Loss-making Malaysia Airlines (MAS) said yesterday the government has authorised it to offer discounted fares on domestic routes so it can compete better with a low-cost rival.

"The government has removed the floor price imposed on Malaysia Airlines under the new domestic aviation policy," the state-owned flag carrier said in a statement.

"This means in the domestic sector, the national airline will be able to provide appropriate discounts to its passengers when it makes commercial sense to do so."

Analysts said the decision would spark a price war on domestic routes between MAS and profitable low cost carrier AirAsia.

MAS said that during lean periods each year when air travel was typically low, "it is important that Malaysia Airlines ... has the opportunity to implement discounted prices to encourage more air travel."

Wan Suhaimi, an economist with K and N Kenanga, told AFP the winner in this price war would be the customers.

"Air fares will now be determined by supply and demand factors. It will help improve efficiency in our airline industry. It is about time the government stops controlling air fare tickets," he said.

The national carrier's managing director Idris Jala said under the new domestic aviation policy which takes effect Aug 1, MAS would be free to restructure its domestic operations to make them profitable.

Loss-making domestic routes

"We can now exercise full control over our frequencies, fleet and pricing to best serve the needs of our passengers," Idris said, adding that the government would not subsidise the airline after Aug 1.

Under the new structure AirAsia will take over 99 of MAS' domestic routes, many of which are currently losing money.

MAS also said it would now operate 22 domestic trunk services with three new routes to East Malaysia.

The government would then stop underwriting the loss-making domestic services which the national carrier was previously obliged to operate.

AirAsia has been pushing for access to the domestic routes, saying it can succeed where the national carrier has failed and wring profits from services to rural and small-town destinations.

Malaysia Airlines, which announced the turnaround plan last month after posting a 350 million dollar annual loss, said it would shed some 6,500 of its 23,000 employees and reduce its fleet from 40 to 21 aircraft.