Opinion: With Rex bowing out, does anyone stand a chance?

Rex ultimately took delivery of six ex-Virgin 737s – which it secured during the pandemic, amid record-low interest rates, when demand for aircraft was near nought, resulting in well-documented discounts. However, the operating landscape for airlines has changed drastically since 2020, and notoriously, the airline industry takes no prisoners – in Australia or elsewhere. It is the epitome of the ‘boom and bust’ industry.

To begin, two major, ongoing global conflicts have kept global fuel prices at an unprecedented high since 2022. Meanwhile, it’s taken four years for passenger demand to lightly graze the levels it saw pre-pandemic (with 98.8 per cent of pre-pandemic capacity achieved in March this year). This occurred just in time for the Australian economy to teeter towards recession, reporting minuscule growth in GDP of 0.1 per cent in March, alongside an ongoing cost of living crisis.

In addition to the above, Virgin Australia was remarkably able to navigate its way out of the storm easier than anticipated by its rivals. The airline nearly immediately slimmed down to an all-Boeing 737 fleet, offloading its long-haul Boeing 777s, regional ATRs, and – rather controversially at the time, given its profitability – cut the entirety of the Tiger Air brand and its Airbus A320 fleet.

Any doubters have certainly been proven wrong, though, as Virgin, under the rule of CEO Jayne Hrdlicka, was able to tip into profitability by as early as December 2021, despite COVID-19 restrictions continuing to impact travel demand. When the airline exited administration in 2020, it had eyed a fleet size of just 58 jets, however today, the airline boasts a 737 and 737 MAX fleet of 92 aircraft.

At the same time, another challenger airline entered the stage: Bonza. Bonza’s CEO Tim Jordan would argue that Bonza’s model would not steal market share from any of the existing airlines, and instead “grow the pie” of the aviation market. While we barely got an opportunity to test that theory, it is undeniable that Australia’s notorious duopoly turned into a four-way battle within a very short period. This, in part, coupled with Virgin’s rapid recovery, unfortunately left no Rex-sized gap in the domestic aviation market.

Virgin’s success is not solely to blame for Rex’s domestic struggle, and neither, would I argue, were the reports of corporate in-fighting in the ranks of the executives. No, I believe that Rex and Bonza were always fighting an uphill battle against the airlines that held decades-long partnerships and infrastructure.

The stronghold that the incumbent airlines hold is near impossible to break at this stage, in a tale that is told across all sides of the globe. The debate over airport slot battles has been long-documented, including in a recent episode of the Australian Aviation podcast (which I recommend you listen to). It is undeniable that long-held airport slots at key Australian airports give older, larger airlines a strong advantage over smaller airlines with less foothold. However, the ACCC has worked hard to ensure fairness in the aviation marketplace, and I believe that there is much more at play than simply slot hoarding.

Here in the USA, there’s a common idiom, that the airlines will ‘hire until they fire’, which has been perfectly showcased in recent months as airlines from across the market announce hiring freezes and, in some cases, furloughs. Budget carriers Spirit Airlines, Frontier, and Jetblue have all announced a freeze on recruitment, while the embattled Florida-based Spirit Airlines will furlough at least 200 pilots in September. Meanwhile, the major airlines continue to hire and expand their operations, seamlessly.

This is because large airlines continuously scoop talented and skilled workers out of the regional and smaller domestic aviation workforce for themselves. In America, smaller airlines have been forced to match the pay rates of the country’s biggest carriers to be competitive, making tight margins even tighter in today’s operating environment. And yet, these carriers will simply never be able to compete with the benefits, and frankly, the prestige, that’s on offer at incumbent airlines. It’s a challenge that Rex has also shared, quite publicly, after accusing Qantas by name for “pillaging” its regional pilot cohort.

Now, Rex has spent years accusing Qantas of anti-competitive behaviours, such as moving into Rex’s key regional routes, and then operating flights at a loss to remain competitive on fares. While I intend not to weigh in on that specifically, the concept is not unheard of overseas.

For the major airlines, loyalty points programs, holiday package programs, credit cards, and other banking and airline partnerships now make up a sizeable portion of airline revenue. For Qantas, this represented revenue of $2.2 billion in the 2022–2023 financial year, nearly 12 per cent of its total revenue for the year. Virgin Australia, which saw its first after-tax profit in 11 years in 2023, saw just under 7 per cent of its revenue attributed to its Velocity and credit card partnerships – having only just bought back the full share of its loyalty program in the months before the pandemic hit.

In the US, the situation is far more dire for smaller airlines, trying to compete with the Big 3 – American, United, and Delta. American Airlines admitted in March that a whopping 80 per cent of its 2024 revenue will be driven by its loyalty program, partners, and associated upgrades, while Delta said that in the six months to June 2023, over $3.4 billion in revenue had come from loyalty and credit card partnerships.

Bloomberg and The Wall Street Journal have both reported that the Big 3 use these headwinds to their competitive advantage over their budget competitors, which rely on a bare-bones offering for thrifty fliers. With revenues bolstered so dramatically by non-flying operations, the incumbents can – and do, according to major analysts – drop the price on their basic airfares on competitive routes, to match those of the budget challengers, while offering all the convenience of a full-service airline.

If the USA is any case study to go off, we know that new entrants to the domestic market Down Under, the likes of Rex and Bonza, are going to face far more difficulties than just slot hoarding. Whether there is an answer to this problem, I am unsure. What I do know is that to solve a problem, we certainly need to understand just what we are dealing with.