China Eastern Airlines and Qantas Airways are joining hands to build a budget carrier called Jetstar Hong Kong.
The joint venture comes at a time when airlines have been boosting the number of low-cost, long-haul flights across Asia to exploit the region's strong economic growth.
China Eastern and Qantas say they each hold a 50 per cent stake in Jetstar Hong Kong and will equally contribute its initial capital of US$115 million.
The capital could be increased to US$198 million.
Earlier this month, Qantas and Malaysia Airlines shelved their plan to form a joint venture.
Alan Joyce, Qantas chief executive, said Asia remained a priority for the airline and it would continue to explore opportunities in the region.
Over in Japan, the proliferation of budget airlines this year is seen as a catalyst for the development of low-cost carriers in the region.
Peach Airlines, the Kansai-based budget carrier, launched its inaugural flight this month.
Another two Japan-based budget carriers are expected to become operational this year.
The three Japan-based budget airlines will fly regional routes after their domestic flight services turn operational.
Hong Kong Express Airways, controlled by the HNA Group, had said it would become a budget carrier this year. That is viewed as a bid to distinguish itself from its sister carrier Hong Kong Airlines.
Analysts are not particularly optimistic about budget carriers based in Hong Kong, particularly as jet fuel prices are hitting US$140 a barrel.
Hong Kong Oasis Airline, a long-haul budget carrier, collapsed in April 2008 when crude oil prices exceeded US$140 a barrel.
'Moreover, Hong Kong does not have a budget terminal. It will add to the woes of the new start up,' said a transport analyst.
To be sure, Japan has a massive domestic market for budget carrier start-ups to grow their business, but Hong Kong does not.
Flight routes between Hong Kong and Southeast Asian destinations are already highly competitive.
For instance, all the budget carriers - including Cebu Pacific, Air Asia and Jetstar - are operating in Hong Kong.
Cathay Pacific Airways says the industry has become increasingly cutthroat.
'We are competing with more than 90 airlines operating from Hong Kong,' a company spokesman said.
Association of Asia Pacific Airlines
The number of Airbus A320s the joint venture will operate by 2015. Initially, the venture will operate a fleet of three A320s