Opinion
Why Rex must be saved from its egotistical self
Jeremy Burfoot
Retired Qantas captainIt is said you can make a small fortune in the airline industry by starting with a large fortune. Just ask one of the world’s greatest investors, Warren Buffett, who once quipped, “If a capitalist had been present at Kitty Hawk … he should have shot Orville Wright.”
He’s right. Airlines don’t make good investing sense. They are capital intensive and subject to the vagaries of geopolitics, the oil price, economic contractions and ego-driven competition. But for some reason, rich people with lazy money can’t resist the industry, and CEOs suck in this money, spin the BS, and pay themselves a huge salary until reality sets in and the music stops. A lot of innocent, hard-working people always suffer a crash landing in the process.
Rex’s big mistake was taking on the main trunk routes between Melbourne, Sydney and Brisbane.Credit: Kate Callas
There is some history of this in the Australian aviation market. In the 1990s, Compass Airlines battled the “Two Airlines Policy” and the incumbents, Ansett and the government-owned Australian Airlines made it impossible to compete, aided and abetted by the government of the time.
Jetstar was successful because it was owned by Qantas, which – after snapping up Australian Airlines – effectively had a monopoly. Jetstar only served to strengthen this monopoly. This is still the case today. The Australian aviation market is not a duopoly. Qantas merely allows Virgin a certain percentage of the market to keep the regulators happy.
Bonza was never going to work, but they did their best until the music stopped. It was a shambles. Ego is a dangerous thing. Which brings me to Rex, largely successful as a regional carrier for many years until arrogance and hubris raised its head again. Its big mistake was taking on the main trunk routes between Melbourne, Sydney and Brisbane. It should have stuck to its knitting.
Surely it was obvious to Rex that the required landing slots weren’t available and that the “bull” was already there. If an ant looks at a bull in a paddock and says out loud “I’d like a piece of that action”, the bull will just chuckle and think, “bring it on, buddy”.
A monopoly airline with bigger pockets has the advantage of economies of scale. It’s easy enough to crush a smaller competitor just by being legally competitive, and as we have seen in recent times, Qantas doesn’t even seem to care whether what it does is legal or not. What chance did Rex have? Zero. But why couldn’t its management see that?
So what’s to be done? In a country like Australia, aviation is an essential service and should be regulated as such. But relying on government regulation would be silly given our country’s history on the subject. The Qantas Chairman’s Lounge has few logical reasons to exist other than to seduce and influence the right people. The recent Qatar Airways fiasco shows the government’s ability to make decisions that favour Qantas’ business, with the government deciding not to grant Qatar extra slots to protect Qantas.
Nevertheless, the same government needs to rescue Rex and make it a public company. Not doing this and selling the remnants will mean even bigger monopolies. Any public investment in Rex needs conditions that protect the airline from the idiots who would seek to profit and make poor ego-driven decisions.
Of course, the $150 million invested by PAG Asia Capital to allow Rex’s foray into main trunk route flying will no doubt be very high on the creditors’ list, so sorting out the mess won’t be simple or cheap.
Taxpayers need to be compensated for their investments in essential services. The $2.7 billion paid to Qantas during COVID-19 with no equity in return was a travesty. They should have given up equity or paid it back. Indirectly, some of it even ended up paying for renovations of Alan Joyce’s penthouse in The Rocks. That is unacceptable.
In an ideal aviation world, the playing field needs to be as level as a runway. Slots should be shared and anticompetitive behaviour must be outlawed. Two-dollar airfares are predatory and ultimately don’t benefit the public. Selling airfares for less than cost should be illegal. It wouldn’t be hard to work out the numbers on this and police it.
And for anybody who still thinks an investment in the airlines is a good idea, take a look at the long-term Qantas share price. In 2008, it was $6. Since then, it has been down near $1 and is currently back at around $6. Given that dividends have been as scarce as hen’s teeth and inflation over that time has wiped out over 40 per cent of a dollar, the return over those 16 years for putting your hard-earned capital at risk is a loss of at least 33 per cent.
Given that the economy is likely to become a basket case sometime soon, I wouldn’t recommend standing under the QAN share price right now without a hardhat.
Jeremy Burfoot is a retired Qantas A380 captain and author of The Secret Life of Flying.