ANALYSIS: Airlines look to partnerships for survival

Mark Frary looks at the evolution of airline alliances in 2010

On the face of it, this week's announcement of a tie-up between Jetstar, the low-cost subsidiary of Australian carrier Qantas, and Air Asia seems like a lite version of the proposed merger between British Airways and Iberia.

Qantas and Air Asia are quick to point out that the alliance does not involve any sharing of equity. However, the airlines will work incredibly close on a number of areas including the joint procurement of the next generation, ground handling services and aircraft maintenance and engineering.

Qantas is calling the deal a world first and it clearly opens up a new chapter in the world of airline alliances. The state of the economy means that some low-cost airlines - with the exception perhaps of Ryanair - have found the low-cost model a challenge when legacy airlines have slashed their fares.

Consolidation is clearly happening among legacy airlines so why not among low-cost carriers? Smaller low-cost carriers could do a lot to ensure their future by getting together with rivals. After all, low-cost carriers rarely overlap on routes and the challenges they face have been underlined by the number of failures in the sector - SkyEurope, MAXjet and Silverjet among them.

Inevitably the Jetstar-Air Asia deal is being talked about in terms of reduced costs.

Jetstar's chief executive Bruce Buchanan said: "Year on year, Jetstar is reducing its controllable costs by up to five per cent annually. This agreement will enable a further step-change in our cost position and ensure sustainable low fares.

"In coming years Jetstar and AirAsia want to work with manufacturers on the next generation aircraft to ensure it best meets our business requirements."

AirAsia group CEO Tony Fernandes said the deal would allow it to "maintain its position as the lowest-cost airline in the world despite rising costs associated with the fledgling global economic recovery".

"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," said Fernandes.

"A strategic arrangement with Jetstar focussed on investigation of operational synergies is a logical development for us. AirAsia and Jetstar share the same philosophy of low cost, low fares and high quality customer service.

"There is clear sense in finding the right cost solution for a range of airline and associated services which support AirAsia's expanding route network."

Yet there may be more to the proposed deal, which is subject to regulatory approval and may yet face stiff opposition from Australian unions, than meets the eye.

Air Asia X, which is not mentioned in the deal, operates long-haul low cost services from its base in Kuala Lumpur, including a daily service to London Stansted.  Air Asia owns a big chunk of the airline but there is another major shareholder of interest - Sir Richard Branson's Virgin Group, which took a 20% stake in the new airline in late 2007.

The ties between Air Asia and Virgin are longstanding. Air Asia boss Fernandes used to work for Branson - with a brief stint as an auditor at Virgin Atlantic ending up as financial controller of the Virgin Records group.

Yet rivalry between the two men has been growing recently because of other interests of the two. Fernandes is the chief executive of Lotus F1 Racing, which sees the return of the Lotus name to motor racing from the 2010 Formula One season. One of Lotus' main rivals will be Virgin Racing, the team that takes over Branson's sponsorship from Brawn GP this year.

The good nature of that rivalry is shown by a bet between the two men. The man from the team that comes lower in the constructor's championship will have to work as a stewardess on the rival airline.

The new deal may test that friendship. There has long been talk of a tie-up between Air Asia and Branson's Virgin Blue. Such an idea is clearly now off the table.

The deal may also test the long-standing Joint Services Agreement between British Airways and Qantas on the Kangaroo Route. Air Asia X's services from Stansted to Kuala Lumpur operate as onward services to Australia. BA may feel a little aggrieved about the new relationship.

Another airline may see more in this deal too. Singapore Airlines' has a 49% stake in Virgin Atlantic and will probably be none too pleased about the development.

With more capacity coming online on the Kangaroo route all the time, thanks to the introduction of new services by Middle Eastern carriers and the replacement of 747s with A380s - 2010 looks like it will be a very interesting year.