* AirAsia may take domestic network, MAS take long-haul routes
* AirAsia would get 2 MAS board seats for CEO and deputy
* Combination could lead to higher airfares-analyst (Recasts with planned share swap, adds analyst comment)
By Liau Y-Sing
KUALA LUMPUR, Aug 8 (Reuters) - Malaysian Airline System (MAS) and rival AirAsia are planning a share swap that would give AirAsia's parent a 20 percent stake in Malaysia's national airline, a source with direct knowledge of the deal said on Monday.
Under the deal, Malaysia's state investment arm, Khazanah Nasional, which currently owns close to 70 percent of MAS, would take a 10 percent stake in AirAsia, said the source who asked not to be identified because the deal has not been announced.
"This will help to improve synergies between the two," the source said. "They have been competing unnecessarily in the past and they will now pool their resources together."
AmResearch in Kuala Lumpur said in a note on Monday that the share swap could position MAS as a premium, long-haul carrier, while AirAsia takes on the domestic, short-haul network.
The share swap is expected to aid MAS, which has struggled to stay profitable, although it would be the second time in 10 years that the national carrier is being restructured to help its bottom line, analysts said.
AirAsia's chief executive, Tony Fernandes, and his deputy Kamarudin Meranun, will sit on the board of MAS after the restructuring, the source said, adding that CIMB is the deal's adviser.
Officials at MAS and Khazanah Nasional were not immediately available for comment. AirAsia officials said the airline would make a statement within a day or two.
The two airlines halted trading in their shares until Tuesday, saying separately they need time to prepare an announcement relating to "a material transaction."
Khazanah Nasional and AirAsia shareholders had denied on Sunday reports that AirAsia's shareholders will emerge as the largest owners of national carrier MAS shares. .
The global aviation sector has been hit by rising fuel prices and economic instability, but MAS and AirAsia have adopted different strategies to deal with the challenges.
MAS managing director Azmil Zahruddin told Reuters in March that the airline was prepared for a stronger future, although the Japan earthquake in March posed a challenge.
In May, MAS posted a first quarter net loss of 242.3 million ringgit ($80.4 million) compared to a profit of 310.6 million ringgit a year earlier, after a decent FY2010 that saw its net profit surpass expectations of a net loss.
In 2001, the authorities bailed out the then loss-making MAS with about $472 million of state money, drawing fierce criticism from investors who painted the deal as government interference in the market.
"AirAsia was set up to liberalise Malaysian skies, but with this partnership, I see us going back to monopolies," said another aviation analyst with a local bank. "At the end of the day, it's the consumers who will suffer as monopolies usually mean higher airfares."
AirAsia recorded a net profit of 171.9 million ringgit in the first quarter, down almost 25 percent from a year earlier. It is on a regional expansion drive, with a source saying it had recently drawn up plans to buy an extra 100 Airbus A320neo jets, potentially taking a record-breaking order to 300.
The budget carrier plans initial public offerings in Bangkok and Indonesia as it capitalises on demand in the region for cheap air travel.
AirAsia shares last traded at 3.95 ringgit before they were suspended, up 56 percent since the start of the year, while MAS' stock was last traded at 1.60 ringgit, down 23 percent so far this year. The overall index has fallen 2.4 percent since the start of the year.
$1 = 3.013 Malaysian ringgit Additional reporting by Min Hun Fong; Editing by Raju Gopalakrishnan and Matt Driskill