Jetstar aims to bluer – and cheaper – skies: Bartholomeusz

The alliance unveiled today between Jetstar and AirAsia, described by both as a ‘world first’, is a sign that the battle for low cost carrier supremacy in the world’s fastest-growing aviation market is entering a new and potentially decisive phase.

The alliance is a world first because it is the first such arrangement between two low cost carriers, a sector where competitors conventionally compete ferociously rather than co-operate. That the two leading low cost carriers in the region could do such a deal underscores the scale of the stakes being played for in what will inevitably become the world’s largest aviation market.

Asia is, in effect, up for grabs and there are a host of carriers pursuing low cost models in an attempt to gain exposure to its growth. The Jetstar/AirAsia alliance, however, has the potential to give those groups a significant edge.

AirAsia is already the biggest and lowest-cost airline in the region and the Jetstar arm of the Qantas group one of the most aggressive and fast-expanding. The airlines said today that the initial phase of the alliance, which focuses on cost reductions rather than revenue growth, would deliver hundreds of millions of dollars of savings and enable them to lower costs further.

The announcement of an alliance that has been under negotiation for a year or more won’t come as a shock to their competitors, but the confirmation of a deal couldn’t come at a worse time for Singapore Airlines-backed rival, Tiger Airways, which started marketing its proposed initial public offering this week.

Tiger had already halved the size of its offering from $S500 million to between $S200 million and $S250 million, but faces considerable scepticism that it will be able get the float away at the prices being sought.

With negative equity, falling cash balances and massive commitments for new planes looming, Tiger needs new capital from somewhere. If it isn’t through a float it will presumably have to come from its existing shareholder base.

Given that one shareholder, US private equity firm Indigo Partners, wants out, and another, the Ryan family, want to sell down, capital would probably be predominantly from Singapore Airlines and the Singapore government-owned Temasek.

The prospect of two powerful and even lower-cost airlines co-operating throughout the region is a threat to Tiger’s stability. It has been able to operate, despite increasing losses, because by adding planes and routes it has been able to grow its revenues from forward bookings fast enough to cover its operating costs. If the growth rate slowed, it would have to re-think its model and would probably require a lot more capital.

The Jetstar/AirAsia deal is, in its initial phase, purely an alliance. There is no equity relationship. The allies will concentrate initially on procurement savings, with major gains seen from their ability to jointly buy new aircraft and, because of their buying power, influence the design of the next generation of narrow body planes.

Shared aircraft parts, joint inventory management, passenger and ground handling arrangements, fuel purchases and even hotel rooms are also seen as sources of eventual synergies estimated at between $200 million and $300 million a year.

It would be a logical next step for the allies to code share and beyond that, as and when there is some deregulation of the markets, the potential for joint ventures and perhaps even something more structural.

This article first appeared on Business Spectator.