Rex, Aussie Aviation and Competition

Rex, Aussie Aviation and Competition

Rex was arguably the best budget airline around for the past couple years. At least, it was my favourite. With popular return tickets as cheap as $200, plus some in-flight complementary services, what wasn’t there to love?

[Dayabir Singh is an undergraduate Science and Arts student at Monash University. He is interested in the more philosophical side of economics, while still trying to maintain some degree of technical rigour. Actively engaging and keeping up to date with economic news, Dayabir sometimes likes to share his thoughts with peers.]

Rex has been in some hot water lately and over the years, they’ve gained a little cult from their exemplary service at their price point. However, what they were really known for were their flights connecting the urban powerhouses of Australia with regional areas, hence the name Regional Express Airlines. Unfortunately, that’s likely no longer the case, as just earlier this month Rex entered voluntary administration - a move which will only further strain Australia’s already brittle aviation industry. We’ll look at the implications of Rex’s situation for the Aussie aviation industry as well as the broader economic landscape.

State of the Industry

The Australian airline industry, as with many other industries in the country, is concentrated. The market is dominated by a duopoly: Qantas Group holds 61.1%, while Virgin holds 33.6% - together, a staggering total of 94.7%. This leaves Rex, the only other domestic competitor, with a mere 5.3%. Just at first glance something already seems off, and raises questions when compared to other markets. In the United States, there are multiple large carriers domestically, with the top 4 about evenly sharing 66.5% of the market. Europe is similarly fragmented with numerous national and continental airlines operating across the region. In these competitive environments, we expect lower general prices and greater quality - typically in the form of better flight experiences, and fewer cancellations/delays. After all, businesses must attract and retain customers somehow, through what we hope is innovation to improve services and production.

Total Domestic airline passenger market share - Data from ACCC, see footnote [1]

The airline industry globally grapples with high starting and continuous operation costs, the barriers to entry. There are also unseen costs, like purchasing prime-time airport slots – benefits which further entrench the position of dominant firms. These form some of the few advantages of a concentrated market, specifically, internal economies of scale. Usually, you would expect fixed costs like aircraft leases and purchases to be spread out across the number of seats sold, reducing costs per seat and hopefully a result of lowered prices for consumers. However, we haven’t really seen these benefits materialise in the industry, with Qantas accused regularly of cancelling flights that aren’t fully booked and even continuing to sell tickets to flights already internally known to be cancelled. Instead, what we did see translated from theory to practice, were the benefits Rex offered with its competition.

Where Rex falls into place

It was only earlier this year in May, just 3 months before filing for voluntary administration, that Rex announced a new Melbourne to Perth route. The entry of the new competitor led to a price drop in tickets of nearly 40%. On days Rex didn’t operate the route, Virgin quickly hiked their rates back to their old, higher pricing. That is already an appreciable financial impact, but Rex went even further, raising the bar for quality in the industry, boasting some of the lowest cancellation rates of 0.8% compared to Qantas’ 3.8%. Surely, it’s pretty reasonable to assume that without intervention, as a core budget competitor exits the market, prices would rise once again. We’ve seen it play out once before with Bonza, which went into administration at the end of April this year, liquidating only a month later after operating flights for just 1 year.

Perhaps an understated factor in Rex’s fall was its rather premature stepping out as a traditional regional serving airline, positioning itself as a budget carrier on popular routes. The airline provided essential connectivity to underserved areas like Coober Pedy in South Australia, and Thargomindah in New South Wales, with 21 routes exclusively run by Rex. We can see maintaining such low prices - although shakes up the market - is difficult in the medium to long term, especially when established industry giants, Qantas, allegedly engage in anti-competitive behaviour to bully you out of the market.

Figure 2: Routes Rex serves - Source: https://www.rex.com.au/flightinfo/network.aspx

Looking ahead

There have been calls recently for the Albanese Government to buy out and nationalise the Company with an Equity Stake. Historically however, state-owned airlines face multiple difficulties and fail, with China providing perhaps the only successful example. Even so, it is quite clear that some sort of intervention needs to occur. The Australian Competition and Consumer Commission (ACCC) has commented on the hyper concentrated industry multiple times but with little being done about it. It may be time to empower the ACCC to enforce stricter rules around pricing and capacity manipulation.

Ultimately, the commercial aviation industry is just one of many examples of concentrated market power in Australia. Rex’s departure from the scene only exacerbates the poor state of competition with Qantas and Virgin continuing to obliterate the market. Along with Rex, disappear the 21 regional routes that they exclusively run, further diminishing the already underserved connectivity of regional Australia.

References

 [1] Andrews, D., Dwyer, E., Triggs, A. (2023). The State of Competition is Australia. e61 Research Note No. 9. Retrieved from

[2] Australian Competition & Consumer Commission. (2022). Airline Competition in Australia. Retrieved from: ACCC

[3]  Rodrigue, J. (2023) Market Share of the top American Airlines, 1977 – 2022. The Geography of Transport Systems. Retrieved from: GTS

[4]  Bovenizer, N. (2024). Qantas Agrees $79m pay out over tickets sold for cancelled flights. Airport Technology. Retrieved from: ATN

[5]  De Kretser, A. (2024). Cost of Perth flights to fall 40 per cent during school holidays. Australian Financial Review. Retrieved from: AFR

[6]  Wang, J. (2024). Albanese Government called to buy out beleaguered Rex Airlines. News Corp Australia. Retrieved from: News Corp