‘It ends up just being a bloodbath’: Why plucky, third player Rex Airlines came unstuck

Everyone knows air travel isn’t what it used to be. Decades ago it was a glamorous affair. Now it’s more of a miserable experience, with delays, discomfort, extra charges and, in Australia, an ever-shrinking choice of carriers for customers, following the failure this year of two regional airlines, Bonza and Rex.

While few passengers and experts in the aviation industry took Bonza seriously, Rex’s implosion shook the nation. Rex, short for Regional Express, has operated for 22 years, providing a critical service to communities scattered across regional Australia. It has flown to more than 50 destinations and often to towns not serviced by the major airlines, Qantas and Virgin.

The news that Rex was going broke and had gone into administration this past week with plans to lay off 610 staff – more than a quarter of its workforce – was a major headache for the Albanese government.

Almost immediately, stakeholders – from unions and staff to customers – began demanding the federal government step in and save Rex, even though Rex was a private company and its failure was most likely the result of hubris and mismanagement.

The news also fanned debate, again, about whether a nation as geographically vast as Australia, with its small population, can support more than two airlines. It’s an argument that goes around and around, and which currently offers little consolation to regional leaders and their communities, who just want to know if Rex will be rescued.

“It’s critical that Rex continues,” says Dallas Tout, the mayor of Wagga Wagga, a large inland city in southern NSW that sits halfway between Sydney and Melbourne. “Everyone of this entire region is of the same mind that we need to get Rex through this, and make sure that the regional network is saved.”

His argument gathers more support if you consider that, in the two decades to 2019, the number of regional routes provided by airlines has fallen substantially, from 458 to 291. In the same period the number of remote routes fell almost 40 per cent to 163.

When Rex started more than two decades ago its arrival was received with enthusiasm – “Rex is here for the long haul”, “Up, up and away with Rex” were the headlines. Its inaugural flight was from Wagga Wagga to Sydney. Wagga Wagga is also where Rex has its engineering base and one of its two pilot-training academies; the other is in Ballarat. Those centres also train pilots for other airlines.

Now the headlines about Rex are gloomier: “Rex’s future is up in the air.” But they won’t stay that way if Tout and other mayors, who are seeking meetings with state and federal ministers, have anything to do with it. “We need Rex all around the country in regional areas. I can assure you that all local governments will be communicating that,” Tout says.

Rex has been an important carrier in Australia’s aviation market, providing links with regional communities and their economies into capital cities, whether for business or leisure. It was particularly important for fly-in, fly-out workers employed at mines and on large infrastructure projects. In southern NSW, where Wagga Wagga is situated, there’s an estimated $10 billion to $15 billion being spent on infrastructure projects, spanning energy, telecommunications and defence, over the next decade.

Additionally, airlines flying to regional centres help to deliver essential services, such as healthcare. Tout estimates that about 5000 air seats annually between Sydney and Wagga Wagga were occupied by medical specialists, such as cardiologists, travelling to that region to attend to patients. Wagga Wagga is fortunately also served by Qantas, but not all regional towns and cities have the choice of two airlines.

It’s why Prime Minister Anthony Albanese can’t let Rex collapse. His government would face a backlash in regional centres that he can’t afford, especially with less than a year to an election and with the government struggling in the polls.

Those pressures may explain why the prime minister has been so highly critical of Rex’s management for trying to be more than just a regional airline. The airline’s downfall was hastened after management made the costly decision to expand into the cut-throat capital-city routes between Sydney, Melbourne, Brisbane and Perth, distracting it from its core market of regional Australia. Rex’s aircraft livery carries the slogan “Our heart is in the country”.

The expansion into those inter-capital-city routes by Rex occurred after the pandemic. As a smaller player, Rex tried, but didn’t have the volume of flights, passengers or slots, especially at Sydney Airport, to make those inter-capital-city routes viable, especially when it was being matched and undercut on fares and routes by its bigger and better-resourced rivals, Qantas and Virgin.

Rex is not the first airline to try and break the dominant duopoly that exists in Australia’s aviation industry. In the past few decades a graveyard has filled with airline groups that have tried and failed, from Compass to Tiger Airways and Bonza, to name a few.

It’s easy to understand why they try. The Sydney-to-Melbourne route alone accounts for 15 per cent of all domestic passenger travel and is considered one of the top-10 busiest domestic routes in the world.

Rod Sims, the former chair of the Australian Competition and Consumer Commission (ACCC), believes the nation can support three airlines. He was critical of the prime minister suggesting Rex should have stuck to its own runway of regional services and not tried to compete against Virgin and Qantas on the inter-capital-city routes.

“The idea that you want to cement the airline structure into a regional player and two national players just dooms us all to higher airfares,” he said. “We’ve got to be more dynamic than that. We shouldn’t criticise a player for wanting to have a go because clearly they brought lower airfares to Australian consumers. It’s a good thing that they tried. If they had the slot allocations at Sydney in better shape, maybe Rex would have done a lot better.”

