When Rex Airlines entered the Golden Triangle, it accused competitors of ‘slot hoarding’. But what is it?

by Admin
August 2, 2024

When Rex expanded its operations into the Golden Triangle routes between Sydney, Melbourne and Brisbane, it knew it was an ambitious plan.

But if the risk paid off, the financial windfall would be considerable.

The Sydney-Melbourne route is one of the most lucrative in the world and delivers our two biggest airlines, Qantas and Virgin, with more revenue than any other.

While that would be more than enough to entice any would-be entrant, there was another likely reason why Rex believed it could pull off such a bold initiative.

In 2020, one of its major competitors on the capital city routes, Virgin Australia (VA), was on shaky footing.

VA went into voluntary administration in April that year, owing an eye watering $6.9 billion sum to creditors, including banks, bond holders and aircraft lessors.

The company directors’ pleas for government money were rejected and administrators were forced to make some tough decisions before it was eventually picked up by US private equity firm Bain Capital.

As it underwent a complex restructure, a potential opportunity loomed for a competitor to swoop in.

Rex snatched up leases for nine Boeing 737 jets to support its expansion into the lucrative intercity market.

Several of them were formerly flown by Virgin.

Another small victory for Rex in its bid to take on new routes was the retreat of international airlines during the pandemic, which allowed it to snap up airport slots required for take off and landing.

But then the carrier hit a problem: many customers were reluctant to fly with a raging virus spreading all over the country, fearing they could become stranded in another state in the event of a swift lockdown.

Analysts believed Rex was more exposed than other airlines because it was the newest entrant to the capital city routes.

So the carrier started cutting prices seemingly in an effort to generate more brand awareness, exposure and word of mouth traffic — which would effectively equate to more sales.

The company’s heavily discounted capital city flight offerings prompted other airlines to do the same, quickly descending into a price war.

Tony Webber, the head of Airline Intelligence & Research (and former chief economist at Qantas), predicted a cut-price strategy would not last.

Rex’s regional services are continuing to operate.(AAP: Paul Miller)

“In normal pre-COVID times, those airlines wouldn’t be able to sustain a deal like that for more than 12 months,” he said in 2021, on the assumption they offered only a handful of seats on each flight at those low prices.

Eventually, he said, “they will have to raise prices or wind back capacity”.

On Tuesday, Rex Airlines grounded its services between major cities, before later appointing administrators from consulting firm Ernst & Young (EY) to oversee the business.

Hundreds of staff have since been formally notified of their termination as administrators dig through the company’s financials to get a clearer idea of the airline’s profitability.

Amid the turmoil, an unlikely hero emerged in the form of another airline and competitor: Virgin Australia.

The very company whose precarious position enabled Rex’s entry into the capital city market with a fleet of planes, is now offering flights to customers caught out by the sudden collapse of the regional carrier.

The airline has undergone quite the riches to rags to riches story in the three years since its own collapse, and could offer some lessons to Rex on how to come back from disaster.

The troubling history behind Australia’s failed airlines

Australia’s largest regional and domestic airline operator is the latest casualty in the country’s notoriously difficult aviation market.

In the 1990s, Compass, the country’s third largest carrier at the time, retreated from the skies, never to be seen again.

A decade later Ansett followed with its own spectacular collapse after racking up troubling levels of debt.

The list of other victims in the sector goes on and on. Impulse, the short-lived Ozjet, which tried and failed to win over customers with all-business class cabins, and Tiger Air.

Just three months ago, Bonza went from mild turbulence to a full plummet in April before finally closing its doors, a mere 15 months into its launch.

What all these airlines have in common is an inability to break into Australia’s aviation market, which is dominated by Qantas and Virgin.

“Domestic aviation is one of the most concentrated industries in Australia, barring only natural monopolies such as electricity grids and rail networks,” ACCC chair Gina Cass-Gottlieb said last year.

Low cost airlines have complained that part of the problem lies with “slot hoarding”, a term which refers to allegations the two airlines are misusing prized spots for take off and landing.

In order to operate along a particular route, carriers need to secure a take off or landing time (also known as a slot) at the airport. The more popular the route, the higher the demand for slots, particularly at peak times.

Aviation analysts have previously told the ABC that a clause in the airport slot system known as “grandfather rights” unintentionally favours older airlines because it allows them to keep their number of slots for the following six months if they’ve operated at 80 per cent.

These slots only have to be used 80 per cent of the time, under what is known as the 80:20 rule, which means airlines can cancel some flights without losing the slot.

Many airlines have failed in Australia’s highly concentrated airline industry.(Reuters: Loren Elliott)

Rex and others accused Qantas and Virgin of scheduling more flights than they intend to run, before cancelling them in a strategic manner, to prevent others from securing the spots.

“We’d like to see some things that address the problems that we have as a smaller airline trying to break into the domestic airline market in Australia,” Rex deputy chairman John Sharp told the ABC in March.

“And we’d like to see amendments made to stop slot hoarding so that we can operate more flights in Sydney and give people the opportunity to get lower prices.”

The problem appears to be most acute at Sydney Airport, which is nearly at capacity.

Both Bonza and Regional Express reported “difficulty accessing slots at Sydney Airport during peak periods”, according to the government’s aviation green paper, released in September last year.

That’s despite an ACCC’s Airline Competition in Australia 2023 report finding that “access to take-off and landing slots during peak times at Sydney Airport is critical for airlines seeking to build an intercity network”.

“Rules allowing airlines to retain slots in perpetuity exacerbates capacity constraints by limiting the opportunities for new or expanding airlines to acquire slots needed to launch new services and compete,” it found.

