, and it is clear that their agenda is to restrict the kind of competition AirAsia India is offering in the low-cost air travel space,” the spokesperson said, without answering specific questions.
Still, the tone, tenor, and details of the brand licence agreement do indicate the control AirAsia Bhd exerts over the Indian operation. And then there are the emails.
One, from last July, written by Bhatia, shows that former AirAsia India CEO Mittu Chandilya didn’t have the power to decide ticket pricing.
Another, from August 2014, shows that the entire budgeting for AirAsia India (and indeed other AirAsia subsidiaries) was done out of AirAsia Bhd’s Kuala Lumpur headquarters.
“Please to inform that the upcoming year budget exercise shall start from end of September. Aircraft plan and route rollout will be sent to you on 29 September 2014 once receive from Regional Network Planning (Subashini),” Lim Wen Shiow from AirAsia Bhd’s finance department wrote in an email on 26 August 2014.
Besides Chandilya, the mail was marked to Thai AirAsia CEO Tassapon Bijleveld, Philippines AirAsia CEO Joy Caneba, AirAsia Indonesia CEO Sunu Widyatmoko and AirAsia Japan co-CEO Yoshinori Odagiri. This budgeting exercise included, according to the email, budget strategy, manpower budget, capital expenditure budget, department revenue, cost of sales, operating expenses budget.
Other mails indicate that AirAsia India may have a received a raw deal while leasing aircraft from AirAsia Bhd.
For instance, old Airbus A320s were priced almost the same as new ones. One A320, made in 2009, and registered as VT-BLR, was leased for $320,000 per month; another, VT-ATF, manufactured in 2014, was leased out for $315,788.
The prices do not match the prevailing rates provided by an independent consultant.
The leased cost of an Airbus A320 aircraft (February 2010 make) is about $235,000 per month. A 2013 make costs about $280,000, according to data from aviation consulting firm CAPA.
Expensive aircraft can mar the costs of a start-up airline and Bhatia seems to have raised this in an email last April.
Another set of mails show the management of AirAsia India holding off on approving the purchase of a software (AX2012) and being ticked off by Fernandes. “Vijay do not... (mess) around and play politics with me or you will be fired in 24 hours. You... sign... You can’t... pick and choose what you want. Brand, planes, expertise and then don’t follow others,” Fernandes wrote in a 17 June 2014 email to chief financial officer Vijay Gopalan.
Fernandes was upset with AirAsia India for resisting signing contracts with AirAsia group companies. The local airline had wanted AirAsia India’s board approval before signing the agreements as it felt work could be done at a lower cost in India.
Perhaps the most obvious proof that Malaysia controls AirAsia India comes from a 4 December 2014 mail from Fernandes to the entire AirAsia group.
“We now have confirmed the organizational changes,” he wrote with an organization chart which included all the other AirAsia brands, including India as part of this structure. “We have the opportunity to consolidate ourselves into a stronger group of companies; leveraging economies of scale, improving efficiency and reducing cost. The changes make for simpler and clearer lines of accountability. HODs (heads of departments) will start implementing these changes in the departments.”
Under the new system, “HODs for Commercial, People, Brand and Communications, Risk and Government Relations, Investor Relations, In-flight and Legal will have direct reporting lines to Group Heads and dotted reporting lines to their respective CEOs.”
This meant most senior managers running departments in AirAsia India report to the group heads of AirAsia based in Malaysia. The DGCA rule says a scheduled airline “shall not enter into an agreement with a foreign investing institution or a foreign airline, which may give such foreign investing institution or foreign airlines or others on behalf of them, the right to control the management of the domestic operator” as per Aeronautical Information Circular 12 of 2013.
At the Hyderabad air show, Fernandes said many of these airlines also have foreign ownership: Jet Airways is controlled by Naresh Goyal, who resides outside of India; Etihad Airways, based in Abu Dhabi, owns 24% of the company. One of the two promoters of IndiGo—Rakesh Gangwal—is based in the US. SpiceJet previously had New York-based Wilbur Ross as a key shareholder.
