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January 28, 2014

1937 law stalls AirAsia bid to offer free tickets

NEW DELHI — AirAsia, the region's biggest budget airline, is aiming to start flights in India and bring more competition to one of the world's fastest growing markets. The only thing standing in the way: a law dating to the 1930s.

India's aviation regulator invoked a a provision under its Aircraft Rules 1937, for the first time, asking for public feedback on an application by an airline to start services in the country. That delayed plans for AirAsia, which had aimed to start operations by the end of December and offer free tickets for some seats.

"This is unfortunate, unwarranted and sets a dangerous precedent," said Amber Dubey, a Gurgaon, India-based partner at consultancy KPMG. "Granting of airline licenses cannot be done through opinion polls."

The regulator invoking a rule after the aviation ministry gave an initial go-ahead shows the difficulties companies face in India, ranked 134th out of 189 countries by the World Bank in June for ease of doing business. Policy flip-flops, disputes and delays for approvals have made Posco wait for about nine years to start a $12 billion steel complex and caused tax squabbles for Vodafone Group Plc.

India's Ministry of Civil Aviation gave AirAsia a so-called "No Objection Certificate" in September. That followed a March approval from India's Foreign Investment Promotion Board. The carrier, which announced its foray in February last year, needs other approvals such as an air operators' license before it can start flights in the country.

Prabhat Kumar, the Director General of Civil Aviation who issues the final flying permit for an airline, said Jan. 15 the notice seeking any objections or suggestions from public on AirAsia's venture was issued to comply with the law.

Aviation Minister Ajit Singh said the same day that the notice is part of the process and doesn't mean a delay for the airline, which has already won preliminary approvals from India's foreign investment regulator and Singh's ministry.

"It's particularly unusual," CAPA Centre for Aviation, which advises airlines, said in a Jan. 16 report. "Any public representations should have been raised at the earlier No Objection Certificate stage. The unpredictability and lack of transparency in India's regulatory framework continues to be the greatest strategic challenge in the market."

If approvals are delayed until mid-year, a start as late as October can't be ruled out for the venture, CAPA said.

Sepang, Malaysia-based AirAsia expects India's approvals are imminent and flights are slated for as soon as March, its Chief Executive Officer Tony Fernandes said in an interview in London on Jan. 17. Fernandes and AirAsia didn't respond to requests for further comment.

AirAsia will give give away a few seats for free when it starts flying, Fernandes said last year. The CEO has said ticket prices will be the "No. 1 differentiator" in India.

Shares of AirAsia gained 1.8 percent to 2.31 ringgit as of the midday trading break in Kuala Lumpur. Seventeen of 28 analysts recommend investors buy the stock, eight say hold and the rest sell.

According to the law, the director general may in his discretion give "an opportunity to the person or persons making representations against the application to appear before him."

The aviation regulator gave 30 days for the public to submit their feedback on AirAsia India, according to the notice initially issued on Jan. 13. The company's application will be taken up after 30 days of the notice's issue.

India ranks behind Ethiopia and Uganda when it comes to the ease of doing business, according to a World Bank report. The country is listed at 179th for starting a business.

Bureaucrats, unnerved by earlier graft probes that beset Prime Minister Manmohan Singh's government, are trying to ensure their decisions don't lead to any controversy later, said Rajan Mehra, India head of Universal Weather and Aviation, a U.S.- based business aviation trip management firm.

"After the string of scandals, the government is certainly in no mood for any further controversy," said Mehra, who previously was a general manager for Qatar Airways's India operations. "So they are keeping all their bases covered."

AirAsia and Singapore Airlineshave both tied up with India's Tata Group for separate ventures while Abu Dhabi's Etihad Airways PJSC has bought a stake in Jet Airways (India) Ltd. after the government eased investment rules in September 2012. They are seeking to tap a market where passenger numbers are forecast to triple to 452 million by 2020.

AirAsia India will be based in the southern city of Chennai, and the budget carrier will fly Airbus A320 aircraft mainly to smaller cities. Fernandes has said he is aiming to attract passengers from the about 1 million people who take trains every day in the country.

The carrier is the latest example of companies facing government delays and complex rules in India, which needs more investments to support growth and improve the livelihood of its 825 million people living on less than $2 a day.

Posco, South Korea's biggest steelmaker, is yet to start construction of its $12 billion plant in the eastern Odisha state, which the company first proposed in 2005.

Earlier this month, billionaire Anil Agarwal's Vedanta Resources Plc. was stopped from mining in a hill range that holds bauxite earmarked for an $8.1 billion aluminum complex following protests by local tribes, who say their God lives there.

Vodafone is battling Indian authorities over a $2.2 billion tax claim for its 2007 acquisition of Hutchison Whampoa Ltd.'s local unit. After the nation's top court ruled in 2012 the mobile phone operator isn't liable to pay the tax, the government unveiled an amendment to the law to retrospectively tax cross-border transactions dating back to April 1, 1962.

"India is increasingly being seen as a country where regulations are being pulled out of the hat and different government departments don't seem to be in sync," Universal Weather's Mehra said. "This move will further shake investors who are planning to enter the country."

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