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‘Golden triangle’ dogfight: Rex creates headaches by taking on Qantas and Virgin

Nowhere will the tensions between the efforts to salvage and rebuild businesses decimated by the pandemic and the long term consequences for competition be more acute than in aviation, where the entire global industry is essentially on life-support, awaiting the re-opening of economies.

Airlines are highly operationally and financially leveraged businesses, with relatively small shifts in costs and volumes leading to either significant profits or substantial losses.

At the moment most of the industry is grounded, much of it is being kept technically alive via government assistance and there is little prospect, even for domestic airlines, of a return to pre-pandemic normal for some years. The time-frame for a large-scale resumption of international aviation is far more extended.

The plight of the industry, and its economics, makes the ACCC’s approach to policing competition issues in the sector particularly interesting. In some respects it provides a concentrated insight into the issues that will emerge across the economy.

Last week the commission produced its first report on its monitoring of the domestic air passenger industry.


It’s curious that airlines have been singled out for special monitoring, including their provision of monthly reports to the ACCC of their capacity, load factors and revenues for each of their routes along with qualitative information such as board papers. The ACCC’s normal powers to demand information, which include its ability to both request information and interrogate individuals, ought to have been sufficient.

The monitoring, however, is at the direction of the federal government, which instructed the commission in June to monitor prices, costs and profits in the sector for the next three years to protect competition in the sector.

In June, of course, Virgin Australia was in administration. While its pleas for a government cash bailout had been refused, it appears its subsequent request for protection from Qantas if and when it (Virgin) emerged from administration was successful.

Virgin has subsequently been acquired by private equity group Bain Capital and will emerge from administration with a vastly different balance sheet and cost structure. Its previous creditors have been essentially wiped out, large numbers of aircraft leases have been terminated or renegotiated, thousands of jobs have been shed and the administration has enabled it to re-do other contracts with suppliers.

When the market does reopen properly, Virgin will fly fewer planes on fewer routes and its second brand, Tiger, won’t fly at all. Qantas has said – and Virgin has agreed – that, as a result, it expects its domestic market share to rise from around 60 per cent pre-pandemic to about 70 per cent.

Complicating the ambitions of both Qantas and Virgin – and adding another element to the competitive dynamics the ACCC will have to grapple with – are the plans by regional carrier Rex to enter the “golden triangle” routes between Sydney, Melbourne and Brisbane.

It’s not clear how Rex expects to survive a three-cornered contest bookended by Qantas and a Virgin now backed by Bain, with its formidably deep pockets.

Rex announced on Tuesday that it is in advanced negotiations with an Asian private equity giant for an issue of convertible notes that could raise up to $150 million. If the first $50 million tranche were converted, PAG Asia Capital would own 23 per cent of Rex. If the fully $150 million were converted it would hold 48 per cent.

The Singapore-owned Rex, a recipient of about $60 million of taxpayer funds to maintain its regional routes (the far larger QantasLink and Virgin presence in the regions went largely unrewarded), has said it will buy or lease planes (some, ironically, from the former Virgin fleet) to compete with the incumbents.

In the initial land grab for returning customers post COVID there could be some loss-leading from Qantas and Virgin.

In the initial land grab for returning customers post COVID there could be some loss-leading from Qantas and Virgin.Credit:Edwina Pickles

While that’s not good news for either Qantas or Virgin – the triangle routes are arguably the world’s most profitable domestic routes and the core of the carriers’ profitability – it’s probably worse for Virgin and Bain than for Qantas, whose loyalty program and dominance of business travel makes it less vulnerable. It also has Jetstar to deploy against price-driven competition.

In fact, the entrant of a third party will help Qantas to a degree because, if Rex lowers ticket prices to build its presence, it provides cover for the Qantas group to match those prices and use its dual brands and its greater capacity and frequency to meet the competitive threat. That’s not anti-competitive behaviour.

It’s not clear how Rex expects to survive a three-cornered contest bookended by Qantas and a Virgin now backed by Bain, with its formidably deep pockets. Others – Southern Cross, Compass (twice) and Impulse among them – have tried to crack the duopoly in the past and failed.

It’s obvious that as the market opens up, even without Rex adding to the intensity, Qantas and Virgin would have initially scrambled to attract whatever volumes there were before the market settled down. There’s no revenue or profit in having planes sitting on the ground.

In the initial land grab for returning customers there could be some loss-leading, although rational competition – and Qantas and Virgin have vowed to be rational – would see capacity returned and fares priced at levels where the cash generated at least covered the variable costs of putting the planes into the air.

It is that period of gradual resumption of flying and the necessary incentives to convince passengers to travel again that will be the messiest and most challenging for the ACCC, particularly if it is something other than direct competition between Qantas/Jetstar and Virgin.

It will have to determine what’s rational pro-competitive behaviour in a market that history suggests will only sustain two players and which will be in the earliest phase of start-up from a pandemic-induced depression.

Aviation isn’t the only sector where these sorts of questions and issues will be at play but its nature and imminent structure will magnify, and confuse, the competition policy considerations of its attempt to re-emerge from the worst of the pandemic.

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