AirAsia and Jetstar sign pioneering money-saving alliance

Low-cost carriers AirAsia and Jetstar plan to save money by pooling resources and collectively influencing aircraft manufacturers.

Malaysia's AirAsia and Australia's Jetstar have inked a new alliance designed to create behind-the-scenes cost savings that can be passed on to their budget-minded customers.

The non-equity agreement includes cooperating on passenger and ramp handling at airports, aircraft parts pooling for their common fleets, joint procurement of engineering and maintenance supplies, and reciprocal passenger disruption arrangements. What it does not include is code- or revenue-sharing between the carriers, a common aspect of many of today's global airline alliances.

While no specific numbers were given, Jetstar chief executive Bruce Buchanan said at a press conference yesterday that the alliance will create "hundreds of millions of dollars worth of cost saving opportunities". A representative of the airline said airfares could fall 5% to 10% as a result of the alliance.

Low costs are critical for the budget carriers. The business models of both AirAsia and Jetstar rely on efficient, money-saving structures in order to provide passengers with low-fares, their raison d'etre in the airline industry. While Jetstar does not break out its cost per seat kilometre -- the measure of passenger costs in the industry -- AirAsia's third quarter 2009 financial statement reported it achieved $0.0321 cost per seat kilometre during the period, one of the lowest in the industry and down 26% year-on-year at the airline.

An interesting aspect of the agreement is the airlines' plan to cooperate on future aircraft procurement. Members of the popular flyertalk online forum speculated that the alliance could be an attempt by AirAsia and Jetstar, both large operators of the Airbus A320, to offset the influence of Ireland-based Ryanair and US-based Southwest Airlines in the development of next generation narrowbody aircraft from global manufacturers Airbus and Boeing.

"Absolutely we want to influence them," said Buchanan on the manufacturers' development of new narrowbody aircraft. "We want something suited to the airports in Asia, to the particular conditions we fly in. There are certain requirements that we have because we do slightly longer sectors than what you traditionally see in Europe or North America." He also cited both airlines' high number of routes over-water.  

What remains to be seen is how the two airlines will pull off the new alliance. "It is interesting that this is not an equity joint venture but just a contractual one," said Paul Ng, Singapore-based global head of aviation at law firm Stephenson Harwood. "It will be interesting to see how it works."

There is no precedent among low-cost carriers for a similar agreement. Alliances have typically been limited to frequent flyer agreements or flight code-share arrangements, for example between AirTran Airways and Frontier Airlines in the US. However, none has been noted as particularly successful. More extensive cooperation agreements have typically included equity sales, for example Jetstar's taking a stake in Vietnam's Pacific Airlines, now known as Jetstar Pacific, in 2007.

Buchanan said that the next stage for the alliance could be a joint venture or code-sharing on flights, but he did not disclose a timeline.

"The most significant thing we are doing today is to show that low-cost carriers can work together," said Tony Fernandes, chief executive of AirAsia Group. "It shows in the aviation industry in this part of the world that there are ways of cooperating that will, in the end, grow the market."

The money saved from the new alliance will come at a good time for the airlines. After the industry lost an estimated $11 billion globally in 2009, the International Air Transport Association (IATA) forecasted it will lose another $5.6 billion this year on continuing low passenger yields and rising costs. Carriers in the Asia-Pacific region are expected to lose $700 million.

"The worst is likely behind us," said Giovanni Bisignani, IATA's director general and chief executive. "Demand will likely continue to improve and airlines are expected to drive down non-fuel unit costs by 1.3%. But fuel costs are rising and yields are a continuing disaster." 

The price of a barrel of oil closed above $81 on Monday, its first time above the $80 mark in 16-months. Fuel is the second largest expense for airlines after labour.

Airlines in the region are hesitatingly optimistic about the coming year. Singapore-based low-cost carrier Tiger Airways is preparing an initial public offering and Cathay Pacific Airways' chief executive, Tony Tyler, said in a recent message to employees that while 2009 was a "tough and tiring year", he was "heartened" that the worst appeared to be over. The same can't be said for money-losing Japan Airlines which is moving closer and closer to bankruptcy.

Shares of Qantas Group, Jetstar's corporate parent, closed down less than 1% at A$2.95 ($2.69) in Sydney, while shares of AirAsia closed almost flat at M$1.43 ($0.42) in Kuala Lumpur yesterday.

In the 2009 fiscal year that ended last June, Jetstar's revenue rose 18.8% year-on-year to A$1.85 billion. However, Qantas Group's total revenue, including Jetstar, fell 6.9% to A$14.6 billion over the same period.

For the nine months ending September 2009, AirAsia's revenues rose 18.1% year-on-year to M$2.28 billion ($671 million). The airline reported a profit of M$472.4 million for the period.

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