Survival of the fittest

Certainly aviation is tough in the regions, with the slowdown in mining construction affecting demand for charter and fly-in/fly-out operations and weak consumer confidence affecting demand on what for many are extremely marginal routes.

There is also the increasing presence of the big national carriers Qantas and Virgin Australia, and their subsidiaries, in resources-related operations and the ever-present high fuel prices and array of aviation charges.

Despite the operating environment, there were still profits, albeit reduced, to be made.

On August 29 Rex reported a near halving of full year net profit to $7. 7 million for the 12 months to June 30 2014, from $14. 0 million in the prior corresponding period.

Despite the second straight year of declining profit, Rex can again claim the title of Australia’s most profitable RPT airline group, given the heavy losses sustained by Qantas and Virgin.

Rex executive chairman Lim Kim Hai says whatever the struggles of Qantas and Virgin, the situation is “much worse in the regional aviation sector”.

“It would be an understatement to say that Australian aviation is in crisis,” Lim writes in the Rex annual report.

“Both the Qantas and VirginAustralia groups are losing money at a rate that would see their net tangible assets wiped out in three years or less unless they manage to recapitalise. ” In addition to Aeropelican, Brindabella and Vincent, the Rex annual report lists 16 regional carriers that have shut down since September 11 2001.

They are: Horizon Airlines (2004), Great Western Airlines (2005), Airlines of South Australia (2005), Emu Airways (2005), Aboriginal Air Services (2006), Sunshine Express (2006), Big Sky Express (2006), Transair (2006), O’Connor Airlines (2007), Aero-Tropics Air Services (2008), MacAir (2009), Regional Pacific (2010), Tasair (2012), Aeropelican (2013), Brindabella Airlines (2013), and Vincent Aviation (2014).

Rex suffered a 1. 3 percentage point reduction in load factor to 54. 3 per cent, while capacity as measured by available seat kilometres was cut by 1. 8 per cent.

Revenue fell 1. 9 per cent to $253. 3 million, while passenger numbers declined 3. 4 per cent to 1. 053 million.

The airline group has not grown its passenger numbers since 2009, aviation consultancy CAPA – Centre

It would be an understatement to say that Australian aviation is in crisis. LIM KIM HAI

for Aviation noted in a September 5 research note.

“Rex flies at the whim of the land – country areas of Queensland, South Australia and New South Wales have experienced rainfall in some areas at the lowest 10 per cent to five per cent ever recorded,” CAPA said.

“This causes disproportionate impacts on regional areas and Rex’s bread and butter business passengers. ” “On the other hand, Rex is largely isolated from competition – it is the sole operator on 27 of its 36 routes and has the advantage of relatively inelastic pricing over those who depend on its services, although this is a double-edged sword. ” The carbon tax, which was abolished in July 2014, cost the company $2. 5 million in 2013/14, Rex said.

“In addition to reducing the cost of fuel, the removal of the carbon tax will have a stimulatory effect on the economy, translating into more air travel,” Rex said.

Lim said the repeal of the carbon tax was not enough to avoid the irreversible damage done to aviation, especially to regional aviation.

Looking ahead to the current year, Rex has forecast net profit in the current year to be “similar to or slightly improved” from 2013/14, while passenger numbers were expected to stabilise.

“So as we embark on yet another uncertain year ahead, we face it with serenity and muted optimism,” Lim told shareholders in the annual report.

“There are already some very preliminary signs that we are near the bottom of the economic downturn and the recent removal of the carbon tax should give the economy a further boost.

“When the inevitable recovery takes place Rex will be there,stronger and better prepared than ever, and I am confident that our best is yet to be. ” Alliance Aviation too says it is approaching the current year with some confidence, having come off a sharp decline in net profit in 2013/14.

Net profit after tax for the 12 months to June 30 2014 came in at $10. 3 million, down 58 per cent from $23. 3 million in the prior corresponding period, Alliance said on August 14.

The result was in line with company guidance issued on August 8.

Revenue fell 10 per cent to $200. 1 million due to a reduction in wet lease flying and ad hoc charters, Alliance said.

The company described 2014 as a “transitional year” and one affected by a changing revenue mix and thestart of some new contracts.

With that completed, Alliance was forecasting a return to revenue growth in 2014/15 and profit levels similar to the 2012/13 financial year.

“With recent contract wins and announcements, Alliance remains confident about the 2015 financial year and beyond,” Alliance said.

“The new contracts together with existing long-term commitments provides confidence that Alliance will return to revenue and profit growth in 2015.

About 74 per cent of forecast revenue for 2014/15 was secured by existing contracts, Alliance said.

While Rex and Alliance are approaching the current year with some cautious optimism, Skytrans chief executive Simon Wild presents a slightly different outlook for 2014/15. “We have a fair amount of our business that is charter and I think everyone would have to say that the charter market, whether in Western Australia or in Queensland, has contracted and prices have contracted as there is less work out there,” Wild says.

“Whether it is a four-year or an eight-year cycle it is a cycle and it will eventually come back but it is not going to be recovering in the short to medium term.

“I think we are talking about a recovery well outside 12 months, possibly a couple of years. ” The family-owned carrier, which flies mainly in regional Queensland, is withdrawing from the Toowoomba-Sydney route once QantasLink begins service to the nearby Brisbane West Wellcamp Airport in November.

Wild says the recent capacity additions by the big national carriers prompted many to hop in the car to pick up cheaper airfares from the major cities rather than book a flight on a regional carrier.

Add to that the slowdown in mining activity and it is clear a significant downturn has taken place in regional aviation, Wild says.

Wild says the airline is focusing on being as efficient as possible and trying to keep costs low, given the elasticity of demand in some ports is so high that a few dollars can be the difference between people choosing to fly, stay at home, or drive to the nearest town to pick up a jet service.

Therefore, it was impossible to pass on every cost to the consumer.

“The important thing I guess is people have got to be battening down the hatches during the tough times and attack your costs because you have to ensure you have sustainability in your business,” Wild says.

“That is our focus here at Skytrans. ”One major cost that regional carriers are almost forced to bear is infrastructure upgrades at the smaller airports in rural towns and cities, Regional Aviation Association of Australia (RAAA) chairman Jim Davis says.

Davis describes the current funding model as unsustainable.

“The airports out there, particularly the small airports, are getting old, runways need resealing and upgrading, new aprons and new terminals,” Davis told the Airservices Waypoint conference in Canberra on September 4.

“The owners of these airports, normally local councils, simply up their head tax and we end up paying. ” Davis, who is also a director on the Regional Express board, says there needs to be a very careful reassessment of infrastructure upgrades at regional airports.

“I have also seen a trend where some councils just tend to build something for the sake it,” Davis says.

“On the Rex network recently we had a 200-passenger terminal built for an airport that realistically is only going to see 30-seat aircraft for many, many years to come.

“So in the interim we have to pay for that and where we can, pass it on to our customers. ” “Demand is quite elastic and we can’t pass everything on. ” Davis says another area of concern is the need to upgrade what in many cases are older aircraft with expensive new avionics, given there has not been a new 19-seater or 30-seater aircraft produced in more than a decade.

“So we are stuck with what we have got and we need to be mindful when we look at navigational surveillance infrastructure upgrades that there can be a huge cost to these old fleets,” he says.

It was impossible to pass on every cost to the consumer.