Air Wars

This essentially puts all Australian operators into the same predicament; expansion of networks within Australia is perhaps the only way to try and recoup the substantial losses taken throughout the pandemic period. But when Australia currently flaunts a healthy number of smaller regional operators, and bigger domestic and international players with a significantly greater amount of resources, one has to wonder if the space is big enough for everyone. 

In aviation, a sector already so cyclical in nature, the ability to quickly and successfully adapt to a significant or ongoing change in the market is crucial. Yet, so too is holding onto precious market share and reliable profits obtained on predictable routes. 

And so, it begins; the war for Australia’s profit-bearing routes.

Welcome, the ACCC 

The Australian Consumer and Competition Commission (ACCC) is an independent Commonwealth regulatory body that serves as a corporate watchdog over consumer markets, to ensure that markets remain competitive, and protects the interest and safety of consumers. It can often be seen in the media scrutinising companies over the sale of junk insurance products, or claims of false advertising. 

However, this watchdog has, in recent months, been increasingly called upon to investigate claims of predatory and non-competitive behaviours within the domestic airline market. 

The drama has seen almost all Australian aviation operators, big and small, either called into question, or pointing the finger, over the introduction of new routes that encroach on the business of another.

On 19 June 2020, the ACCC officially announced that it would be ‘monitoring’ and actively reporting on movements made in the domestic travel market around Australia, at the request of Treasurer Josh Frydenberg. This comes as a direct response to the outbreak of COVID-19, which has devastated the aviation industry around the world. Specifically, the corporate competition watchdog had its eyes set on any “early signs of damage” in the domestic airline industry that may ultimately harm consumers, by driving out competition. For example, the ACCC stated it will monitor the rate at which any airline is “increasing capacity on each route” – or adding new routes to its network – with a view to determine whether or not a carrier is attempting to “damage a competitor or drive them off the route”. 

On top of all this, the government has also issued airlines with a number of lifelines, in order to keep them afloat during the prolonged downturn, as it simultaneously urged Australians to stay at home. Government funding offered to airlines include the $715 million Australian Airline Financial Relief Package, the $165 million Domestic Aviation Network Support package and the $300 million COVID-19 Regional Airline Network Support Program. The provision of taxpayer funding to help keep the airline industry afloat only further complicates the matter of expanding networks within Australia, and definitely isn’t ignored by those operators feeling the heat. 

Here, Australian Aviation offers you a rundown of the most notable examples of treading the fine line between profitable business decisions and stamping out the small guys. Break out your popcorn, because this is where it gets dramatic.

Rex v Qantas on Sydney to Orange 

Perhaps the most media catching example of the battle for regional routes was when Qantas announced it would fly return Sydney to Orange for the first time. On Wednesday, 1 July 2020, Qantas announced that, from 20 July, it would be launching a new service between Sydney and Orange. It was a regional route that Qantas, nor its regional subsidiary QantasLink, had ever undertaken before. Additionally, despite Orange being a regional hub, it was not a route that was being underwritten by the Australian government under the COVID-19 Regional Airline Network Support Program. This brought into question why Qantas, during a period of global aviation stagnation, and after just seeing its largest rival, Virgin Australia, hit the verge of extinction, would consider going into a route that it had never before undertaken? Especially considering the monumental amount of government assistance it had welcomed, just weeks beforehand. 

It was a question that was asked, quite loudly and openly, by Regional Express (Rex). The new QantasLink Sydney-Orange route announcement was met shortly with a response, which can only be described as ‘fiery’, from Rex, which argued that Qantas had only entered into the route in order to undermine and weaken the financial standing of Rex, which, at the time, held a monopoly over the regional route. The response called upon the ACCC to investigate Qantas over “predatory” and “anti-competitive” behaviour in a period of struggle for the global aviation community. 

“Qantas has demonstrated that it has spare funds to incur additional losses simply to weaken its competitor at this time of national crisis,” the zealous statement said. According to Rex, the Orange to Sydney route currently averages a total of 40 passengers per week, which “barely fills” 30 per cent of the regional airline’s twice weekly return services. “Qantas intends to flood the market with another 216 seats a week, making it an aggregate load factor of 11 per cent for the two carriers,” Rex said. It continued on to say that, even at pre-COVID levels of demand, Qantas entering this market will likely be “commercially unsustainable” for both carriers. 

