JETSTAR and AirAsia are about to announce an operational joint venture that could save hundreds of millions of dollars by enabling them to jointly buy aircraft, parts and other goods.
The two airlines would still compete for passengers and the deal does not involve equity.
It aims to cut costs through economies of scale.
A Qantas Group spokesman confirmed yesterday that the two airlines were talking but declined to comment further.
It is understood the region's two biggest low-cost carriers have been talking for some time and are working out final details of the deal.
Areas expected to be included in the agreement are procurement and ground handling, with costs savings in the order of 5-10 per cent.
Kuala Lumpur-based AirAsia is the Asia-Pacific region's biggest low-cost carrier.
It is headed by flamboyant entrepreneur and former musician Tony Fernandez.
At the end of last month it had a fleet of 64 180-seat Airbus A320 aircraft and 18 Boeing 737s.
It operates more than 400 flights daily to domestic and international destinations and has offshoots in Thailand and Indonesia as well as a stake in long-haul carrier AirAsiaX, which serves Australia.
Airlines flying under the Jetstar brand operate 46 A320 and and A321 aircraft.
Combining procurement for the two fleets will give the carriers more clout to cut deals with suppliers.
The two airlines also plan to share ground handlers in ports where one partner faces higher costs because it does not have enough flights.
They are considering pooling parts, giving them wider coverage at lower cost.
The deal is understood to minimise the need for regulatory approval but that might be unavoidable in some areas.
Engineering work will still be done separately and the agreement will not include heavily regulated areas such as training and standards.
In the longer term, the airlines hope to join forces on aircraft purchases. They are hoping the size of their combined fleet will give them enough sway to influence the design of the next generation of narrow-body jets when they are offered.
The Australian low-cost carrier has been expanding in Southeast Asia as part of a pan-Asian strategy that includes stakes in Jetstar-branded airlines in Singapore and Vietnam.
Jetstar chief executive Bruce Buchanan reaffirmed the airline's Asia focus last week as Singapore-based Jetstar Asia began services to mainland China.
The move is expected to be a blow to Singapore-based Tiger Aviation.