Australian aviation appeared vibrant in 2023.
Rex, the longtime regional airline of small turboprop aircraft born out of Ansett’s ashes, was enlarging its fleet of leased Boeing 737s. It was expanding its network of flights between capital cities it launched at the height of the pandemic.
The carrier was offering Australians a true alternative to the Qantas and Virgin duopoly not seen since Tiger Air.
Meanwhile, low-cost carrier Bonza had finally launched, flying jets between previously unconnected regional centres in what promised to democratise air travel and further push down the airfares of the dominant airlines.
The Qantas brand was in turmoil and there was more appetite than ever for alternatives to the status quo.
It was an optimistic time for an industry that had swiftly recovered from Covid’s tight travel restrictions.
Airfares were cheaper on routes with the new entrants. Rex’s cancellation rate on the so-called “golden triangle” – between Melbourne, Sydney and Brisbane – was far lower than those of Qantas, its budget wing Jetstar and Virgin.
Now, all that has come crashing down.
In the space of three months, Bonza has collapsed, and now Rex’s inter-capital city network has been axed. Administrators must salvage a future for Rex which is almost certain to be cut back down to its pre-pandemic size, supported by a possible government stake to ensure connectivity for regional passengers.
Regional towns depend on Rex. Birdsville, about 1,600km west of Brisbane, has two weekly flights to Queensland’s capital. They are the only alternative to an almost 20-hour drive.
“If they were to close down, we would be devastated,” Francis Murray, the local mayor, said this week, stressing residents rely on Rex for medical appointments.
Industry observers believe the writing was always on the wall for Rex and any new airline trying to enter the market.
Allegations of mismanagement were compounded by the aviation market’s competitive and costly nature, but experts argue these were not the core problems.
Government inaction and its failure to do anything that would meaningfully help new entrants compete or prevent alleged anti-competitive behaviour from the big players deserves the largest share of blame, some say.
You’d almost have to be a fool to challenge Qantas and Virgin, argued Rod Sims, the former chair of the Australian Competition and Consumer Commission (ACCC).
“Should [Rex and Bonza] have anticipated that the system was so rigged against them that they were doomed to fail? You could argue they should,” Sims said this week.
“The government sets this system up for failure. It sets this system up for duopoly, and therefore sets the system up for higher airline prices than Australians should be paying,” Sims said.
Sydney airport slots
Rex’s emergence as a new option for travellers between capital cities was a breath of fresh air for many, especially budget flyers accustomed to being crammed on Jetstar flights and charged for food, drinks, and each gram over their 7kg allotted hand luggage.
After all, Rex offered free checked baggage and snacks, appealing to the middle of the market.
Rex’s expansion into flying between major cities was funded by $150m from Asia-based private equity firm PAG, at a time when Virgin Australia was in administration and its future uncertain.
An opportunity emerged to replace Virgin as Australia’s second big carrier, but Virgin was rescued and positioned itself with a similar offering.
While the cost of expansion was significant, things appeared to be going well. The airline’s country charm and value had appeal, and it continued adding new routes between cities such as Hobart, Adelaide and Perth.
Rex’s fleet grew to ultimately lease nine Boeing 737s and boasted about its profitability.
Qantas and Virgin were taking notice. An Australian Airports Association report said airfares on flights between Melbourne and Perth dropped by 40% when Rex began flying the route.
But there was more to the picture.
For John Sharp, Rex’s firebrand deputy chairman, a lack of access to Sydney airport was a constant gripe.
Sydney airport operates an hourly cap of 80 takeoff or landing movements – something the industry calls “slots”. It also has a daily 11pm to 6am curfew. All this meant it was difficult for Rex to add new services.
Rex managed to secure some Sydney flights, but it didn’t get enough slots at lucrative peak travel times to reap the margins enjoyed by Qantas and Virgin.
This is because incumbent airlines retain the rights to slots, so long as they don’t cancel any individual service more than 20% of the time.
Qantas and Virgin have long been accused of “slot hoarding”. This alleged practice sees airlines schedule more flights than they intend to run and cancel them in a strategic manner; but not more than 20% of the time. This way, they retain the slot at the expense of a competitor wanting to launch a rival service.
