AirAsia is in talks with Philippine airline Zest Air about a possible "strategic alliance" between the two carriers.

This could eventually lead to the Malaysia-headquartered low-cost carrier buying a minority stake in Zest, say sources familiar with the discussions.

The Malaysian LCC, however, reiterates that a decision has not been made. Officials from Zest could not be reached for a comment.

"Zest Airways and AirAsia are in discussions about a possible strategic alliance," AirAsia said in a statement. "No definitive agreements have been reached and discussions may or may not lead to a transaction."

AirAsia has a stake in AirAsia Philippines, which is based in Manila's secondary Clark airport and operates domestic services with a fleet of two Airbus A320s. However, AirAsia Philippines has found it difficult to expand its international and domestic network from Clark and does not have permission to set up a hub at Manila's main Ninoy Aquino International Airport.

Zest, which has a fleet of 10 A320-family aircraft and four Xian Aircraft MA-60 turboprops, would help AirAsia to increase its footprint out of Ninoy Aquino airport, which is still the main gateway into the Philippines despite its congestion problems.

The sources say that Zest is looking for an investor that can pump in funds and help it to restructure its operations. The aim is to put it in a better position to compete with Cebu Pacific and Philippine Airlines on domestic, regional and long-haul services.

Sources say that as part of a restructuring programme, Zest could sell its MA-60s and become a purely jet aircraft operator. It has also been looking at adding Airbus A330s in order to begin medium- and long-haul services.

That would be helped via a tie-up with AirAsia, which has a backlog of A320s and is in talks to order more of the type. AirAsia also has a backlog of orders for A330s and Airbus A350s, which are meant for its Malaysia-based long-haul affiliate AirAsia X, but could also be sent to other AirAsia franchises in the region.

Zest's talks with AirAsia come as Philippine Airlines continues with its restructuring programme, with an order for 34 A321s, 10 A321neos and 10 of the new higher-weight Airbus A330-300s. This is meant to help it retire its older aircraft and compete with market leader Cebu Pacific.

On its part, Cebu Pacific has ordered 30 A321neos for its short-haul operations and plans to lease eight A330-300s to begin medium- and long-haul, low-cost services in the third quarter of 2013.

Source: Air Transport Intelligence news