Taking on big boys: Rex to compete with Qantas, Virgin Australia
Undoubtedly, a crisis can be the best time to innovate and reinvent yourself as a company. Regional Express Airlines (Rex), a local domestic airline in Australia, seems to share this viewpoint. The carrier announced that it will expand the scope of its services and introduce narrow-body jet aircraft into its fleet to serve the golden triangle in Australia: Sydney-Melbourne-Brisbane.
Pre-COVID, Rex had a fleet of 60 Saab 340 turboprop aircraft, seating a maximum of 34 passengers in the airline’s interior configuration. Despite the unfavorable conditions at first glance, the domestic airline might have seen a glimpse of an opportunity to flex its muscles and punch above its weight.
Its 60 aircraft-strong fleet is unencumbered, meaning the company can do anything it wants with the assets at its hands. Thus, raising capital to acquire said narrow-body aircraft, of which Rex plans to have between five to ten jets, is much easier than if it had debts attached to its most capital-intensive assets. Furthermore, aircraft prices have tanked as well, as airlines reduced their capacity due to the free-falling demand for air travel. Retirements were accelerated and buying second-hand is more favorable than ever before.
Even new aircraft have tanked in value. For example, a Bombardier CRJ-900ER lost 13% of its value, while the average price of an Embraer E190-E2 dropped as much as 10%, indicates ch-aviation.com data.
Regional Express Airlines plans to raise $20 million (AUD30 million) to start its narrow-body operations in return for the carrier’s 15 Saab 340 aircraft. It also plans to expand its capacity by acquiring state-of-the-art ATR 42 and ATR 72 aircraft, as Rex entered into a non-binding Memorandum of Understanding (MoU) with the Franco-Italian turboprop manufacturer to renew its fleet.
“With Rex’s expansive regional network of 60 destinations, existing infrastructure in all these capital city airports, superior efficiencies and unbeatable reliability, it will simply be an incremental extension for Rex to embark on domestic operations,” stated the deputy chairman of the airline John Sharp.
While it does operate from the golden triangle cities, Rex does not connect them directly. The three airports are served by Qantas and its low-cost subsidiary, Jetstar, and Virgin Australia. Competition, despite current headwinds faced by the two Australian airlines, will be tough.
A punchy Roo
After the collapse of Ansett Australia, Qantas became the number one airline in the Land Down Under. While Virgin Australia, under the Virgin Blue banner, successfully chipped away at Qantas’ market share, the de facto flag carrier of Australia responded quickly with the establishment of Jetstar. When Virgin Australia tried to make a dent in the premium market, the two sides entered a capacity war and ultimately, Virgin Australia was hemorrhaging cash left and right. The airline was forced to enter administration in the hopes of attracting an investor, which it, fortunately, did in Bain Capital.
The freshly-bought out airline was determined to take Qantas’ market share when it overhauled its business in 2011.
“But you've got to be able to afford it. You have to be able to afford going into those things. And in the end, deep pockets win and Qantas is the deep pocket, not Virgin Australia,” said the chairman of the company, Elizabeth Bryan.
And Virgin Australia was not the only victim of Qantas’ aggressive policy of protecting its market share. Regional Express itself was at the forefront of a very punchy Flying Roo. In February 2020, the regional carrier filed a complaint with the Australian Competition and Consumer Commission (ACCC) due to “Qantas’ behavior of dumping excessive capacity on routes that are already extremely marginal,” stated the airline.
Rex highlighted three regional routes that it was being forced out of, two of which it did exit.
“Rex has to face up to the reality that it is not able to match Qantas’ financial firepower and unlike Qantas, Rex is not able to continue servicing a money-losing route indefinitely.”
In June 2020, the story repeated itself once again. QantasLink, the regional subsidiary of the Australian carrier, announced a significant schedule expansion starting July 2020. Some of the routes were in direct competition with Rex, and the latter was forced to respond by also increasing its capacity on the same routes.
“It is with great reluctance that we are adding so much additional flying so soon that doesn’t match demand,” stated the company’s Chief Operating Officer, Neville Howell. But the newly introduced schedule by QantasLink compelled Rex to respond in order for it not to be squeezed out of the market, he added.
“Rex does not have the deep pockets of the Qantas Group but our resolve will not be found wanting and will prevail,” Howell ended his statement.
A hybrid airline competing
However, Qantas will not be the only headache for Regional Express. Virgin Australia fell down hard during the coronacrisis, as its already stretched finances were further challenged by the pandemic. But its new owners have a plan for the airline, in order to find its place under the sun currently overshadowed by Qantas Group.
“Under our ownership, we will strengthen Virgin Australia's regional services and ensure the airline emerges offering exceptional experiences at a great value while continuing to service business travelers, as well as those of us traveling for fun or to visit loved ones,” stated Virgin Australia’s newly enacted owners, Bain Capital, possibly hinting at a hybrid business model.
Question is, where would Rex fit in? The regional carrier did state that it plans to provide affordable ticket prices between the three cities, and include “baggage allowance, meals on board and pre-assigned seating” on the ticket.
“It will be a hybrid model that Rex has so successfully pioneered over the last two decades for its regional operations,” stated John Sharp.
Strength against competition?
The low-cost segment is covered by Jetstar, the crème de la crème of travelers will board Qantas’ flights, while Virgin Australia will try to squeeze itself between the two and offer something unique and different to both segments. Much like Rex, except the Virgin Australia's brand is known for its aggressive and cheeky marketing campaigns. Qantas, as seen by the few examples, is not hesitant to defend its territory and let up market share in regional markets. Even now, as domestic flight restrictions lifted, Jetstar was keen to drive up demand with low prices.
In a market update on May 5, 2020, Qantas’ group CEO Alan Joyce stated that its low-cost carrier subsidiary could provide tickets for as low as $26.8 (AUD39), even $13 (AUD19) and “still cover our cash costs on those flights,” added Joyce. And the triangle of Sydney-Melbourne-Brisbane is no easy market to compete in. Sydney (SYD) to Melbourne (MEL) alone was the fifth busiest domestic route in the world in 2019, according to OAG data, with over 9.9 million scheduled seats throughout the year.
Virgin Australia, despite its precarious cash position, is also unlikely to give up market share in the cash-cow triangle. While Rex did highlight that its domestic operating costs prior to the pandemic were 35% lower than Virgin Australia's , the new investors will want to restructure the business in order for it to return to its core strengths strategically and operationally, according to Bain Capital.
If Rex does try to punch above its weight, another question emerging is how much resources can it dedicate to the fight for a spot in the golden triangle? Sure, demand for domestic travel will rise due to overseas travel restrictions. But how much of an opportunity will be there left once Rex launches the newly announced jet flights, as of now planned for March 1, 2021?
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