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Rex Airlines’ future up in the air amid questions about viability of small airlines in Australia

  • Written by Justin Wastnage, Adjunct Industry Fellow, Griffith Institute for Tourism, Griffith University

Winter is always a tough time to be an airline in Australia.

This current cold snap has been exacerbated by a cost-of-living crisis, causing would-be holidaymakers to tighten their belts as the aviation industry again braces for more bad news.

This time it’s from Regional Express Holdings, parent company of Rex Airlines, whose shares are in a trading halt pending a “material announcement” to the stock exchange, expected Wednesday.

Responding to many Australians having a lower disposable income, the major carriers Qantas and Virgin Australia, have reduced airfares after recovering strongly from the COVID shutdown.

Qantas’s budget sister Jetstar has been particularly aggressive, with sub-$100 fares back on the menu after a four year absence.

Yet, as witnessed by the collapse of Bonza in May[1], airlines without deep pockets can be squeezed out of the market.

Analysts have always had higher hopes for Rex, which provides feeder services from regional towns across New South Wales, Queensland and to a lesser extent, Victoria, to the eastern capital cities.

The airline also has significant regional operations in other states and is backed by a private equity firm PAG Asia Capital [2](formerly the Pacific Alliance Group).

These factors should have helped the business stave off the worst of the ravages that beset Bonza.

Supply versus demand

Yet there are some simple market economics at play in Australian commercial air transport.

We are a nation of 28 million people, but we are also concentrated into 25 population centres of greater than 100,000 inhabitants[3].

Studies suggest that route viability relies on towns being at least this size to ensure sufficient two-way traffic. For example, the US has about 250 population centres with more than 100,000 people, while Europe has about 400.

This was, in many ways, Bonza’s downfall, relying on one-way leisure traffic to smaller towns that could never repay the favour with passengers returning.

Budget carriers’ blighted history

Bonza was merely the latest in a string of failed low-cost carriers hoping to break the effective duopoly that is the Australian air market. Tigerair Australia collapsed during the pandemic despite earlier being rescued by Virgin Australia.

Before Tigerair, it was Air Australia in 2011 and before that, Backpackers Xpress in 2005. Impulse collapsed in 2001. Each had bet on duplicating the US and European budget carrier model, but in a much smaller market.

Airplane sitting on a tarmac
Impulse Airlines was one of several low-cost carriers to fold in the last two decades in Australia. Dave Hunt/AAP[4]

Yet Rex is fundamentally different, the core of its business is flying 34-seater Saab 340 turboprop aircraft in and out of regional towns, connecting with capital cities.

Much of this flying is underpinned by state subsidies that are further propped up by federal government assistance to maintain the regional airport infrastructure.

Often these routes are managed monopolies, meaning either Qantas Link or Rex have sole provider status, albeit in return for agreed service levels and maximum fares set by the relevant state government.

Not enough planes

One of Rex’s key problems is aircraft availability. As the Saabs reach the end of their working life, there don’t appear to be any suitable replacements.

So Rex has been forced to ground half of it Saab fleet, awaiting parts so scarce that the airline sent salvage teams[5] around the world to find them.

This has caused it to axe some under-performing routes, highlighting the importance of the flights in regional communities where they have transported passengers to business meetings and medical appointments in big cities, while providing outback towns with fresh food.

The airline may have solved the Saab problem by opting for the 42-seater Franco-Italian ATR-42[6], which is the work-horse of regional routes in Europe. But any deliveries would be at least five years off and come with a high price tag.

Expansion problems

But now, the current headache is the expansion into Brisbane-Sydney-Melbourne routes.

This is compounded by the costs associated with its major city service, which uses a fleet of six ex-Virgin group Boeing 737-800s leased at a cut-price rate after COVID but now attract market rates of about $180,000 per week, by some reports[7].

These aircraft are central to Rex’s underlying objective to secure a third of Australian air traffic and become the true third player in the market.

To achieve this, it secured a $150,000 convertible note from PAG – essentially a loan the private equity group can cash in at a three times premium for shares once the company has trebled its value.

The convertible note debt instrument, common in the tech startup world, is known for raising tensions in leadership teams, as its terms are predicated on the success of a strategic plan.

Trouble at the top

This may explain some of the unusual board shenanigans that have taken place recently within Rex.

The Singaporean owners of the airline recently ousted executive chairman (and company insider) Lim Kim Hai[8] and replaced him with Rex stalwart and former federal transport minister John Sharp.

Headshot of a grey haired man
John Sharp, who replaced Lim Kim Hai as head of Rex. Mick Tsikas/AAP[9]

Mr Lim’s removal appears to be partially linked to the $48 million takeover of West Australian charter airline National Jet Express[10] (formerly Cobham Aviation Services Australia) in 2022.

The trading halt currently has no impact on Rex services. There is media speculation that a consultancy firm has been appointed to restructure the group.

Just a setback?

Yet, despite fears of another collapse, Rex appears to have more of the foundational building blocks of a national airline network than Bonza did.

It also, through years of servicing marginal electorates across regional Australia, has a far warmer welcome in Canberra than the start-up Canadian leisure airline ever could have hoped for.

It is likely, therefore, that the rumours of Rex’s death have been greatly exaggerated.

References

  1. ^ as witnessed by the collapse of Bonza in May (www.indaily.com.au)
  2. ^ PAG Asia Capital (www.pag.com)
  3. ^ concentrated into 25 population centres of greater than 100,000 inhabitants (www.ussc.edu.au)
  4. ^ Dave Hunt/AAP (photos.aap.com.au)
  5. ^ the airline sent salvage teams (www.rex.com.au)
  6. ^ 42-seater Franco-Italian ATR-42 (www.aviationnews-online.com)
  7. ^ $180,000 per week, by some reports (www.afr.com)
  8. ^ Lim Kim Hai (www.ch-aviation.com)
  9. ^ Mick Tsikas/AAP (photos.aap.com.au)
  10. ^ National Jet Express (www.aviationbusinessnews.com)

Read more https://theconversation.com/rex-airlines-future-up-in-the-air-amid-questions-about-viability-of-small-airlines-in-australia-235761

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