A hex on Rex: The real reason it has hit the decks

Talk about the Rex hex. Is the demise of Australia’s challenger airline the result of predatory competition or management failure? Take your pick.

Sifting through this financial wreckage won’t be easy for the appointed administrators, EY.

Rex – heart in the country but head in the clouds.

The board is engaged in open internal warfare, the airline has sustained accumulated losses of tens of millions of dollars, and regional policy sensitivities the government must face in any decision to bail out the airline.

The chat in aviation circles is that the government is expected to take part-ownership of Rex, conditional on the airline shrinking back to its regional roots (or should I say routes) and abandoning any aspirations to take on the national city network.

In other words, the government has no appetite to bankroll Rex’s attempt to break the domestic Qantas/Virgin duopoly.

Indeed, over the years Rex has received a disproportionate amount of government aviation support, including during the COVID-19 pandemic, because of the political desire to ensure the regional population is not disadvantaged.

Ironically, it is not Rex’s regional operations that have come financially unstuck. It was the airline’s starry eyed notion, after the collapse of Virgin in 2020, that it could become Australia’s second-biggest airline carrier.

Rex wasn’t fighting the duopoly, but instead wanted to make the battle of the skies a triopoly.

In a presentation Rex sent privately to potential investors to raise $200 million, the airline said: “Initially the airline would operate only between the Australian capital cities but eventually will extend its operations to the entire domestic market, capturing up to 37 per cent share of the domestic network and establishing itself as Australia’s second domestic carrier.”

The document also outlined how Rex had considered buying Virgin out of administration but concluded that the group had too many chronic problems.

Rex told the investors it could operate a cost base 30 to 35 per cent lower than Virgin, with lower overheads, lower wages and some cheaper aircraft it picked up during Virgin’s administration.

With the value of hindsight, a less perspicacious strategy would be hard to find.

Virgin didn’t just survive, it prospered and pitched itself into the mid-tier market, the same spot that Rex was trying to fill on its intercity flights.

Nor was Virgin about to sit still and let Rex eat into its market share. On many new city routes introduced by Rex, Virgin matched the discounted fares.

Those routes were also serviced by Qantas-owned low-cost carrier Jetstar, whose fares were often pitched at even lower price points.

And how is this for timing? Within hours of Rex appointing administrators, Webjet was advertising a Jetstar sale, with $54 flights from Sydney to the Gold Coast and $64 flights to Brisbane.

And breaking into the capital city market was always going to be a challenge when the two competitors dominate the slots, which allocate times and frequency that airlines can take off or land.

Think of slots as airline parking spaces, without which it is impossible to park a plane. And there are slots, and slots. Having a parking space at a time when no one wants to park (let’s say 2am at a suburban shopping centre) is far less valuable or useful than, say, at 8am in the city.

While competition experts and airports have been howling for years about how the slot system has been gamed by the established airlines to entrench their dominance, governments have been extremely tardy about addressing this competition choke point.

Had the slot system been overhauled years ago, the federal government may not be faced with having to use taxpayers’ money to rescue Rex and as many as 610 staff would not be staring at an unemployment queue.

Rex complained bitterly about its slots, but those complaints were challenged by its competitors, who said Rex got all the slots it wanted.

Governments, including our current one, talk a big game on competition, but their actions too often don’t match the rhetoric.

And if the government does decide to partially nationalise Rex, and in doing so becomes a large shareholder, how does it deal with a board that is duelling with one of its shareholders for executive control?

It’s a fair bet that Rex will emerge from the ashes in some form, be it acquired by private capital or public money.

But it will be messy.

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