‘Qantas has demonstrated that it has spare funds to incur additional losses simply to weaken its competitor at this time of national crisis’

Rex went so far as to request further investigation into exactly how Qantas has used its COVID-19 financial assistance packages, including the Australian Airline Financial Relief Package, the Domestic Aviation Network Support package and the COVID-19 Regional Airline Network Support Program. “It is obvious that Qantas’ action is not competition on its merits but rather predatory behaviour aimed at weakening Rex at a time when all airlines, including Qantas, are sustaining operational losses, hoping that if Rex collapses it will have the regional aviation market to itself,” the regional airline claimed. 

“Given that Qantas has enough money to engage in noncommercially-viable ventures, it clearly shows that Qantas does not need any financial assistance. That being the case, the federal government should not be using tax payers’ money to prop up Qantas even as the latter leverages on its financial muscle to try to destroy both its domestic and regional competitors during this pandemic.”

This is not the first time that Rex has unleashed its displeasure with Qantas over such “predatory behaviour”. In late January 2020, the regional airline also flagged Qantas with the ACCC over “dumping excessive capacity” on regional routes that Rex felt were already serviced to a necessary extent, insinuating the decision to do so as purely a means to financially undermine Rex.

Oh, the irony… 

While some may read the above and feel sorry for smaller operators, such as Rex, who stand at the feet of Australia’s biggest major airline, Qantas – a company that has recorded just one annual loss since it was fully privatised in 1995 – that pity may be premature. 

It is indeed curious for an airline, in the midst of a pandemic that has seen the global aviation sector take a hit of hundreds of billions – by some estimates – to see and take an opportunity to expand their network. And yet, Rex did just that, not even two months prior to its fiery, public spat with Qantas. 

On 12 May 2020, deputy chairman John Sharp announced that Rex was gearing up to rival Qantas, Jetstar and Virgin Australia in servicing capital cities by early 2021. The new routes were announced with the intention of launching by March 2021, once domestic travel restriction had been lifted, with a particular emphasis on ‘The Golden Triangle’ – Sydney, Melbourne and Brisbane. Along with the new, vastly different route network, Rex announced it would invest in the lease of 10 new narrow-bodied aircraft – likely to include Boeing 737s or Airbus A320s. The airline’s jet expansion would ultimately see Rex bolster its workforce, according to Sharp in May. He said Rex intended to hire new pilots, cabin crew and ground staff, while leveraging its existing management and corporate infrastructure to run the new services at low cost. 

At the time, Sharp noted the significant “opportunity” presented to the regional airline to expand its network, as it worked to capitalise on the market upheaval caused by the global outbreak of COVID-19. 

Firstly, an international decline in demand for travel led to a subsequent, almost instantaneous, drop in demand for new aircraft, which meant that Rex could easily secure the lease of 10 new narrow-bodied aircraft – its first ever venture into jet aircraft – at a below-market price. 

Further, Virgin Australia had entered voluntary administration just weeks prior to Rex’s shocking announcement, and there was not yet any way to tell if the struggling airline would manage to survive the pandemic. This in itself brought about the potential of a soon-to-be huge gap in the domestic market, and it is likely not a coincidence that Rex’s commitment to 10 narrow-body jets was just four aircraft shy of the number previously heralded by Virgin’s budget subsidiary, Tigerair. Tiger’s operations had been entirely suspended from 25 March, in light of Virgin Australia’s struggle.

Throwing salt in the newly formed wound, Mr Sharp assured the public that the new and improved Rex will be a strong disruptor to the domestic travel market, that it will likely to sit “halfway between a full-service airline and a low-cost airline”, while keeping costs low enough to have the capability to offer capital city routes at prices far below those of Qantas and Virgin. Further, Mr Sharp highlighted that even if Rex 2.0 were to match the salaries currently paid to Jetstar captains, the new model will see Rex as “the only capital city operator that is debt-free”, meaning airfares “will be 20 per cent cheaper than Virgin”. 

Sharp said that Australia “may as well” have a three-airline market. “The domestic aviation market is not going to go back to what it was three months ago so we are ready to scale up in line with demand,” he said. “We are doing this because we see an opportunity. We have the advantage of having successfully run an airline for 18 years.” 

Additionally, in order to fund the drastic expansion, the regional airline stated at the time that it was already in discussions with “half a dozen private equity and investment companies” about obtaining a $200 million capital investment. 

