Australian aviation looked successful in 2023.
Rex, the long-standing regional airline of small turboprops that emerged from the ashes of Ansett, has been expanding its fleet of leased Boeing 737s, expanding the network of flights between capital cities it launched at the height of the pandemic.
The airline offered Australians a real alternative to the Qantas and Virgin duopoly not seen since Tiger Air.
Meanwhile, the budget airline Bonza had finally started operating. This airline would fly jet aircraft between previously unconnected regional centres. This would democratise air travel and further reduce the air fares of the dominant airlines.
The Qantas brand was in turmoil and there was a greater need than ever for alternatives to the status quo.
It was an optimistic time for an industry that had recovered quickly from the severe travel restrictions imposed by Covid-19.
Related: The Labor Party ignored Bonza’s plea for help, while questions remain about what transport officials knew and when
Fares were cheaper on routes with the new entrants. Rex’s cancellation rate on the so-called “golden triangle” – between Melbourne, Sydney and Brisbane – was much lower than that of Qantas, its budget wing Jetstar and Virgin.
Now it’s all collapsed.
In the space of three months, Bonza has collapsed and now Rex’s inter-capital network has been scrapped. Operators must salvage a future for Rex, which will almost certainly be scaled back to its pre-pandemic size, supported by possible government participation to ensure connectivity for regional passengers.
Regional cities depend on Rex. Birdsville, about 1,600km west of Brisbane, has twice-weekly flights to the Queensland capital. They are the only alternative to a nearly 20-hour drive.
“If they closed, we would be devastated,” Francis Murray, the local mayor, said this week, stressing that residents rely on Rex for medical appointments.
Industry experts believe that Rex and other new airlines were always meant to enter the market.
Related: Rex Airlines holds a special place in the heart of the country of Australia. What would we do without it? | Claire Keenan
Experts argue that these were not the core problems, despite allegations of mismanagement that undoubtedly hampered the ambitions of Rex and Bonza and the competitive and expensive nature of aviation.
Some say government inaction and the failure to meaningfully help new entrants compete or prevent perceived anti-competitive behavior is the main culprit.
You’d almost have to be a fool to challenge Qantas and Virgin, argued Rod Sims, the former chairman of the Australian Competition and Consumer Commission (ACCC).
“Should (Rex and Bonza) have anticipated that the system was rigged against them in such a way that they were doomed to failure? You could argue that they should have,” Sims said this week.
“The government is setting this system up for failure. It’s setting this system up for duopoly, and therefore setting the system up for higher airfares than Australians should be paying,” Sims said.
Slots at Sydney Airport
The emergence of Rex as a new option for travellers between capital cities has come as a breath of fresh air to many, especially budget travellers used to being crammed into Jetstar flights and paying for food, drink and every gram above the 7kg of hand luggage they are allowed to take.
After all, Rex offered free checked baggage and snacks, with which the company aimed at the mid-range segment.
Rex’s expansion into flights between major cities was funded with $150 million by Asia-based private equity firm PAG, at a time when Virgin Australia was in receivership and its future was uncertain.
An opportunity arose to replace Virgin as Australia’s second major airline, but Virgin was bailed out and positioned itself with a similar offering.
Although the cost of the expansion was considerable, business seemed to be going well. The airline’s rural charm and value were attractive and it continued to add new routes between cities such as Hobart, Adelaide and Perth.
Rex’s fleet eventually grew to nine leased Boeing 737s, and the company boasted of its profitability.
Qantas and Virgin took notice. A report from the Australian Airports Association said airfares on flights between Melbourne and Perth fell by 40% when Rex began flying the route.
But there was more to it.
For John Sharp, Rex’s ambitious vice-chairman, the lack of access to Sydney Airport was a constant source of irritation.
Sydney Airport has an hourly limit of 80 take-offs or landings – something the industry calls “slots”. There is also a daily curfew from 11pm to 6am. All of this has meant that it has been difficult for Rex to add new services.
Related: One in 10 flights between Sydney and Melbourne is cancelled. Is slot hoarding to blame?
Rex managed to secure some flights to Sydney, but was unable to secure enough slots at lucrative peak times to match the margins enjoyed by Qantas and Virgin.
This is because current airlines retain slot rights as long as they do not cancel a given service more than 20% of the time.
Qantas and Virgin have long been accused of “slot hoarding.” This alleged practice involves airlines scheduling more flights than they plan to operate and strategically canceling them; but no more than 20% of the time. In this way, they hold the slot at the expense of a competitor who wants to launch a competing service.
