For AirAsia, the dream destination is spawning a nightmare
Was Tony Fernandes really in love with the Indian aviation story? Or did he use it as a stepping stone for his global ambition?
Share Gift this article
Tarun Shukla
5 Jun 2018
TONY FERNANDES, FOUNDER, AIRASIA (CENTRE); ROBERTUS PUDYANTO/GETTY IMAGES
To use an aviation metaphor, for an Indian airline, flying domestic is flying economy but international routes are business class. That's where the money and glamour rest.
It is also a fatal attraction.
If you are an airline in India, you can’t just fly international. Your airline needs to do some hard yards over the dusty skies. An airline needed (till 2016) to put in 5 years of operations in India and have at least 20 aircraft under the so-called 5/20 rule before it could fly abroad.
This quirky aviation rule, which exists nowhere else in the world, has made people do desperate things in the past. It got liquor baron Vijay Mallya in trouble. Its latest victim is the founder of AirAsia, Tony Fernandes.
Mallya bought over arch rival GR Gopinath’s budget airline Air Deccan in 2007 for INR1,000 crore because his Kingfisher Airlines was not old enough to fly international. Mallya, now an absconder with USD1.5 billion owed to state-run banks, lives in London, where Kingfisher had flown its first flight. Besides his beloved airline, his liquor empire is practically kaput.
For Mallya, the desperation to buy Air Deccan was driven by ego to finish off Naresh Goyal's Jet Airways. But for Fernandes, the desperation seems to have been led by a desire to expand his aviation empire beyond southeast Asia, according to people who helped set up AirAsia India.
Today India, tomorrow the world
AirAsia, which also runs subsidiaries in Thailand, Indonesia, Philippines, and Japan, wanted a foot in one of the world’s fastest-growing aviation markets. That was largely the stated reason. The real reason was to use India as a base to expand to West Asia and beyond.
“What we could strike from Chennai within four hours was much more lucrative than what Kuala Lumpur (KL) could strike.What was a long-haul flight from KL now becomes a short-haul flight from Chennai,” one of the officials, who worked with Fernandes, explains. “Tony was playing a larger group game. It was a much larger network decision, [which] is why they desperately wanted [to go] international.”
AirAsia group has hundreds of orders for Airbus A320 planes, which can fly about 4 hours at one go. By combining such “short-haul”, 4-hour routes, Fernandes could reach a destination that is 8-10 hours away and even use bigger planes if required.
The other goldmine that India offered was bilateral rights. India is sitting on a huge pile of unused bilateral rights. Governments around the world allot home-grown airlines rights to fly international. These are based on reciprocity with the other country. While many other countries, and therefore their airlines, had used their share of the rights, Indian airlines were rapidly expanding domestic services or targeting the US and the Europe, leaving gaps for others to tap.
To understand it better, consider that an AirAsia Malaysia plane coming from Kula Lumpur to Chennai has to go back from Chennai. It cannot take passengers onwards to Dubai or Abu Dhabi. Once AirAsia India was operational, it could use bilateral rights to sell tickets from Kuala Lumpur to Dubai with a Chennai stop and vice versa, where its Indian subsidiary could operate the Chennai-Dubai leg.
Assumptions gone wrong
The problem was that after the damning reports by the Comptroller and Auditor General during the last half of the UPA-II tenure, the government reduced handing out bilateral rights.
Fernandes’ next hope was that the 5/20 rule would go away. So sure was he that the airline had prepared two budgets in 2013 — one was a pure domestic operations-led budget and the other had only international operations, which Fernandes called the “realistic budget”.
When the rule took longer than expected to go away, it didn’t sit well with Fernandes.
“There were multiple times he said I would pull out of India if 5/20 does not go away. It doesn’t get bigger than this, right?,” the same official says, explaining the desperation. “Every board meeting, group meeting was always about when are we flying international? Tony said unless we are going to fly international, I am not going to increase my planes in India. He would promise eight planes but only two would come. How else could one explain such a slow ramp-up of AirAsia India? The message was don’t come asking for planes. Keep yourself barely afloat.”
The 5/20 rule finally went away in 2016, allowing airlines to fly international after 3 years and 20 planes. AirAsia, which started operations with a flight between Bengaluru and Goa, has an 18-aircraft fleet and a 5% share of the domestic market. It announced plans to fly international in early 2019.
