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Malaysia’s AirAsia and Australia-based Jetstar on Wednesday confirmed they were forming an alliance to help the budget carriers reduce costs, including cooperation on passenger handling at airports across the region and possible joint purchases of aircraft.

On Dec. 18, the Jakarta Globe reported the two were in talks to form a joint venture, a sign that budget carriers were under pressure to cut costs.

Reacting then to the news, the country’s biggest low-cost carrier, PT Lion Air, said any alliance would make competition in Indonesia, one of the region’s largest markets, even more cutthroat.

Key to the AirAsia-Jetstar agreement signed on Wednesday in Sydney is a proposed joint specification for the next generation of narrow body aircraft, the airlines said.

The airlines, among the biggest low-cost carriers in Asia, will consider buying aircraft together so that the bigger orders lower the cost of each plane.

Jetstar, a unit of Australian flag carrier Qantas Airways, and AirAsia will share aircraft parts and cooperate on passenger handling at airports in Australia and Asia.

Airlines are under pressure to find new ways to reduce costs as demand for travel remains weak despite some signs of recovery from the global recession. The International Air Transport Association forecasts the global airline industry’s losses will reach $5.6 billion this year after an estimated $11 billion of losses in 2009.

AirAsia, however, posted a profit in the third quarter of last year — its most recently released result — as travelers traded down to budget carriers. Qantas said it returned to profit in the second half of 2009 after a loss in the first half.

Qantas chief executive Alan Joyce said the alliance would give Jetstar and AirAsia a natural advantage in one of the world’s most competitive aviation markets.

AirAsia chief executive Tony Fernandes described the new agreement as a logical development.

IG Markets research analyst Ben Potter said the alliance was “very positive” given the extremely competitive industry and the pressures under which carriers operated.

“The Asia-Pacific region is one of the biggest growth markets in aviation so any ways to further reduce costs and offer more competitive fares will benefit both shareholders and customers,” Potter said.

AirAsia plans to list in both Thailand and Indonesia. In September, the carrier raised $144 million in a new share placement to help reduce debt.

AirAsia and Jetstar compete regionally with Tiger Airways, which is 49 percent-owned by Singapore Airlines.

In Indonesia, AirAsia’s major competitors are Lion Air and flag carrier PT Garuda Indonesia. Lion Air is considering expanding to China, South Korea and Japan by mid-2010. Like AirAsia, it has been weighing partnerships with other regional airlines.

Additional reporting by AP