Qantas Group and Virgin have consistently denied that they are abusing slots. However, critics point to the long-term average cancellation data, which shows that one in 10 flights between Sydney and Melbourne is cancelled.
Not only does the Sydney slot system favour the incumbents, it is also partly managed by them. The government has outsourced the management of Sydney Airport slots to a third party – a company majority owned by Qantas and Virgin.
“It’s just unbelievable,” Sims said this week, his pleas for an overhaul of the system when he led the ACCC falling on deaf ears.
Rex’s access problem – shared by Bonza – was clearly visible in Sydney’s slot schedule. In the morning peak between 6am and 11am, Qantas had 103 Sydney slots, Virgin 57 and Rex just seven.
While this partly reflects the market share of Qantas and Virgin, according to ACCC data as of May 2024, Qantas Group carried 61.8% of domestic passengers, with around 25% of those flown by Jetstar, while Virgin carried 31.3%.
Another hurdle for Rex was the rising cost of leasing aircraft, which were still low during the pandemic due to backlogs at Boeing and Airbus.
Allegations of anti-competitive behaviour
In addition, Sharp alleged that Qantas had criticised Rex for attempting to compete with its jet airline operations and launching rivals on key regional routes.
Not only was Qantas in a better financial position to absorb losses on these routes – a tactic comparable to the price war between supermarkets over $1 milk – the arrival of the flying kangaroo in some markets also disrupted Rex’s business model.
Australian law requires airports that accept planes with more than 40 seats to screen every passenger. The technology, which has become commonplace since the September 11 attacks, is expensive. Many saw the laws as a concession to Rex’s regional fleet.
When Qantas launched a service to compete with Rex’s monopoly on the Adelaide-Whyalla route, with its 74-seat Dash 8 400s, it forced Whyalla Council – the airport operator – to invest in security screening, a cost it covered through the fees it charges all airlines using the airport.
We need real competition and we need to see if that can happen
Bar Sims
In effect, Rex was forced to subsidise the cost of screening technology for Qantas. Sharp claimed this added between $40 and $50 to the ticket cost of each passenger, on a route where the starting fare was $149.
Rex abandoned the Adelaide-Whyalla route and Sharp levelled accusations against Qantas, which it had beaten to the punch, in revenge for his expansion ambitions.
Pilot shortages and accusations of poaching also gave Rex headaches.
Government failure
Sims’ view that the Albanian and previous governments have actively consolidated the dominance of the duopoly is shared by airport executives, smaller airlines and almost all representatives of the aviation industry, except the two companies themselves.
A review of the slot system, carried out by former Productivity Commission chairman Peter Harris, in 2021 produced a list of recommendations to the government to help new airlines compete.
The former Morrison government has not responded to the report. Nor has the new transport minister, Catherine King.
King has dodged questions about Qantas’ influence in Canberra and postponed any discussion of reform until an industry white paper due out in mid-year.
An audit program of Sydney airport slots announced in February has failed to produce visible results. Industry observers are pessimistic that the white paper will bring about any real change.
This was underlined again this week by comments from Albanian.
My point and my frustration is that we are actually stopping [real competition] happens
Bar Sims
When asked whether Rex might need to be rescued, the Prime Minister criticised Rex’s decision to expand and fly routes to capital cities in 2021, given the funding it receives from various governments, including subsidies for regional routes.
“One of the things I expressed my concerns about was that there were no conditions [have been attached to Rex’s government funding],” Albanese said. Rex had “stepped away from their traditional role,” he said.
Albanese reiterated the argument that Australia’s population is large enough for only two major airlines on domestic routes.
However, competition and aviation experts have dismissed such suggestions.
Related: At Rex, 360 employees have been laid off, with hundreds more jobs to be cut
Ian Douglas, senior lecturer in aviation management at the University of New South Wales, said the Melbourne-Sydney route was the world’s largest in terms of total revenue, with more revenue than Los Angeles-New York and New York-London.
“Rex was an established airline with a brand, it should be able to fly the same routes and aircraft as Qantas and Virgin, for roughly the same fares as they sell, and make a profit,” Douglas said.
Sims, usually a soft-spoken speaker, didn’t hold back.
“We need real competition and we have to see if that is possible.
“My point and my frustration is that we are actually stopping [real competition] happens. Talking about whether it can or cannot happen, while the government is doing something to prevent it, is what makes me, yes, a little angry.”