Rex deputy chairman John Sharp was probably right this week when he said there had never been a better time to set up a new domestic carrier. That, however, doesn’t guarantee success for the latest challenger to the traditional domestic aviation duopoly.
Sharp, writing in the Australian Financial Review, took exception to Qantas boss Alan Joyce’s recent comment that it was unlikely that both Virgin Australia and Rex would both survive a post-pandemic three-cornered contest in the domestic market.
Sharp cited Rex’s profitable history, its low cost base, existing infrastructure and regional operations and the impact of the pandemic as the reasons for his confidence that Rex could transform itself into a highly competitive and viable domestic competitor to Qantas an Virgin.
Rex plans to launch its services on the “golden triangle” of domestic aviation – the Sydney, Melbourne and Brisbane routes that are among the world’s busiest and most profitable – on March 1.
Rex plans to launch on the “golden triangle” routes of Melbourne-Sydney-Brisbane on March 1, challenging the Qantas and Virgin duopoly.Credit:Andrew Taylor
Initially it will fly only three of the six Boeing 737-800s it has leased on the Sydney-Melbourne route, adding another two by Easter and hoping to have 10 planes in the air by the end of the year.
The opportunity for Rex was created by the pandemic and Virgin’s near-immediate crash into administration.
The downsizing of Virgin and the decision to axe its Tiger brand along with Qantas’ response to the pandemic – massive cuts to staff numbers and the mothballing of a significant part of its fleet – have created the pools of cheap aircraft and available pilots and the landing slots at the capital city airports.
Rex plans to go head to head with Virgin as a mid-market, or hybrid, carrier with a significant cost base advantage over the restructured group, now owned by US private equity giant Bain Capital; one roughly in line with Qantas’ Jetstar brand.
Apart from disparaging Qantas’ historic financial performance and implying that Qantas might be the carrier that fails (“from the Titanic to Pan Am to Kodak to Nokia to General Motors, the world is littered with what was believed to be too-big and too-iconic to fail”) Sharp said that Qantas had never had to face any disciplined competition.
Yet Joyce’s view that there was only room for two carriers on the core domestic routes has history on its side.
In 1990 Bryan Grey, the owner of a profit regional airline, East-West, launched Compass Airlines as a low-cost carrier in competition with Ansett and TAA (renamed Australian Airlines and subsequently merged with Qantas to form Qantas Domestic). Compass failed just over a year later.
History says it is exceptionally difficult to crack what might be a natural duopoly in the domestic market.
In 1992 Southern Cross Airlines launched Compass Mk II. It lasted less than a year.
In 2000 another successful regional operator, Gerry McGowan, launched his on low-cost carrier, Impulse Airlines, into the domestic market at much the same time as Virgin Blue started up. Impulse was sold, under financial duress and near-inevitable failure, to Qantas in 2001 and helped form both the QantasLink regional business and the low-cost launch platform for Jetstar.
The only success story among that bunch was Virgin Blue, which from the demise of an over-leveraged Ansett, with an ageing fleet, owned (briefly) by an under-capitalised Air New Zealand. Ansett was hit by the grounding of its fleet due to maintenance issues and failed in 2001.
Under founding CEO Brett Godfrey, Virgin Blue grew cleverly and profitably into the vacuum left by Ansett’s demise, carefully to avoid a direct confrontation with Qantas, until Godfrey was succeeded by John Borghetti.
Borghetti tried to challenge his former employer’s dominance, leading to billions of dollars of losses that left Virgin completely vulnerable to the impact of the pandemic despite the best efforts of his successor, Paul Scurrah.
That history says it is exceptionally difficult to crack what might be a natural duopoly in the domestic market.
It might even be more difficult today than it was in the past. After its destructive capacity war with Virgin early last decade Joyce completely remade Qantas into one of the most profitable airlines in the world.
Even as COVID virtually grounded its business, Qantas retained a strong balance sheet and Joyce isn’t wasting the crisis. He is vowing to cut $15 billion from the group’s cost base over the next three years to produce a $1 billion a year cost saving. His history says he will.
Virgin, under its new ownership, has new management, has reduced its fleet, shed the Tiger brand and its international routes, simplified its structure and slashed its cost base. It now has the backing, after a $3.5 billion investment, of Bain Capital, a private equity group with assets under management of more than $A130 billion.
Rex also has private equity support. It has raised an initial $50 million and has another $100 million committed over the next three years, in the form of secured convertible notes, from Asian private equity firm PAG Asia Capital.
Before Rex decided to crash the duopoly there was an expectation within Qantas and Virgin that the downsizing of Virgin and the withdrawal of the Tiger brand would enable Qantas to increase its share of the domestic marketing, including Jetstar, from around 63 per cent to 70 per cent.
If Rex is to be viable it has to take share off one or both of them. Neither will surrender it easily, even if a response to Rex’s entry is costly.
Both incumbents are far larger, with structural advantages – particularly so for Qantas – in terms of the capacity and frequency of their flights, their loyalty programs, their up-market lounges and the value and visibility of their brands in the markets that matter.
That said, it is conceivable that if Rex is disciplined – and its own history says it is – and is satisfied with being a niche player with perhaps five or 10 per cent of the market in time, Qantas and Virgin might be prepared to concede a few points of share each to avoid the destructive consequences for all of a price war.
John Sharp said it was the first time Qantas has faced disciplined competition. For Qantas, and Virgin, that’s a far less daunting prospect than the undisciplined and destructive competition they engaged in half a dozen or so years ago. And with Qantas adding more regional routes to its network – routes that Rex just happens to fly – Rex might find itself increasingly confronting a very disciplined competitor of its own.
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