Now, the Central Bureau of Investigation (CBI) has alleged that AirAsia’s directors lobbied with the government to fly abroad and used money to swing the decision.
Besides Fernandes, Travel Food owner Sunil Kapoor, who runs restaurants such as Curry Kitchen, Cafeccino, Copper Chimney, and DilliStreat, AirAsia director and Tata nominee R Venkatraman, lobbyist Deepak Talwar, who has already left the country, director of Singapore-based HNR Trading, Rajendra Dubey, and unidentified bureaucrats have been named in the CBI’s First Information Report (FIR) filed on May 28.
Pressing charges is easy, proving will be harder
The CBI has its work cut out. Charges against AirAsia – including those proposed under the Prevention of Corruption Act - will be tough to prove.
The investigative agency in its FIR has said that the then aviation ministry under minister Ajit Singh moved a “secret cabinet note” on February 27, 2014, to change the rule but could not do so because of elections.
Singh had told the Times of India in September 2013, “There is no technical reason in asking our airlines to comply with the 20/5 rule to fly abroad. It is simply not good for the Indian airline industry”.
Besides, all cabinet notes are secret and any airline can lobby for its interests, which is not illegal.
The CBI will also have to prove that the effective control of the airline was not in India as per the existing rules laid down by the government.
Then there is a trail of money.
CBI says AirAsia remitted about INR12.28 crore to HNR Trading, Singapore, for a sham contract on the basis of a bogus agreement on plain paper, “which was utilised for paying bribes to unknown public servants of the government of lndia and others for securing permit for operation of international scheduled air transport services through Deepak Talwar and Sunil Kapur, who acted as lobbying agents”.
The payment, according to the CBI itself, was made in 2015-16 — which means it took place under the current government.
That Sunil Kapur and Bo Lingam met in December 2014 at a coffee shop in Mumbai’s Four Seasons Hotel and handed over a packet of INR50 lakh to someone called Sriram will also not be easy to prove unless the CBI has specific evidence.
For Fernandes, the AirAsia India corruption allegations have surfaced when he is already on a weak wicket in his home country. He had to publicly apologise last month after he endorsed Malaysian prime ministerial candidate Najib Razak ahead of Malaysia’s general election. He said he had done so to appease the office of the then prime minister Razak.
But Razak lost and Mahathir Mohamad became the new prime minister in what was a shock election result.
Fernandes was strongly criticised for endorsing Razak, who has been linked to a multibillion-dollar corruption scandal involving the Malaysian state fund.
For Fernandes, this turn of events can ruin his plans. An AirAsia without India will not do justice to the brand name nor to his ambition.
AirAsia India is making losses. In fact,it doubled its losses from about INR40 crore to INR97 crore in the quarter ending March (partly due to high fuel prices), when both its rival budget airlines IndiGo (INR117 crore) and SpiceJet (INR46 crore) were profitable.
The airline is also looking for a new CEO (third in five years of operations), and dozens of its flights in eastern India have recently been pulled out without stating any reason.
A detailed questionnaire sent to Fernandes, Tata Group, and Vistara on June 2 did not illicit any response. Former ministers Ajit Singh and P Chidambaram declined comments.
Will AirAsia shut down in India?
That will depend on how seriously the government follows this up.
“This process will take long,” CBI spokesperson RK Gaur says, responding to a question about when people will be called for interrogation. “It’s not a small case.”
Fernandes is likely to be called on Wednesday.
Gaur would not elaborate on whether existing government officials will also be interrogated, as the policy was cleared recently.
“It seems to me that AirAsia has forged papers. The CBI will not file such a case if it does not have proof. I would have relooked at their entire paperwork,” says former director general of civil aviation Kanu Gohain.
In the immediate short term, three things could happen to Fernandes’ India dream. AirAsia’s planned expansion may not happen, international-operations launch may be postponed indefinitely, and if the Tatas get riled by the damage AirAsia India is causing to the group that pioneered aviation in India with Air India, they may make life difficult for the Bengaluru-based carrier.
"This has long been talked about — AirAsia and Vistara cannot continue together on Tata sponsorship," says an analyst who does not wish to be named.
