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Will AirAsia Be a Game Changer for Indian Aviation?

Tony Fernandes, chief executive officer of AirAsia.
Kiyoshi Ota | Bloomberg | Getty Images
Tony Fernandes, chief executive officer of AirAsia.

When India opened its ailing aviation sector to foreign airlines last September, not many thought the sector, which is reeling under heavy losses, would attract foreign investment.

A few months down the line and AirAsia, a successful budget carrier based in Malaysia, has tied up with Indian conglomerate the Tata Group and another Indian investor to set up a new airline called AirAsia India. This has ignited hope in an industry, which despite seeing a huge growth in passenger numbers is suffering due to over-regulation and intense price competition.

"Having a foreign carrier such as AirAsia come in, is a good sign," Binit Somaia, South Asia director at the Centre for Aviation (CAPA) said. "They have experience, expertise, good management - all of that - if they bring it into the country, it helps lift the entire industry."

While it might be some time before AirAsia starts flying in India - it has got initial approval, but could still run into regulatory hurdles - the near $15 million deal that gives the budget carrier a 49 percent stake in the new airline is restoring confidence in the turbulent sector.

(Read more: Foreign Airlines See Beyond Clouds in India)

After AirAsia's move, Somaia says more airlines will be encouraged to navigate the Indian skies and try and cash in on the sector's long term growth potential that is evident from the fact that currently under 5 percent of the country's 1.2 billion people travel by air. Foreign carriers especially from the Gulf are also reportedly in talks with Indian airlines, but the AirAsia deal is the first.

Tony Fernandes, CEO of AirAsia, told CNBC last month that he was confident the airline's "really low cost product" would work in India.

(Read more: AirAsia Ready to Take on India Challenge: CEO)

AirAsia's low cost model with no frills has resulted in its full-year profit more than tripling in 2012. The airline has gone on to dominate cheap air travel across Asia since it was taken over by Fernandes in 2001.

In contrast, India's six airlines are heavily debt laden with one of them Kingfisher Airlines being grounded last year.

Game Changer?

But Amber Dubey, partner and head of aviation at KMPG said AirAsia's low cost model could prove to be a game changer for Indian aviation.

"As compared to developed markets, per capita income in India is low and the average passenger is extremely price sensitive," Dubey said. "AirAsia's entry will be a game-changer since they are proven masters of the low cost game."

Siva Govindasamy, Asia managing editor at Flightglobal said AirAsia's success in India is dependent on if the government will loosen regulations and lower taxes.

"AirAsia brings a lot to the table, but a lot of its success depends on whether the Indian government takes away the barriers that hinder Indian airlines," Govindasamy said. "If you are a low cost carrier, the key factor for you is cost, and if you're operating in a high cost environment like India, then it's going to be extremely challenging."

For example, fuel taxes in India can add up to 30 percent to airlines' oil bill, according to IATA (International Air Transport Association) estimates. Fuel accounts for 45 percent of total operating costs for India's carriers, compared to a global average of 33 percent. Plus, a price war with state-owned Air India - which is able to provide cheaper fares because it is subsided by the government - has driven fares to unsustainably low levels.

(Read more: Why India's Most Promising Sectors Fail to Deliver)

Analysts predict that it may take AirAsia nine to 12 months to clear all the regulatory procedures before it can fly in India and another two to three years to have a real impact on the Indian market.

According to Dubey, AirAsia may face some pain in the short term, but it is in India for the long haul and is coming with a 10 to 15 year plan.

"They may go for a point to point strategy, avoid large airports, focus on quick turnaround and have an aircraft utilization rate in excess of 12 hours per day," Dubey said.

It has been reported that AirAsia will forgo the highly competitive Mumbai-Delhi route and instead focus on connecting second and third tier cities.

"If you look at it from a brand, operation, financial and pan-India perspective - every which way, it appears to look like a very strong combination," Dubey added.

-By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu

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