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Jetstar and AirAsia form cost-based alliance, pressure on Airbus/Boeing for new narrowbodies

6-Jan-2010

Jetstar and AirAsia are claiming a world-first in the establishment of their new alliance centred on cost reduction and the pooling of expertise that aims to deliver cheaper fares for passengers of both carriers. The core of the agreement is a “proposed joint specification for the next generation of narrow body aircraft, that will best meet the needs of the low fare customer of the future”. Both airline groups will also investigate opportunities for the joint procurement of aircraft, adding “in coming years Jetstar and AirAsia want to work with manufacturers on the next generation aircraft to ensure it best meets our business requirements”.

Boeing and Airbus on notice to deliver new narrowbodies

The alliance is expected to intensify pressure on leading manufacturers, including Boeing and Airbus to move more quickly on next-generation narrowbody types, to replace their B737 and A320 offerings. The current timeframe sees replacements well after 2020, although there is a push for new generation engines to be installed on the current narrowbody airframes to improve efficiency within the next four to six years, depending on engine certification. Airbus and Boeing have been focused over the past two decades in enhancing their widebody offerings.

Asia Pacific LCCs are expected to play an increasingly dominant role in regional aviation over the next decade and already have significant order books for new aircraft. This is giving them a stronger voice in aviation matters ranging from government policy through to supplies of equipment, including aircraft and parts. The development of a coalition between two of the region's leading LCCs will only strengthen this position, increasing their leverage and influence over suppliers and driving the changes the airlines need to grow their presence and lower costs.

Qantas CEO, Alan Joyce, stated the announcement “breaks the mould of traditional airline alliances and establishes a new model for achieving reduced costs and increased efficiency".

The agreement includes the development of cooperation in areas such as:

  • Future fleet specification – both carriers will investigate opportunities for joint procurement of the next generation of narrow body aircraft. A collective goal is to achieve cost reductions in terms of order volume and influencing design specification to deliver more efficient, low cost operations;
  • Airport passenger and ramp handling services – developing cooperative arrangements for the provision of passenger and ground handling in Australia and within Asia at overlapping airports by leveraging scale; 
  • Shared aircraft parts and ‘pooling’ – pooling inventory arrangements for aircraft components and spare parts;
  • Procurement – Joint procurement, with a focus on engineering and maintenance supplies and services, with Jetstar maintaining its existing use of and commitment to Australian facilities; and
  • Passenger disruption arrangements – reciprocal arrangements for passenger management (i.e. support for passenger disruptions and recovery onto the other airline’s service) across both the AirAsia and Jetstar flying networks.

The (non-equity) alliance does not cover aircraft maintenance services or revenue generating activities, such as codesharing and other marketing tie-ups at this stage. However, it is expected the alliance could evolve over time to include more areas of cooperation.

Costs must be cut further, as oil rises, yields fall

The alliance is acknowledgment by Jetstar and AirAsia that fuel prices are likely to stay high for the foreseeable future - making sustainable cost reduction strategies all the more urgent. During last year's oil price peak, AirAsia's oil prices spiraled to represent 67% of total operating costs (in the Jul-Sep-2008 quarter).

The alliance also puts rival full service carriers on notice that low fare competition in the Asia Pacific is here to stay and will only intensify on short-haul routes in the future. This will put additional long-term pressure on yields that have been slashed over the past 18 months amid the global economic crisis.

Jetstar Chief Executive Officer, Bruce Buchanan, stated that while Jetstar is reducing its controllable costs by up to 5% annually, the agreement with AirAsia will “enable a further step-change in our cost position and ensure sustainable low fares”.

AirAsia Group CEO Datuk Seri Tony Fernandes hailed the agreement as another step in the airline’s strategy to maintain its global leadership as the lowest-cost airline operator. Mr Fernandes added, “with joint purchasing power it means that we can potentially work with airline manufacturers on the right configuration and design of an aircraft specifically for AirAsia and that best suits our operational needs for the future”.

The alliance comes as rival Tiger Airways launches its investor roadshow for its planned IPO in Singapore later this month.


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