A slot is an agreement between an airport operator and an airline that allows the airline to operate take-offs and landings at a specific time and date. Smaller airlines have struggled to compete against Qantas and Virgin, which dominate slots at Sydney Airport particularly during peak times and more broadly in the market.

Sims said the reform of the slot system at Sydney Airport was paramount to ensuring the survival of a third player in Australia’s aviation market.

The federal government still has to implement the recommendations of former Productivity Commission chairman Peter Harris to open more peak-time slots at Sydney Airport to smaller players. The imminent release of the government’s aviation policy paper may help accelerate that change but that may still be too late for Rex.

Sims said the government needed to act, and there was little the ACCC could do to help ensure a third player in Australia’s aviation space would survive. He said when Rex expanded onto the inter-capital-city routes it claimed Qantas had retaliated by entering some of its regional routes.

‘The idea that you want to cement the airline structure into a regional player and two national players just dooms us all to higher airfares.’

Rod Sims, former ACCC chair

“It was: ‘You [Rex] have come on our routes and we will give you a really big bloody nose and we, Qantas, won’t make any money but will really cut your returns down, big time’. So that was the retaliation Qantas is alleged to have done,” said Sims. He said when he was ACCC chair he reviewed Rex’s complaint under Australia’s competition law. “The evidentiary burden you’ve got to have to get a case like that as being a substantial lessening of competition is just enormous.”

Not everyone agrees that Australia can sustain more than two big airlines. “The answer is no,” said Ian Douglas, who used to work for Qantas and now works as a senior lecturer at UNSW’s School of Aviation. “I don’t think with 27 million people we are ever really going to find a sustainable third carrier space on the market. Every time we get a third carrier it ends up just being a bloodbath, and the smallest one falls out.

“Air New Zealand has had the rights to fly domestically in Australia for years and years. They have the right aircraft, they fly those aircraft across the Tasman, they never try to operate domestically in Australia.”

He said the European and American markets, which are more than 10 times the size of Australia’s population, can only support a handful of carriers. In the US, with its population of 330 million, there are only four major carriers, which together account for about 80 per cent of that market.

And yet the federal government wants Rex services to continue into the regional areas, despite its woes. Federal Transport Minister Catherine King, whose department has been liaising with Rex’s administrators, EY, has said the government doesn’t want to see Rex “fold”. Albanese, a former transport and regional development minister, said the government would keep a close eye on the proposals put forth to rescue Rex.

“We are concerned about Rex,” said Prime Minister Anthony Albanese.Credit: Alex Ellinghausen

For now, Rex has ceased all of its flights between capital cities, and customers who had tickets on those routes have been able to book equivalent services on Virgin and Qantas free of charge. Rex has secured short-term funding to continue flying regionally until a buyer of the airline is found.

The downfall of Rex wasn’t only caused by its expansion into those inter-capital-city routes. There have been other contributing factors – a global shortage of pilots meant it was unable to fly a number of its ageing planes – and there were also boardroom ructions. And by not yet reforming the slots system at Sydney Airport the Albanese government and previous federal governments have helped entrench a duopoly in the market.

But the government’s anger towards Rex’s management is also understandable, given the financial support it has received.

Rex had funding in the form of a $150 million convertible note – essentially a loan – from an Asia-based private equity group, which helped it undertake its expansion into those inter-capital-city routes, pitting it against Qantas and Virgin. In addition to that loan, Rex received $150 million in financial support from the federal government in the two years to June 30, 2022, as it recovered from the COVID-19 pandemic, which roiled airlines globally. The Western Australian and Queensland governments have also given it financial support.

“Rex receives substantial government support with no conditions,” the prime minister said earlier this week, and hinted that if there was any future government support of Rex, it would have conditions.

Outgoing Virgin Australia chief executive Jayne Hrdlicka has hosed down speculation the company might acquire Rex. Credit: Dan Peled

The speculation has been that Virgin may step in to acquire Rex. This speculation deepened when it emerged that Alistair Hartley, Virgin’s chief strategy officer, met with Rex executives and EY on July 9.

At the time EY was undertaking an independent review of Rex’s business. The 10-week review included a contingency plan for a potential administration. Meetings with Rex management regarding a potential administration didn’t start until July 16.

EY, which is now doing Rex’s administration, was paid $572,000 for that 10 weeks of work, or about $11,440 a day.

Virgin’s outgoing chief executive Jayne Hrdlicka has hosed down speculation the carrier would want Rex’s regional operations, although analysts believe it would make a sale of that group more attractive.

Private equity group Bain, which owns Virgin, has shelved plans for a public listing of the group. It may instead attempt a partial trade sale of Virgin to a foreign carrier like Qatar Airways. Qatar could possibly take a 20 per cent stake in Virgin, which would require federal government approval. Under that scenario, Rex assets might prove appealing.

Meanwhile, it remains a turbulent time for regional communities as they wait to learn of Rex’s fate.

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