Hunting party

Qantas CEO Alan Joyce hailed the deal as historic. “This is the first alliance between two low cost carriers of this size anywhere in the world. We think it leads the way in Asia,” he told reporters at a press conference announcing the alliance in Sydney.

“I think the most significant thing of what we’re doing today is to show that low cost carriers can work together, and I think that was the myth that it couldn’t be done,” said AirAsia CEO Tony Fernandes. “But it is fantastic because the cultures are very similar… and we’ve been able to build something that I think is very unique. So I think this is a huge step forward for the aviation industry in Asia.”

He added that the alliance was aimed at making travel even more affordable for passengers through the Asia Pacific region. “The key behind what we’re going today is to continue to give low fares and to continue to stimulate the market and to continue to find ways to grow the market through low fares and cooperation.”

Headlining the alliance is a plan for the two carriers to issue a joint specification for new aircraft to replace their fleets of A320s. While Airbus and Boeing decline to commit to launching a new narrowbody before the expected 2020-2024 date, a possible joint order and specification could place pressure on the manufacturers to bring forward their timelines for replacing the A320 and 737 respectively, and one more suited to the two airlines’ requirements.

“With joint purchasing power it means we can potentially work with airline manufacturers on the right configuration and design of an aircraft specifically for AirAsia that best suits our operational needs for the future,” said Fernandes.

The carriers have also announced plans to develop cooperative arrangements for ground handling at overlapping airports in Australia and Asia, joint procurement of engineering and maintenance services and spares, and closer cooperation on passenger disruption arrangements, meaning that passengers may be rebooked on the other airline in the case of a flight cancellation.

While joint procurement of maintenance services is a key part of the alliance, Jetstar was not planning to take maintenance of its A320s offshore. “What we talk about will have no impact on maintenance in Australia,” stressed Joyce, while Jetstar CEO Bruce Buchanan added that the airline was close to announcing the location for its second A320 heavy maintenance base in Australia.

Both Fernandes and Buchanan were also quick to reassure reporters that neither AirAsia nor Jetstar expected job cuts as a result of the alliance, pointing out that labour was never a consideration as part of their talks on the alliance.

Overall, the alliance is expected to deliver cost savings of at least $200-$300m for the two carriers. Nevertheless, Fernandes said that the initial level of cooperation is expected to deepen in the future.

“The key thing… that I want to keep repeating, is that the culture is right, so as I said, from the first agreement, there will be many, many more things moving forward that we’ve talked about over the last six to eight months in real detail,” said Fernandes.

“From this I believe we will then move into revenue ideas and we’ve already got a few that we’ve been discussing. The sky’s open to what else we can do going forward,” he added.

It is expected that an interline or codeshare arrangement would be a natural starting place for a closer relationship, which would become easier once AirAsia moves to the NewSkies reservations system over the next year, which is the same as used by Jetstar. Even so, Fernandes said that any such arrangements would not be aimed at pushing fares higher.

“As we move from cost saving initiatives to revenue ideas, you’ll begin to see where the power is and we start combining those two things, you can get fares subsequently lower,” he said.

Buchanan added that the alliance could also work to grow each carrier’s ancillary revenues. “We both fly into a lot of leisure destinations at the moment, we’re both relatively small players in some of those markets but together we can influence the procurement of hotel rooms in some of those places and secure really good holiday deals for our passengers.”

Ancillary revenue aside, any moves to coordinate closer on longhaul services could potentially cause issues with AirAsia’s longhaul affiliate, AirAsia X, which appears to have built its plans around connecting passengers between Australia and Europe, competing with Jetstar’s stated ambitions of flying similar routes. In recent months, the airline has added services to Melbourne and the Gold Coast aimed at offering more efficient connections through Kuala Lumpur onto its flights to London/Stansted, clearly pitching for a share of the Kangaroo route.

However, Jetstar appears to be steering clear of AirAsia’s Kuala Lumpur hub, with the airline signing an agreement on January 28 with Changi Airport Group to grow its operations through Singapore, cementing the city-state as its primary hub for longhaul services.

Similarly, AirAsia appears not to have adjusted its plans for its new partner, with Fernandes hinting that AirAsia X would announce flights from Kuala Lumpur to Sydney “very, very soon.”

Stalking a Tiger?

While both Joyce and Fernandes claim that it was by pure coincidence the announcement of the alliance and Tiger’s IPO coincided, it demonstrates that the stakes are rising in the Asian low cost airline battle.

By the time the IPO closed, Tiger had raised S$248m (A$196.5m), with the shares priced at the higher end of its guidance at S$1.50 (A$1.19), with some reports claiming that the offer was heavily oversubscribed. The shares were officially quoted on the Singapore Stock Exchange on January 22.

As a result, a number of the original shareholders have chosen to sell their shares or seen their stakes reduced. Singapore Airlines, which originally owned 49 per cent of the carrier, saw its stake reduced to 33 per cent, while Temasek Holdings (which is the majority shareholder in SIA) has seen its stake dilute from 11 per cent to seven per cent.

The IPO is the first by an airline in Asia in five years, and the strong interest appears to be a sign that investors are once more interested in airline stocks, particularly in a region which appears to be leading the global economic recovery.

Nevertheless, many analysts have been surprised at the reaction of investors given Tiger’s poor financial performance. Regulatory filings show that for the financial year ending March 2009 Tiger made a loss of S$50.8m (A$42.2m), which appears to have been dragged down by its Australian operations. Tellingly, major shareholder Singapore Airlines recently stopped accounting for Tiger’s losses as they had outstripped its initial investment in the carrier.

Despite this background, the successful IPO appears to have given Tiger renewed faith in its rapid expansion strategy. Shortly after the carrier listed on the Singapore Stock Exchange, it announced that it was bringing forward delivery of five A320s, while its first “fully owned” A320 arrived in late January.

The airline also stated in its prospectus that the majority of the funds raised from the IPO would go towards its growing fleet. Tiger has also allocated at least S$10m (A$7.9m) of the funds for new crew bases or airline investments, although it is not known if the carrier is pursuing new bases following its aborted attempts to establish affiliates in South Korea and the Philippines.

However, most industry analysts remain sceptical about Tiger’s ability to sustainably compete in its markets. While the increasing presence in Australia and Asia will give it better economies of scale and allow it to grow its revenue base, similar benefits are expected to flow through to its larger competitors Jetstar and AirAsia through their alliance.

Joyce dismissed the threat that Tiger posed to the two carriers, saying, “I think Tiger is insignificant and they’re staying.”

Still, Jetstar is expected to aggressively pursue Tiger within the domestic Australian market, and has already flagged intentions to add 77 weekly frequencies on existing routes between March and July as it takes delivery of four new A320s.

It remains to be seen how long Tiger’s public shareholders will be willing to let the carrier continue to grow at the risk of racking up more losses, as Jetstar and AirAsia apply a pincer movement to it. While few of the new shareholders will hold a stake which could threaten the current board, a low share price and returns are not expected to be palatable to any shareholder for an extended period, and pressure may come on for the carrier to concentrate on routes where it is able to attract better yields.