Flag carrier Malaysia Airlines will axe a third of its workforce and hand over all but 19 of its domestic routes to low-cost carrier AirAsia under a sweeping rationalisation plan.

The loss-making carrier will also lose its government subsidies under the three-year turnaround plan aimed at returning it to profitability by 2007, the prime minister's office said in a statement late yesterday.

Under the new structure which takes effect August 1, AirAsia will take over 96 of Malaysia Airlines' domestic routes, many of which are currently losing money.

Malaysia Airlines will operate only the remaining 19 domestic trunk services, to major destinations like the resort island of Langkawi and tourist centres on Borneo island, leaving it to focus on reviving its international business.

The government said that under the restructuring, it will stop underwriting the loss-making domestic services which the national carrier was previously obliged to operate.

"The government will not be giving any subsidy to Malaysia Airlines or AirAsia to operate the domestic sector," it said.

AirAsia, the region's biggest no-frills airline, has been pushing for access to domestic routes, saying it can succeed where the national carrier has failed and wring profits from services to rural and small-town destinations.

Beginning of new era

Malaysia Airlines, which announced the turnaround plan last month, said it would lay off some 6,500 of its 23,000 employees and reduce its fleet from 40 to 21 aircraft.

The carrier's newly appointed managing director Idris Jala hailed the future collaboration with AirAsia as "the beginning of a new era for the airline industry in Malaysia."

The changes are part of a bold RM4 billion turnaround plan announced in February to revive the carrier's fortunes after it posted a RM1.3 billion (US$350 million) loss for the 2005 financial year.

The troubled carrier also plans to cut out unprofitable international routes and sell off its landmark headquarters in the heart of Kuala Lumpur.

Malaysia Airlines has blamed its losses on crippling fuel prices and lower load factors but hopes to be back in the black by 2007 and to achieve record profitability the year after.