In 2021 Rex Airlines began a price war by launching Brisbane to Sydney and Brisbane to Melbourne flights.
Virgin Airlines matched Rex’s $69 Brisbane to Sydney fare, Jetstar undercut Rex by offering $55 flights, and Qantas lopped fares by 33 per cent to $109.
These competitive benefits are gone now that Rex has collapsed, once again highlighting the inability of Australia’s domestic airline industry to support a fourth carrier on major routes.
Any entrant to the market faces two big challenges when aiming to dent the Qantas Group and Virgin duopoly which has a 93 per cent market share, a huge number for any industry, anywhere.
The first is the concentrated nature of Australia’s relatively small population. We mainly live in state capital cities, which limits the number of commercially viable airline routes and concentrates flights around a few cities where there is only one main clogged airport. The inability of newcomers to offer more flights from these busy airports gives incumbent airlines a huge moat to ward off their attacks.
Airports can only handle so many flights each day, especially when curfews restrict night flights. Airports at capacity use a ‘slot’ system to allocate landing rights. The problem is that incumbents have been accused of manipulating this system to deny newcomers the ability to offer flights.
The lack of viable alternative secondary airports thus dooms their insurgencies. (The new Western Sydney airport could erode some of this incumbency advantage, though the quality of the airport’s public transport links and flights on offer are unclear).
There is, however, one way to help Australia’s flying public. The Federal Government could change the ‘cabotage’ laws.
The second challenge for newcomers is that flying is a capital-intensive business. The initial capital outlay is huge because leasing or buying planes is expensive and pilots and a host of support staff must be hired. Any newcomer must market against profitable incumbents that have loyalty programs, lounge facilities and benefit from how foreigners seem to prefer the same carrier that flew them to Australia for domestic legs.
Airline running costs are likewise high. Oil prices can surge anytime as can interest rates on the debt carriers typically need. Demand for flights can be fickle.
The prospect of a newcomer on capital-city routes surviving, let alone thriving, is not high, as the list of airline failures shows.
What of the future? Less competition following the collapse of Rex is likely to herald higher fares, fewer flights, no new routes offered and reduced quality of services.
There is, however, one way to help Australia’s flying public. The Australian Government could change the ‘cabotage’ laws.
Cabotage, derived from the French word for travelling along a coast, is the term used to describe legal restrictions on domestic travel. Australian federal laws bar foreign airlines selling airfares solely for travel between Australian cities – something they could do without the capital outlay that Rex and others needed to spend.
This is a political choice supported by the major parties that is unlikely to change. Governments everywhere seem biased towards national carriers and ours appears to be no exception.
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Take some recent decisions. Last year, the Australian Government refused Qatar Airlines permission to conduct more flights into Australia when a post-pandemic surge in demand for travel had boosted airfares.
During the pandemic, the Australian Government gifted $2.7 billion to lockdown-hit Qantas without taking an equity stake in an airline that used to be government owned. This generosity to Qantas shareholders has not been extended to the owners of other airlines in trouble.
All passengers benefit when new competition appears. If only these carriers could survive.
Dr Paul Crosby is a senior lecturer in the Department of Economics, Macquarie Business School.