It should be noted that this announcement, consisting both of the airline’s drastic route expansion plans, brand new aircraft leasing arrangements, and its subsequent new recruitment strategy, as well as its intentions on how to fund all of the above, came just six weeks after Rex cautioned the government that it was on the absolute brink of bankruptcy and in dire need of a government assistance package. 

This kind of call was common in the months following the outbreak of COVID-19, and the airline even went so far as to say that its capacity to continue its transport of “medical tests and supplies” would be hindered, if not obliterated, should the government not intervene with a regional aviation bailout.

Did Qantas cause the fall of Ansett? 

Among other things, a contributing factor to the demise of Ansett Australia was no doubt Qantas’ purchase of Australian Airlines from the government, to the tune of $400 million, in August 1992, that all but sealed the deal for Ansett. By handing Qantas a fully-fledged domestic network on a silver platter, to add to its already healthy international system, Qantas became a force to be reckoned with. Qantas had now expanded at a rate that Ansett could never meet organically. Other factors of course contributed, however, including the unsustainable salary packages offered to senior and long-standing pilots at Ansett.

Qantas fights back, and a pattern emerges 

In light of the media frenzy caused by Rex’s dramatic new network plans, as well as its hot-headed criticism of Qantas’ Orange expansion, Australia’s flag carrier was hot on the heels of Rex, with a shiny mirror in hand. 

“Rex is clearly uncomfortable about facing competition and seeing their monopoly on flights to Orange coming to end,” a Qantas spokesperson told Australian Aviation back in July, at the peak of the grizzly feud. “Rex sees their plans to expand into domestic routes as good for competition, but when a route they have had a monopoly on for decades faces some competition they say it’s predatory behaviour.” 

Qantas was not alone in accusing Rex of harbouring a double standard in its reaction to Qantas, with many spectators arguing that the regional airline was perhaps being a bit hypocritical. To point the finger at Qantas for using its government bailout cash to expand its network to a small regional NSW town, after Rex had announced its huge, national expansion just weeks prior, is clearly a blatant contradiction. Further, Australian Aviation readers were quick to point out the irony in Rex challenging Virgin and Qantas on domestic routes amid a period of deep uncertainty over the future of Virgin Australia, throughout April and May, which could also, for all intents and purposes, be considered ‘predatory’. 

This was not the only time that Rex had been labelled as the ‘predator’, rather than the ‘prey’. Just days after the public Rex versus Qantas feud, Hamilton-based regional airline Sharp Airlines called upon the ACCC to investigate Rex’s decision to introduce a new King Island service. On 14 July 2020, Sharp Airlines chief executive Dallas Hay publicly questioned Rex’s decision to introduce a Wynyard to Currie service for the first time, and called upon the ACCC to review how Rex was utilising its government assistance. In a phrase that is becoming ever more common, Sharp Airlines labelled Rex’s move as “anti-competitive conduct and predatory behaviour”. 

In fact, the statement released by Sharp sounds eerily similar to the criticism that Rex touted on Qantas. “Recently Rex announced and implemented services between Wynyard and King Island – a route in which it has not operated before,” Hay said. “While all airlines globally are suffering due to COVID-19 it appears Rex has the capability of expanding their network and with the view of weakening an existing operator.”

‘When a route they have had a monopoly on for decades faces some competition they say it’s predatory behaviour’

Sharp Airlines stated that prior to the outbreak of COVID-19, around 10,000 passengers were shuttled between Wynyard to King Island each year. “Even if the passenger numbers return to pre-COVID-19 levels in the next 12-18 months, Rex’s entry on this route with increased capacity will diminish load factors to a clearly unsustainable level for two operators to be commercially viable,” the statement said. 

In response, Rex said it had introduced the Burnie-King Island service as an “efficiency measure”, and a result of operating a combined Melbourne-Burnie-King Island-Melbourne service. 

“This was implemented as an efficiency measure in the same way that Rex introduced a new sector for Wagga Wagga-Albury as a result of operating a combined Melbourne-Albury-Wagga service,” Rex said. “Under the Commonwealth government’s Regional Airline Network Support (RANS) program, these combined routes are funded for up to three return services a week which is what Rex is offering to both of these combined routes.” 

Rex also said it welcomed scrutiny by the ACCC and encouraged Sharp Airlines to lodge a formal complaint. 

As entertaining and dramatic as this all is, it raises the question: at what point does a business decision change from being as simple a ‘seizing an opportunity’, to something much more sinister?