To be sure, Goyal and Gangwal do not have any other airline ventures and have nursed their respective airlines from the beginning.
Fernandes, 51, also took everyone by surprise when he said that he has suddenly decided to apply for a overseas citizen of India card to become what he called—like Jet’s Goyal—a non-resident Indian. “I was looking for my father’s passport to bring to this (air show),” Fernandes said, referring to his father’s Goan roots, “I couldn’t find it.”
An analyst said AirAsia India was an oddball despite 51% ownership under Indian promoters. “Technically, AirAsia India is under Indian control,” said Steve Forte, a New York-based independent aviation consultant, “although being run by a foreign airline.”
What the brand licence agreement says
• Ancillary revenue
AirAsia India shall offer products and services as determined by AirAsia Group’s ancillary team. This includes, but is not limited to, excess baggage, pick-a-seat, hot seat, AirAsia insure, red carpet, in-flight food and beverages and duty-free.
“New products and services developed by AirAsia India shall first be approved by AirAsia Group’s ancillary team. The pricing and appearance for products will be set by AirAsia Group’s ancillary team in consultation with the licensee.”
Even third-party providers of ancillary products and services for AirAsia India shall first be approved by AirAsia Group’s ancillary team.
AirAsia India has to contribute 1% of gross revenue to the parent firm, which will also cover the base sponsorships of AirAsia Group properties including but not limited to Queen’s Park Rangers FC, the ASEAN basketball league and MotoGP Australia and Japan title sponsorships, the agreement notes.
• Revenue management
AirAsia India’s revenue managers will report to AirAsia’s group revenue management.
“Fare classes terms and conditions and prices will be set by AirAsia Group’s revenue management team with recommendations from the licensee on local pricing and promotional fares. The licensee (AirAsia India) shall adhere to fare classes determined by AirAsia Group’s revenue management team. The licensee’s pricing strategy shall be determined in agreement with AirAsia Group’s revenue management head.”
All major engineering-related purchasing or leasing contracts (aircraft, engine, landing gear, maintenance checks, etc.) has to be done on the terms approved by AirAsia Group.
Engineering support services such as technical services, contracts, warranty and reliability, materials, planning and records are to be conducted by AirAsia Group except where local regulations require local compliance.
Management of aircraft specification and configuration with Airbus and aircraft parts shall come from AirAsia Group’s pooling of spares and to be managed by AirAsia Group’s team on a best effort basis.
“Major variations from the above policies to comply with the local regulation shall be approved by AirAsia head of Engineering prior to variation being adopted.”
AirAsia India needs to “support and uphold agreements with AirAsia Group’s joint venture partners including but not limited to BIG, AirAsia Expedia, Tune Hotels and Tune Insurance”. AirAsia India shall also “produce and provide to AirAsia monthly management accounts in the form and manner as required by AirAsia Group’s finance team”. AirAsia Group’s CEO will provide input and approve annual budgets for each airline with AirAsia Group, including the licensee.
Appointments to managerial positions are to be approved by the chief commercial officer and respective AirAsia group heads. The positions include, but are not limited to, marketing, sales, distribution, route revenue and commercial public relation roles.
“Commercial structure, headcounts budget and task outline of the licensee shall be approved by AirAsia Group’s CEO and CMO.”
All in-flight products and services (including but not limited to food and beverages and merchandise) and pricing thereof shall be approved by AirAsia Group’s catering and in-flight services team.
• Flight operations
All initial and recurring training is to be done at Kuala Lumpur-based Asian Aviation Centre of Excellence (AACE), an AirAsia Group company, using AirAsia Group’s syllabus. All systems and processes, including IT systems, currently in use by AirAsia Group are to be utilized and embraced by AirAsia India. It also cannot “enter into any negotiations with any vendor for any system of equipment without prior approval of AirAsia group’s flight operations team”.