"This might just be that turning point for AirAsia in India."
Was Tony Fernandes really in love with the Indian aviation story? Or did he use it as a stepping stone for his global ambition?
Share Gift this article
Tarun Shukla
5 Jun 2018
TONY FERNANDES, FOUNDER, AIRASIA (CENTRE); ROBERTUS PUDYANTO/GETTY IMAGES
To use an aviation metaphor, for an Indian airline, flying domestic is flying economy but international routes are business class. That's where the money and glamour rest.
It is also a fatal attraction.
If you are an airline in India, you can’t just fly international. Your airline needs to do some hard yards over the dusty skies. An airline needed (till 2016) to put in 5 years of operations in India and have at least 20 aircraft under the so-called 5/20 rule before it could fly abroad.
This quirky aviation rule, which exists nowhere else in the world, has made people do desperate things in the past. It got liquor baron Vijay Mallya in trouble. Its latest victim is the founder of AirAsia, Tony Fernandes.
Mallya bought over arch rival GR Gopinath’s budget airline Air Deccan in 2007 for INR1,000 crore because his Kingfisher Airlines was not old enough to fly international. Mallya, now an absconder with USD1.5 billion owed to state-run banks, lives in London, where Kingfisher had flown its first flight. Besides his beloved airline, his liquor empire is practically kaput.
For Mallya, the desperation to buy Air Deccan was driven by ego to finish off Naresh Goyal's Jet Airways. But for Fernandes, the desperation seems to have been led by a desire to expand his aviation empire beyond southeast Asia, according to people who helped set up AirAsia India.
Today India, tomorrow the world
AirAsia, which also runs subsidiaries in Thailand, Indonesia, Philippines, and Japan, wanted a foot in one of the world’s fastest-growing aviation markets. That was largely the stated reason. The real reason was to use India as a base to expand to West Asia and beyond.
“What we could strike from Chennai within four hours was much more lucrative than what Kuala Lumpur (KL) could strike.What was a long-haul flight from KL now becomes a short-haul flight from Chennai,” one of the officials, who worked with Fernandes, explains. “Tony was playing a larger group game. It was a much larger network decision, [which] is why they desperately wanted [to go] international.”
AirAsia group has hundreds of orders for Airbus A320 planes, which can fly about 4 hours at one go. By combining such “short-haul”, 4-hour routes, Fernandes could reach a destination that is 8-10 hours away and even use bigger planes if required.
The other goldmine that India offered was bilateral rights. India is sitting on a huge pile of unused bilateral rights. Governments around the world allot home-grown airlines rights to fly international. These are based on reciprocity with the other country. While many other countries, and therefore their airlines, had used their share of the rights, Indian airlines were rapidly expanding domestic services or targeting the US and the Europe, leaving gaps for others to tap.
To understand it better, consider that an AirAsia Malaysia plane coming from Kula Lumpur to Chennai has to go back from Chennai. It cannot take passengers onwards to Dubai or Abu Dhabi. Once AirAsia India was operational, it could use bilateral rights to sell tickets from Kuala Lumpur to Dubai with a Chennai stop and vice versa, where its Indian subsidiary could operate the Chennai-Dubai leg.
Assumptions gone wrong
The problem was that after the damning reports by the Comptroller and Auditor General during the last half of the UPA-II tenure, the government reduced handing out bilateral rights.
Fernandes’ next hope was that the 5/20 rule would go away. So sure was he that the airline had prepared two budgets in 2013 — one was a pure domestic operations-led budget and the other had only international operations, which Fernandes called the “realistic budget”.
When the rule took longer than expected to go away, it didn’t sit well with Fernandes.
“There were multiple times he said I would pull out of India if 5/20 does not go away. It doesn’t get bigger than this, right?,” the same official says, explaining the desperation. “Every board meeting, group meeting was always about when are we flying international? Tony said unless we are going to fly international, I am not going to increase my planes in India. He would promise eight planes but only two would come. How else could one explain such a slow ramp-up of AirAsia India? The message was don’t come asking for planes. Keep yourself barely afloat.”
The 5/20 rule finally went away in 2016, allowing airlines to fly international after 3 years and 20 planes. AirAsia, which started operations with a flight between Bengaluru and Goa, has an 18-aircraft fleet and a 5% share of the domestic market. It announced plans to fly international in early 2019.
