Tata Group is set to re-enter the country's aviation sector in partnership with Malaysia's AirAsia, Asia's biggest budget carrier, and Telestra Tradeplace.

AirAsia said on Wednesday it is seeking government approval to establish a joint venture with the two companies. Tatas Sons will be the minority investor with a 30 per cent stake and no operational role and Telestra Tradeplace will hold a 21 per cent stake while the Malaysian airline will have operational control with a 49 per cent stake. The Tatas will be represented by two non-executive directors on the airline's board.

The carrier expects to begin operations by the fourth quarter of the current year and will operate in tier 2 and tier 3 cities, and be based on the low-cost model.

"We have carefully evaluated developments in India over the last few years and we strongly believe that the current environment is perfect to introduce our low fares," AirAsia chief executive Tony Fernandes said in a statement.

The venture plans to operate from Chennai.

"Air Asia flies to the south of India. Naturally, we know south India well. We have to wait for the necessary nod from the Indian government," Mr Fernandes said in a conference call.

"The Tata-AirAsia deal is in line with our estimate that the policy change will lead to equity deals in 2-3 existing airlines and 1-2 fresh startups. This will enhance competition, expand spread of air connectivity to tier 3-4 cities and bring down airfares for the Indian passenger," said global consultancy KPMG in a note.

"We may also see some consolidation in line with what's happening in the US and EU since clearly, India - with its low flyer-base, regulatory challenges and high cost structure - cannot afford more than four strong national airlines," the consultancy added.

AirAsia's planned entry into the Indian aviation space spells trouble for current operators like SpiceJet, global investment bank JPMorgan has said.

"After Air Asia it could be challenging to sustain higher yields and entry of a new player could put pressure on pricing," JPMorgan said in a report.

Budget carrier SpiceJet, India's number 4 operator by market share, may be the biggest casualty as competition increases. That's because SpiceJet has major presence in Chennai and tier II/III cities. AirAsia India will also be based in Chennai and will be serving smaller cities, adding to pressure in an already competitive market.

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