AirAsia Group Bhd, Southeast Asia’s largest discount carrier by fleet size, plans to start a low-cost airline in India through a partnership with local investors.

Through its investment arm, AirAsia Investment Ltd., Air Asia has applied to the Foreign Investment Promotion Board (FIPB) in India for approval to invest 49% in a proposed joint venture with Tata Sons and Arun Bhatia of Telestra Tradeplace, a senior government official says.

“The join-venture company will make an application to the Indian aviation regulators for the air operator permit after it gets an approval from the FIPB,” he says.

“The parties have signed a memorandum of agreement that details high-level terms with regards to the proposed partnership,” the airlines says in a statement.

“AirAsia believes Indian aviation has enormous long-term growth potential and is expected to produce tremendous upside for first movers,” the statement adds.

Group CEO Tony Fernandes says, “We have carefully evaluated developments in India over the last few years and strongly believe that the current environment is perfect to introduce AirAsia’s low fares, which stimulate travel and grow the market.”

The joint venture plans to operate from Chennai, in southern India, and focus on providing domestic Tier 2/Tier 3 city connections to Indian travelers. AirAsia, through its operations in Thailand and Malaysia, already connects Chennai, Bangalore, Tiruchirappalli, Kochi and Kolkata with points in the 10 countries of the Association of Southeast Asian Nations.

The Tata group had plans to start a joint venture airline with Singapore Airlines earlier. The Tata group owns a nearly 6% stake in SpiceJet Ltd., India’s second-largest low fare carrier.

AirAsia’s decision comes in the wake of India easing the foreign direct investment (FDI) rules on domestic carriers. 

So far, no airline has bought a stake in a local carrier since the government relaxed the FDI policy.

In September, the government allowed overseas airlines to pick up a stake of as much as 49% in domestic carriers. The AirAsia proposal also comes as United Arab Emirates carrier Etihad Airways PJSC is inching towards buying a 24% stake in Jet Airways (India) Ltd.

According to estimates by aviation analysts, the AirAsia Group ended 2012 with a fleet of 120 Airbus A320s, including two aircraft acquired on an operating lease from Airbus. The fleet includes 64 A320s at AirAsia Malaysia, 27 at Thai AirAsia, 23 at Indonesia AirAsia, four at AirAsia Japan and two at AirAsia Philippines.

AirAsia A320 photo: Airbus