The failure of Rex in Australia’s aviation market is really only a sideshow to the biggest issue of maintaining an effective duopoly in the Australian market. Nonetheless, it could well trigger the necessary difficult decisions that the government is finally going to have to make.
It might seem strange to talk about maintaining a duopoly at a time when questions are being raised about whether there is space for three airlines in the market (which, under the right circumstances, I believe there is). But for as long as there has been commercial domestic aviation in Australia, that has been the underlying strategy governments have sought to achieve.
It worked pretty well up until Ansett collapsed in 2001, but since then it has been decidedly rocky, as Virgin Blue emerged and grew, morphing to Virgin Australia then finally collapsing in 2020 – leaving us again with only one national airline. Even before that, Virgin had only survived thanks to solid investments from several foreign airlines with a great interest in Australia’s domestic market.
After Ansett failed, then the GFC struck, the overriding aim of successive governments throughout the second decade of this century was to secure a viable primary national airline, the flying kangaroo. To this end, Alan Joyce was remarkably effective in securing Qantas’ future. Today, the airline is pretty much invincible, even bulletproof as Mr. Joyce once described it.
Qantas’ power is in its full service and low-cost suite of jet operations, its frequent flyer program, a stranglehold on domestic freight, a mightily powerful regional airline proposition, complete dominance of the corporate and FIFO travel market, all complemented by a formidable international array of partners. It’s undoubtedly good for Australia to have that sort of reliable operation.
Today though it is time for federal government policy to bite the bullet. It is not enough to have a duopoly where one airline is in a position where it could easily blow its competitor out of the market. Not that Qantas would not want to do that, but it could. It’s a far more attractive proposition to be the strong party in a duopoly rather than a monopolist, with all the regulatory attention that would involve.
But arguably the balance is far too heavily weighted in its favour to have a successful duopoly as things stand.
Virgin Australia is now almost entirely owned by a private equity group whose sole purpose is to make money, not run airlines. Since coming out of administration, the risk-averse owners have established negligible regional airline presence, a couple of international airline partners but almost no operations in its own right, and only a tiny dab of the Australian corporate market.
So, back to the present. For the moment, there is a flourishing romance between Virgin and Rex, as they come to rescue mutual benefits out of the ashes. The Transport Minister has made it clear that the federal government will lubricate what is needed to make sure that Rex’s regional operation continues, and coincidentally that may well be very much in Virgin’s best interests.
Despite Rex’s geriatric fleet of Saab A340s, it has a well recognised brand in the bush and a right-size aircraft for those smaller routes. The aircraft’s days must be numbered, but we’ve been saying that for 20 years and they will continue to fly until a financially viable replacement can be found.
Assuming that issue is locked away, it becomes the catalyst for more comprehensive action. What’s needed now is a strong international airline partnership and the provision of a solid financial base that will allow Virgin to grow out of its relatively tiny corner of the Australian market.
There’s really only one entity in a position that perfectly fulfills both of those requirements.
Here's where it gets interesting. Australia is unusual in allowing 100% ownership of its domestic airlines. Most countries only allow between 25 to 40% foreign airline ownership. (The policy had the attractive spinoff that, when Virgin Australia failed in 2020, almost all of the financial losses were suffered by foreign airlines and other investors.)
So now the only thing that lies between a willing Qatar Airways and a significant minority investment in Virgin Australia is whether Mr Albanese is willing to take on the relatively small risk that Virgin could grow to becoming a much more powerful domestic competitor, with solid international links.
For although, the 100% policy exists, this sort of foreign investment must first be determined to be “in national interest“.
Qantas is indeed bullet-proof, for now; and although it must face the need to spend money to reduce its carbon footprint, largely in step with buying a whole new fleet of young aircraft, it could undoubtedly survive against a greatly invigorated Virgin.
The Australian domestic market is extremely valuable and can withstand stiffer competition than it has at present. It would be hard to argue that reinvigorated competition with this framework is not in the national interest.
Peter Harbison
Director, Greener Airlines
Co-Founder, Australia Corporate Travel Summit (ACTS)
Publish in the AFR, 1 August 2024.
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