AirAsia and Jetstar join forces: a potential killer combination in Asia

Each of the Qantas, Jetstar and AirAsia CEOs was at pains yesterday to stress that the relatively modest relationship described was only the beginning of what could be something big. Indeed, it is hardly worth going through this sort of major strategic shift if there were not expectations of more involved. Qantas' Alan Joyce talked of it being the "foundation for much bigger things", "reinforcing Qantas' position in Asia. Bruce Buchanan, Jetstar CEO, said it was "today about operational synergies, but there would be much more to come later" and Tony Fernandes said the two sides had already been discussing "some revenue ideas".

The arrangement is the first of its kind between low cost airlines, albeit Jetstar's parent, Qantas, sees the potential very much as a group strategic move. Qantas Group's longer term future is clearly in Asia - where the growth is - and Jetstar will be the key implement for that.

An unbeatable force

Together, the airlines make a formidable low cost combination in Asia. Using domestic Australia as its foundation, Jetstar has already expanded into southeast Asia. Both airlines operate the A320 on short haul (to which the current agreements apply), as well as A330s on long haul; arrangements may extend to the long haul operations later.

AirAsia Group and Jetstar fleets and orders: as at 06-Jan-2010

Operator	In Service	Order	Grand Total
AirAsia	49	105	154
Indonesia AirAsia	17		17
Jetstar	45	57	102
Thai AirAsia	19		19
Jetstar Asia	6	3	9
Jetstar Pacific Airlines	6		6
Grand Total	142	165	307

At present, Jetstar has a very limited presence in Asia, although it is ramping up its Singapore fleet, under the locally majority-owned Jetstar Asia brand; its Vietnam operation, as Jetstar Pacific, is also still small. But, as it expands - and over the next decade, Asia will be where the carrier's growth opportunities lie - Jetstar would increasingly knock up against AirAsia.

The key competitive route where the two go head to head at present is the Singapore-Kuala Lumpur city pair. This is a cut-throat, high growth route, liberated earlier this year, after decades of protectionism.

But there is a complementarity with AirAsia in that the Malaysian LCC does not have a Singapore base. So a team with both bases covered can be a stronger entity.

No equity, for now anyway and no competition constraints

For the time being, the talk is of joint purchasing and of persuading Boeing and Airbus to build a next generation aircraft tailored towards low cost operations. It is appropriate that any JV between LCCs should address cost savings, not revenues, but there will be more to come.

Any equity relationship is off the radar, at least at this stage.

But the parties emphasised the similarity of cultures between Jetstar and AirAsia; they share some common features. For example, Conor McCarthy, Ryanair Operations head in the late 1990s, helped Jetstar with its startup and is a substantial shareholder in AirAsia. This sort of linkage, along with a continuing dialogue stretching well back into the pre-Joyce leadership of Qantas, has cemented a long term relationship between the two airlines.

Whether the cultures are in reality quite as close as suggested is moot, but there are undoubted advantages for both sides, so a few shortcomings can easily be overlooked.

Yesterday's agreement in its present, narrow form will probably not attract the attention of Australian competition lawyers. But Alan Joyce may be optimistic in assessing that Competition and Consumer Commission (ACCC) approval will not be needed at all. Although AirAsia X and Jetstar only have around 10% international market share, when the whole Qantas group is included, the total heads well above 30%, meaning that a commercial relationship involving the core Jetstar may be sensitive to competition concerns.

These may arise for example if there are explicit plans to develop international joint services from Australia. But the ground is apparently already being prepared for this, with suggestions that significantly reduced fares would become possible.

Expansion, not contraction, the order of the day

The usual concerns immediately emerged about staff rationalisation and cutbacks as a result of any in depth relationship between Jetstar and AirAsia, but these worries do seem in this case at least to be ill-founded. Both carriers are in expansion mode (which is what this agreement is about), so reductions in head count seem unlikely on any count.

Inevitably as time passes and Jetstar does expand in Asia, the nature of the carrier will shift in those markets, with staffing and maintenance inevitably being locally based. But that is part of an offshore expansion programme, not a domestic downsizing.

