Flag carrier Malaysia Airlines and Asia's top budget carrier AirAsia will cooperate on certain domestic routes as part of an industry rationalisation, Transport Minister Chan Kong Choy.

"We are going to rationalise the domestic routes. We want them to cooperate. There is a lot of room for cooperation in the interests of the country and the aviation industry," he told AFP .

Newspaper reports have said that the proposal involves AirAsia taking on some of Malaysia Airlines' less profitable routes but Chan declined to elaborate on the details, saying that both the carriers were holding talks on the plan.

Malaysia Airlines last month said net profit fell 29 percent to RM326.1 million in the year to March due to higher fuel costs, which more than offset record international traffic growth.

Malaysia Airlines currently flies to 88 international and 32 domestic destinations.

AirAsia, which launched as a budget carrier in December 2001 with just two aircraft, has become a significant player in the industry and been imitated by startled national carriers along with a host of new low-cost entrants.

AirAsia is now Southeast Asia's biggest low-cost carrier in terms of fleet size and derives much of its business within Malaysia. It also operates in Thailand, Indonesia, the Philippines and China.