Why Rex's nose-dive probably means bad news for all of us travelling

First Rex Airlines expanded its operations in 2021 to give the big two a run for their money. Rex expanded its fleet and started flying between bigger cities as well as to more smaller airports in regional Australia (living up to its name: Rex is a shortening of Regional Express).

And in January 2023, Bonza attempted to do what the budget airlines have done in Europe. Low prices, ran the theory, would create a mass demand.

Fares came down. The Australian Airports Association reckons that Rex's entry into just one route (Melbourne-Perth) lowered fares by 40 per cent. The corollary is obvious: Rex's exit will raise fares.

And now the upstarts are gone, leaving Qantas and Virgin Australia still standing. "Over the last two decades, more than 90 per cent of domestic passengers flew with Qantas Group or Virgin Australia," the Australian Competition and Consumer Commission said a year ago.

It made a warning then which resonates today: "A lack of effective competition in Australia's domestic airline industry, which has characterised the industry for decades, has resulted in higher airfares and poorer service for consumers."

It had hopes that Rex and Bonza would break that anti-competitive situation: "The expansion of Rex and the entry of Bonza have created an opportunity for the domestic airline industry to enter a more competitive period; however, the two airlines would need to grow significantly to compete meaningfully with Qantas Group and Virgin Australia."

It didn't happen.

We are back in the situation which the ACCC's head, Gina Cass-Gottlieb, described: "Domestic aviation is one of the most concentrated industries in Australia, barring only natural monopolies such as electricity grids and rail networks."

The reasons for the failures of both airlines are similar: they over-expanded (and that was probably due to over-optimism by their bosses), but also the incumbents, particularly Qantas, didn't just sit back.

In fact, Qantas hit back, according to executives at Rex.

Rex complained very publicly that Qantas was targeting Rex routes, and putting on extra flights at the same times as Rex flights so that the route became unviable for the smaller airline.

In its evidence to a Senate inquiry last year, Rex identified three routes as examples: Adelaide to Whyalla, Adelaide to Kangaroo Island, and Sydney to Ballina.

Once Rex was knocked out of a route, its executives alleged, Qantas would raise prices.

It was "obvious", its evidence to the Senate said, "that the massive additional capacity introduced by Qantas on the routes described above kills the ability for Rex to offer a sustainable alternative to the Qantas model for regional communities and increases Qantas's market power."

Rex thought it could compete by being lean. Its first aircraft were smaller (the propeller Saab 340 could take 36 passengers) but then it got ambitious and introduced the Boeing 737 with 170 seats. It was taking on Qantas and Virgin Australia nose-to-nose in its lucrative city-to-city markets.

And then Bonza, also with the bigger Boeings, crowded the market still further. Qantas and Virgin Australia had an obvious advantage of scale with these bigger, expensive aircraft. They had the staff and the servicing facilities.

In Europe, lower cost airlines have succeeded - but the market there is massive. There are at least 30 European cities of more than a million people. In Australia, only Sydney, Melbourne, Brisbane, Adelaide and Perth have populations over a million.

Rex probably failed because it over-reached itself and because the big bruiser Qantas took its gloves off.

We are back to what the ACCC feared a year ago: the "lack of effective competition" resulting in "higher airfares and poorer service for consumers".