Now, the Central Bureau of Investigation (CBI) has alleged that AirAsia’s directors lobbied with the government to fly abroad and used money to swing the decision.
Besides Fernandes, Travel Food owner Sunil Kapoor, who runs restaurants such as Curry Kitchen, Cafeccino, Copper Chimney, and DilliStreat, AirAsia director and Tata nominee R Venkatraman, lobbyist Deepak Talwar, who has already left the country, director of Singapore-based HNR Trading, Rajendra Dubey, and unidentified bureaucrats have been named in the CBI’s First Information Report (FIR) filed on May 28.
Pressing charges is easy, proving will be harder
The CBI has its work cut out. Charges against AirAsia – including those proposed under the Prevention of Corruption Act - will be tough to prove.
The investigative agency in its FIR has said that the then aviation ministry under minister Ajit Singh moved a “secret cabinet note” on February 27, 2014, to change the rule but could not do so because of elections.
Singh had told the Times of India in September 2013, “There is no technical reason in asking our airlines to comply with the 20/5 rule to fly abroad. It is simply not good for the Indian airline industry”.
Besides, all cabinet notes are secret and any airline can lobby for its interests, which is not illegal.
The CBI will also have to prove that the effective control of the airline was not in India as per the existing rules laid down by the government.
Then there is a trail of money.
CBI says AirAsia remitted about INR12.28 crore to HNR Trading, Singapore, for a sham contract on the basis of a bogus agreement on plain paper, “which was utilised for paying bribes to unknown public servants of the government of lndia and others for securing permit for operation of international scheduled air transport services through Deepak Talwar and Sunil Kapur, who acted as lobbying agents”.
The payment, according to the CBI itself, was made in 2015-16 — which means it took place under the current government.
That Sunil Kapur and Bo Lingam met in December 2014 at a coffee shop in Mumbai’s Four Seasons Hotel and handed over a packet of INR50 lakh to someone called Sriram will also not be easy to prove unless the CBI has specific evidence.
For Fernandes, the AirAsia India corruption allegations have surfaced when he is already on a weak wicket in his home country. He had to publicly apologise last month after he endorsed Malaysian prime ministerial candidate Najib Razak ahead of Malaysia’s general election. He said he had done so to appease the office of the then prime minister Razak.
But Razak lost and Mahathir Mohamad became the new prime minister in what was a shock election result.
Fernandes was strongly criticised for endorsing Razak, who has been linked to a multibillion-dollar corruption scandal involving the Malaysian state fund.
For Fernandes, this turn of events can ruin his plans. An AirAsia without India will not do justice to the brand name nor to his ambition.
AirAsia India is making losses. In fact,it doubled its losses from about INR40 crore to INR97 crore in the quarter ending March (partly due to high fuel prices), when both its rival budget airlines IndiGo (INR117 crore) and SpiceJet (INR46 crore) were profitable.
The airline is also looking for a new CEO (third in five years of operations), and dozens of its flights in eastern India have recently been pulled out without stating any reason.
A detailed questionnaire sent to Fernandes, Tata Group, and Vistara on June 2 did not illicit any response. Former ministers Ajit Singh and P Chidambaram declined comments.
Will AirAsia shut down in India?
That will depend on how seriously the government follows this up.
“This process will take long,” CBI spokesperson RK Gaur says, responding to a question about when people will be called for interrogation. “It’s not a small case.”
Fernandes is likely to be called on Wednesday.
Gaur would not elaborate on whether existing government officials will also be interrogated, as the policy was cleared recently.
“It seems to me that AirAsia has forged papers. The CBI will not file such a case if it does not have proof. I would have relooked at their entire paperwork,” says former director general of civil aviation Kanu Gohain.
In the immediate short term, three things could happen to Fernandes’ India dream. AirAsia’s planned expansion may not happen, international-operations launch may be postponed indefinitely, and if the Tatas get riled by the damage AirAsia India is causing to the group that pioneered aviation in India with Air India, they may make life difficult for the Bengaluru-based carrier.
"This has long been talked about — AirAsia and Vistara cannot continue together on Tata sponsorship," says an analyst who does not wish to be named.
"This might just be that turning point for AirAsia in India."
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