The low cost alliance takes flight

While Qantas/Jetstar and Air Asia talked up the immediate cost saving benefits of their new alliance this morning, they also made it clear it would evolve into joint ventures and revenue and code sharing arrangements that will redraw the realities of airline operations across the Asia-Pacific hemisphere.

Qantas CEO Alan Joyce said; “This is the foundation for bigger things in the future. and…while we believe the cost savings will be substantial it also makes Asia the main focus of Qantas moving forward.”

Air Asia CEO Tony Fernandes said; ” There are many things to move forward with now that will lower our costs, but we have established the groundwork … to move into revenue growth-and-sharing ideas and the sky is wide open.”

Jetstar CEO Bruce Buchanan said the costs of both franchises were nearly identical in Asia, their corporate cultures were highly compatible, and they could remain highly competitive with each other while joining forces to grow the overall demand for low fare air travel.

Fernandes said that while traditional airline alliances focused on revenue benefits, the low cost alliance focused on costs.

He said traditional full service airlines simply ‘didn’t get’ the business model of the low cost carrier, which was to reinvest cost savings into cheaper fares to stimulate more flying more often by new customers.

“Who would have thought we could do an A330 daily between the Gold Coast and Asia?” he said. “We now think we should go to twice or three times daily on that route alone. That is the whole idea behind lower fares, get more people to travel more often.”

In the shorter term the alliance means joint purchasing of fuel at airports common to both brands, shared ground handling and combined hotel room booking at leisure destinations to include in packaged deals.

In the longer term it means joint fleet purchases, and a joint approach to Airbus and Boeing over the specifications of the replacement each manufacturer was planning for their single aisle A320 and 737 families as well as a bulk purchase price.

Jetstar currently operates 39 A320 family jets in a fleet of 60 aircraft, and Air Asia flies 85 jets, mostly A320s. Both airlines are profitable.

No-one at the press conference was ruling out the creation of a jointly owned fleet company in the future, which is something sources in the leasing sector regard, without enthusiasm, as inevitable if the full benefits of negotiating orders, prices and finance for both carriers is to be realised.

The Jetstar/Air Asia alliance puts more pressure on Tiger Airways, which is losing money, has reported low cash reserves, faces a large bill for very ambitious future jet orders, and is seeking to raise several hundred millions of dollars in an equity placement that has already been scaled back from an originally suggested $US 500 million IPO.

Today’s announcement brings into sharp focus a future in which the two largest and most successful low cost franchises in the hemisphere intend to keep themselves strong enough to see off inevitable challenges from the emergence of similar competitors in China, Japan and South Korea.

In this sense both Jetstar and Air Asia share the advantage of true cross-border branding, something that the Singapore Airlines controlled Tiger operation lacks, and the established national carriers in other parts of the hemisphere do not show any sign of recognising at this stage.