Thursday, January 7, 2010

Qantas, AirAsia Form Alliance

SYDNEY—Qantas Airways Ltd.'s cut-price unit Jetstar and Malaysian discount carrier AirAsia Bhd. said Wednesday they have formed an alliance aimed at cutting costs and pooling expertise, putting pressure on Singapore Airlines Ltd.-backed rival Tiger Airways as it begins briefing investors on its listing planned for later this month.

The non-equity alliance between Asia-Pacific's two largest discount carriers by revenue, which already cooperate in some operational areas, comes after more than a year of talks. It will potentially be expanded to incorporate aircraft procurement and revenue sharing deals, the two airlines said.

The agreement is an "important first step," said Jetstar Chief Executive Bruce Buchanan, and could result in costs savings "in the hundreds of millions of dollars" that would be "phased in over many years."

The airlines plan to cooperate on passenger and ground handling in Australia and Asia at airports they both serve, to pool their inventories of aircraft components and spare parts, and to work toward joint procurement of engineering and maintenance supplies and services.

They also aim to use their combined scale to help influence the design of the next generation of narrow-body aircraft from both Boeing Co. and European Aeronautic Defence & Space Co.'s Airbus unit, and secure more purchasing power via joint procurement orders.

With the initial focus on cost reductions, Qantas Chief Executive Alan Joyce said that no major regulatory approvals were expected to be required. If it was expanded to include revenue measures such as codeshares and joint ventures on flights it would be subject to more rigorous regulatory scrutiny, he said.

"The aviation market in Asia is a growth market and has proven resilient over the past 12 months, despite the tough operating environment, with significant growth in passenger numbers forecast in the region," Mr. Joyce said.

"This partnership will ensure that both airlines can capitalize on these growth opportunities," giving them a "natural advantage," to keep their fares lower than their main competitors, he said.

Through its domestic and international discount networks, and its stakes in Singapore-based Jetstar Asia and Vietnam-based Jetstar Pacific airlines, Jetstar operates around 1,900 weekly flights to more than 50 destinations in Australia, New Zealand and Asia-Pacific.

Kuala Lumpur-based AirAsia is the Asia Pacific region's largest low-cost carrier with more than 400 daily flights to over 60 Malaysian and international destinations. It also has hubs in Thailand and Indonesia.

Its affiliate long-haul carrier AirAsiaX serves destinations more than four hours flight away, including cities in Australia, the U.K. and China.

Both Jetstar and AirAsia operate almost exclusively Airbus A320 aircraft that carry around 180 passengers on short-haul flights, while using the nearly twice as large A330 aircraft on long-haul flights.

News of the agreement comes as Tiger Airways, 49%-owned by Singapore Airlines, began an investor roadshow to gauge demand for its planned Singapore listing on Jan. 22.

Tiger is hoping to raise up to S$273 million (US$195.4 million). It has priced its initial public offering between S$1.35 and S$1.65 a share.

The airline plans to use proceeds to help fund quadrupling of its fleet of 17 Airbus A320 aircraft by December 2015 and to potentially establish a new airline or fourth operating base. Tiger operates flights to 33 destinations across 11 countries and also operates domestic routes in Australia out of bases in Melbourne and Adelaide.

Qantas shares ended down one Australian cent at A$2.95 (US$2.69) after an earlier rise to A$3.01 on news of the alliance.

IG Markets analyst Ben Potter said the tie-up shows both management teams are "thinking outside the box" to ensure they remain leaders in the region.

"The Asia Pacific region is one of the biggest growth markets in aviation, so any ways to further reduce costs and offer more competitive fares will benefit both shareholders and customers," he said.

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