Qantas Group and Virgin have consistently denied they misuse slots. However, critics point to long-term average cancellation data, which shows up to one in 10 flights between Sydney and Melbourne is cancelled.
Not only does the Sydney slot system favour incumbents, it’s partly managed by them. The government has outsourced management of the slots at Sydney airport to a third party – a company majority-owned by Qantas and Virgin.
“It is just unbelievable,” Sims said this week. His pleas for the system to be overhauled when leading the ACCC fell on deaf ears.
Rex’s access struggle – shared by Bonza – was evident in Sydney’s slot schedule. In the morning peak between 6am to 11am, Qantas had 103 Sydney slots, Virgin 57, and Rex just seven.
While this partly reflects Qantas and Virgin’s market share – according to the ACCC’s May 2024 data, Qantas Group carried 61.8% of domestic passengers, with about 25% flown by Jetstar, while Virgin carried 31.3%.
Another hurdle for Rex was the increasing cost of leasing planes, which had grown from the bargain basement prices during the pandemic due to backlogs at Boeing and Airbus.
Anti-competitive allegations
Additionally, Sharp claimed Qantas hit back at Rex for trying to compete with its jet operations, launching rivals to its core regional routes.
Not only was Qantas in a better financial position to absorb losses on these routes – a tactic likened to the supermarkets’ $1 milk price wars – the entrance of the flying kangaroo to some markets interfered with Rex’s business model.
Australian law require airports welcoming aircraft with more than 40 seats to security screen each passenger. The technology, which has become common since the 9/11 attacks, is costly. Many saw the laws as accommodating Rex’s regional fleet.
When Qantas launched a service to rival the monopoly Rex had on the Adelaide-Whyalla route, with its 74-seater Dash 8 400s, it forced Whyalla council – the airport operator – to invest in security screening, costs which it covered through fees it charges all airlines using the airport.
In effect, Rex was made to subsidise the cost of screening technology for Qantas. Sharp claimed this added between $40 and $50 to each passenger’s ticket cost, on a route where a starting air fare was $149.
Rex abandoned the Adelaide-Whyalla route and Sharp levelled allegations against Qantas it had been outmuscled as revenge for its expansion ambitions.
Pilot shortages and allegations of poaching also caused headaches for Rex.
Government failure
Sims’ view that the Albanese and previous governments have actively entrenched the duopoly’s dominance is shared by airport chiefs, smaller airlines and almost all aviation industry voices except for the two companies themselves.
A review into the slot system conducted by former Productivity Commission chair Peter Harris provided a list of recommendations to government in 2021 to help new airlines compete.
The former Morrison government did not respond to the report. Nor has the new transport minister, Catherine King.
King has dodged questions about Qantas’ influence in Canberra and deferred all discussion of reform to an industry white paper, due by the middle of this year.
An audit program of Sydney airport slots announced in February has provided no apparent results. Industry observers are pessimistic the white paper will bring about any real change.
This was reinforced by comments from Albanese this week.
When asked about potentially bailing out Rex, the prime minister criticised Rex’s decision to expand and fly capital city routes in 2021, in light of funding it receives from various governments – including to subsidise regional routes.
“One of the things that I expressed concern about was that no conditions [have been attached to Rex’s government funding],” Albanese said. Rex had “moved away from their traditional role”, he said.
In doing so, Albanese echoed the claim that Australia’s population is only large enough for two main carriers on domestic routes.
Competition and aviation experts, however, have rubbished such suggestions.
Ian Douglas, a senior lecturer in aviation management at the University of New South Wales, said the Melbourne-Sydney route is the highest revenue route in aggregate terms in the world, generating more than Los Angeles-New York and New York-London.
“Rex was an established carrier with a brand, it should be possible to fly the same routes and aircraft as Qantas and Virgin at something similar to the airfares they sell and make a profit,” Douglas said.
Sims, an ordinarily mild-mannered speaker, did not mince his words.
“We need real competition and we need to see whether it can happen.
“My point and my frustration is we’re actually stopping [real competition] happening. To talk about whether it can or can’t happen, when the government is doing something to stop it happening, is really what is making me, yes, a little bit angry.”
A spokesperson for King said the audit program was part of its response to the Harris review, and that “detailed regulatory design” of slot compliance rules was being conducted ahead of bringing forward legislation to parliament this year.
