Asia's most profitable budget carrier AirAsia is expecting a wave of consolidation in the sector as rising fuel prices and firmer aircraft leasing rates put pressure on new entrants, a report said today.

The Malaysia-based carrier's chief executive officer Tony Fernandes told the Financial Times that many no-frills ventures were founded by "people chasing what they thought was easy money" but who now faced much tougher operating conditions.

"I think business plans are looking quite different, and I think there's going to be a rationalisation for sure. I think it's inevitable," he was quoted as saying in an interview from Singapore.

The comments come less than a week after Valuair and Jetstar Asia, two discount airlines based in Singapore, announced they were in talks that could lead to an alliance or merger.

The negotiations are a sign that the industry could be set for a shake-out after a period of rapid growth, with a host of new low-cost carriers having been set up across Southeast Asia and India in the past three years.

"At 25 dollar jet fuel (per barrel), with aircraft leasing where it was and people seeing how well we were doing, there was a herd mentality, with many people chasing what they thought was easy money," Fernandes said.

"I think their business plans have obviously changed dramatically, with jet fuel now at 75 dollars (per barrel) and a hardening in aircraft (leasing) pricing," he added, according to the report.

AirAsia, which launched as a budget operator 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.