Malaysia - Qantas Group's gateway to Asia?

Qantas under Geoff Dixon's leadership was keen on a Malaysian linkage for quite some time. Apart from cultivating a relationship with Tony Fernandes, Dixon was responsible for getting almost to the finish line with a proposed "merger" with Malaysia's flag carrier, Malaysia Airlines, in late 2008, just as Alan Joyce was taking over the reins at Qantas. This was to involve commercial cooperation and profit sharing and clearly presaged a wider joint relationship. It was to have become a three-way merger, with Qantas also effectively taking over British Airways. But all this faltered as MAS and the government lost momentum, along with the global economy.

So there is ample logic in expanding the Australia-Malaysia aviation axis. As long as Qantas/Jetstar has no direct service between Sydney and Kuala Lumpur, there is a void from the Qantas Group side. The only non-stop operator on the route is MAS, with AirAsia X prevented from flying the route by its own government, in order to protect the valuable market for the Malaysian flag carrier.

Jetstar did briefly operate there, but pulled out due to a combination of stiff competition from AirAsia X (out of the Gold Coast) and the need to reallocate scarce A330 aircraft to the Japanese market, in order to preserve Qantas' slots at Narita.

Despite the occasional media speculation about a highly improbable Qantas-SIA merger, Qantas has for some time seen Malaysia as its friendly potential partner/base for achieving its Asian expansion goals. Ever since Malaysia's Australia-phobe Prime Minister, Dr Mahathir left office, the opportunity has been there.

Malaysia Airlines out in the cold; is there another shoe to drop?

That raises an intriguing scenario. The big potential loser in this deal is Malaysia Airlines. After a remarkable turnaround in 2007, MAS is now again struggling seriously, as premium demand slips and as AirAsia, with its much lower cost base, becomes more powerful. (Another "victim", Tiger Airways, was specifically targeted with the timing of this announcement, simultaneous with Tiger's release of its IPO prospectus).

AirAsia's tie up with the powerful Qantas Group will do nothing to reduce the flag carrier's problems. It may well even bring things to a head. MAS is going to need to take some difficult decisions. With market demand promising to remain slow in 2010, the carrier's recent deterioration into loss making and its relatively poor performance alongside AirAsia (see LINK -Malaysia Airlines loss in 3Q2009 USD88.6 million. Full service airline shrinks while AirAsia expands), the majority government owned carrier cannot afford to stand still.

Qantas' previous close link with MAS CEO Idris Jala has gone, following the dynamic executive's promotion into a key government role, but the links are still there. And the potential is compelling, especially for the Malaysian government, as its investment appears to be in jeopardy once again. A strengthened AirAsia in a relationship with Qantas Group will heighten that awareness.

Now for a four-way tie-up?

A three-way (or even four-way) tie-up between Qantas/Jetsar/AirAsia/MAS, albeit apparently unlikely at this stage, could really be a killer combination, with major benefits for all concerned. So it would be risky to rule out any such deal, most notably as Qantas has already signalled its keenness to be there.

The twin-brand Qantas/Jetstar, full service/low cost model has been a world leader, helping preserve the Group's position domestically and internationally and a similar matching of resources could also work in the Malaysian market, between MAS and AirAsia. As CEO Fernandes frequently suggests, the future of the international airline marketplace will be similar to the domestic one - there will be two types of carrier, one which focuses on premium travellers and the other which targets the low cost, discretionary travel end. He obviously sees AirAsia as the latter of these, with MAS providing the other limb, not dissimilar from Qantas/Jetstar.

So, just as the symmetry between Qantas and Jetstar has been remarkable, why not a MAS/AirAsia parallel?

Then, add to that a double-header, linking Australian and Malaysian markets, with multiple hubs and you have a killer combination would really create waves. Great for consumers, great for the respective airports and airlines, a great trade link between the two countries and a massive opportunity to plunder the growing Asian market.

That really would be a model for the future.