Hindsight is 20/20 

In search of better understanding, Australian Aviation spoke with Rod Flockhart, an ex-Dash 8 pilot who has been around the regional block a few times. Flockhart spent decades in the regional aviation space in various capacities, and is now the proud owner of a growing flying school at Brisbane’s Archerfield Aerodrome. As a business owner himself, Flockhart now has an even better understanding of the importance of cash flow, profit, and seizing opportunity in the aviation industry. 

Flockhart was out looking for work in the weeks just prior to the September 11 attacks in New York City; which resulted in a deeply uncertain time for the future of aviation. However, it appears that the events of that day, combined with the – unrelated, but simultaneous – demise of Ansett Australia, paved a series of great opportunities for Australia’s remaining airlines, and ones that neither Qantas, nor any of the other market players at the time, hesitated to seize. 

According to Flockhart, after the September 11 attacks, “The focus shifted to Australia, people were scared to go overseas and risk being involved in such an attack, so they thought ‘let’s just travel within Australia. So, we actually saw a lot of growth, and became a whole lot busier within our regional and domestic markets at that time.”

Virgin the takes the prize in the wake of Ansett 

While Qantas, Alliance and Impulse all may have made gains in the wake of the Ansett collapse, Virgin Australia may be considered the biggest winner of the ordeal. Virgin Blue began operations in Australia in August 2000, just a year before the fall of Ansett. It was initially running just seven return services per week on the same route – Brisbane to Sydney. Virgin Blue’s timely entrance into the Australian market just months before Ansett’s demise gave it the ability to very quickly become Australia’s second-largest domestic carrier, as well as facilitating access to limited terminal space, a feat that would have taken significantly longer had another domestic carrier not just exited the market. This was a monumental contributor to Virgin’s growth at the time.

Increased demand for domestic travel, in combination with the fall of Ansett, which entered into voluntary administration on 12 September 2001, meant that other players in the market had great opportunities to grow their networks and expand their fleet. 

Firstly, there was Alliance Airlines, established in April 2002, mere months after the demise of Ansett. Flockhart says that Alliance then “expanded quite rapidly” thanks to the new gap in the domestic market. Alliance also saw the opportunity to cash in on Australia’s growing ‘fly-in, fly-out’ market in the regions; an opportunity that was passed over by Ansett previously. However, Alliance wasn’t alone in seizing opportunities in the shadow of Ansett. 

“Qantas expanded, Cobham, contracted to Qantas, saw growth, and Virgin was just the ‘new kid on the block’ at the time, and they had a huge opportunity now. More demand, more airplanes, plus (Source Seth Jaworski) now a whole stack of Ansett pilots looking for work,” he says. 

At the time, low-cost carriers Virgin Blue (which eventually became Virgin Australia) and Impulse Airlines had also only just entered the domestic market, with Virgin Blue shortly moving into Ansett’s former terminal in Melbourne. Meanwhile, with Ansett out of the way, Qantas earned a near monopoly over the national corporate sector in Australia, essentially overnight. Further, Qantas even briefly leased some former Ansett aircraft, as it ramped up domestic routes to fill the Ansett-shaped hole in operations. 

All this is to say that an integral part of business is to seize opportunity as it presents itself, and that this has been achieved over and over again in the history of the Australian airline market. It also suggests that a global pandemic might not necessarily mean there are no opportunities available for growth. 

Flockhart says that there are often still opportunities to grow, even when things aren’t looking that way: “A wise man once said to me, that old saying of ‘through tragedy comes triumph’, and I believe that, and have seen that myself.”

‘We are doing this because we see an opportunity. We have the advantage of having successfully run an airline for 18 years’ 

He notes that by getting all his “ducks in a row” amid the pandemic, he can be set up to grow exponentially in the future, “and that’s what Rex looks to be doing, and Qantas looks to be doing”. 

“It’s all just business, right?” 

Bringing it back to the idea of being ‘predatory’ over expanding route networks, or the idea of driving out the competition, Flockhart says, “If you think about it, what goes on is no different to the trucking industry, or likely any other industry … Unfortunately, it’s just smart business, and it’s the way of the world.” 

Whether or not these practices are in fact predatory, or rather just part and parcel of achieving a profitable business amid a period of deep uncertainty, Australian Aviation will leave that to you – and the ACCC, of course. Regardless, it sure is entertaining to watch it all unfold.