“Airlines can exploit the scheme by acquiring and hoarding slots for strategic reasons, such as to prevent competitors’ access to slots, resulting in inefficient slot use and further diminishing opportunities for increased competition.

“The impact of these flaws in the demand management scheme is more than theoretical. Rex’s ability to continue to expand its intercity jet operations and bring choice and competition to more consumers each week will likely be hindered without better access to peak period slots at Sydney Airport.”

In response to claims of “slot hoarding”, Qantas has said it is operating “well over 90 per cent of its allocated slots” and that Regional Express was “awarded the majority of additional peak slots it sought” in summer and winter 2023.

A year after the ACCC report, Rex went into voluntary administration and though the government introduced measures to significantly increase transparency about how slots are allocated in February, the 80:20 rule remains unchanged.

The lessons of Virgin Australia’s great revival

Virgin Australia went under in 2021, at the peak of the pandemic and with most of the country still in and out of restrictive lockdowns.

The airline entered voluntary administration, leaving the jobs of at least 15,000 airline and connected supply chain workers in doubt.

Deloitte’s Vaughan Strawbridge, John Greig, Sal Algeri and Richard Hughes were brought in as voluntary administrators in what became “one of the most challenging administrations in Australia’s corporate history”.

While VA continued to operate its scheduled international and domestic flights, it was burning $200 million a month and quickly running out of money.

With no bailout on offer from the federal government, it needed to find a buyer quickly.

Bain Capital’s winning bid ticked most of the criteria required for a new owner, including guaranteeing the airline would continue and that it would honour its creditors.

Within months, Virgin Australia unveiled a new strategy under the direction of a freshly appointed chief executive Jayne Hrdlicka.

Virgin has turned around its fortunes after going into voluntary administration.(ABC News: Meg Purtell)

“The environment remains challenging for the business and the aviation industry, but the airline is now in the best possible place to meet those challenges,” Deloitte administrator Mr Strawbridge told ABC News a month later.

So are there any lessons for Rex in Virgin’s corporate come back?

When administrators were asked on Wednesday if they were seeking a buyer, Justin Walsh told staff that it was looking for an interested party to purchase the business.

But he said it was “highly unlikely” one would be found.

Unlike Virgin Airlines, which is the country’s second largest airline, Rex is a much smaller business that looks less attractive if kept all together.

“There is some interest in certain elements, but it’s more around individual aircraft rather than the business, as opposed to the regional part of the business where it’s a bit different,” Mr Walsh said.

The news was a devastating blow for the hundreds of staff listening on, having hoped for the best but fearing the worst.

Rex under the spotlight

Just days before learning their fate, Rex staff had been ordered to ignore media speculation in a chief pilot notice, with crew told it was a “threat to the business”.

For many, it would only be through the media that the 2,000-strong workforce learnt their employer had been placed into administration at 9:30pm on Tuesday.

Rex Airline employees received this text message on Tuesday night after the company entered administration.(Supplied)

By the next morning, employees of Rex Airlines — its now-defunct capital city operations, known amongst staff as its “domestic”, “jet”, “737” business or “RAL” — followed the Microsoft Teams link sent to their personal emails for their meeting with EY administrators at 8am.

The meeting between the hundreds of employees and administrator Mr Walsh, which was provided to the ABC in a recording, was tense.

Blindsided employees demanded answers after being informed they would not be paid their wages or redundancy packages for weeks or months after losing their jobs — 360 jet employees and 250 of their regional colleagues.

They were told they had until 12pm to send through their thoughts and administrators agreed to hold a second meeting at 10am and extend the consultation until 2pm.

A crew member asked for someone from upper management to attend so they could answer questions about how long they knew the business was in trouble for.

“I’ll see what I can do, but what I don’t want is this to turn into a lynching,” Mr Walsh said.

In the end, no-one from upper management ended up attending the second meeting.

Rex cancelled flights between capital cities but the airline says regional routes are still flying as scheduled.(Supplied: Rex)

The consultation period for the 737 staff was ultimately extended until 4pm on Wednesday, with the first termination letters sent out two and a half hours later.

It is understood that consultation for all other employees affected was finalised on Friday, with communications being sent to staff in the coming days.

By the end of the week, Rex’s workforce had been reduced to about 1,400 people, with 594 people made redundant in total — less than administrators had initially expected on Wednesday.

Of those, 343 people were made redundant from its capital city business, and 251 roles were terminated from other areas of the broader Rex group. It is unclear how many of those 251 roles are from its regional services, which remain operational.

It will be another week until the airline’s former employees, who are now creditors of the business, know what happens next.

The first creditors meeting is set for August 9, but it will be longer still before they are paid what they are owed.

The collective feeling of collateral damage

For those still employed by the company or since terminated, the events of the past week have weighed heavily on their shoulders.

Seven days ago, they were proud to be working for the airline — whether that be in its failed 737 expansion, or as part of its regional operations. Regardless of the day-to-day divide, Rex staff saw themselves as one.

With hundreds of their colleagues without work, many that remain are now questioning whether the airline is a company they want to continue working for.

A number of crew still working in the regional arm of the airline, who are not authorised to speak publicly, have told the ABC that several staff are looking to leave the company altogether, horrified at the way their colleagues have been treated.

Many of those working at Rex are still coming to terms with the sudden departure of their colleagues.(ABC South East SA: Sandra Morello)

Many have privately expressed concern for the wellbeing of their colleagues. They say they are frustrated at the lack of support being offered, and instead are taking it upon themselves to check in on each other during a time of intense stress and anxiety.

Others have told the ABC that they are not surprised by the airline’s lack of support for its staff, with some saying it has been common practice in the past for staff to work longer hours than what is allowed by the aviation safety authority.

Adding to the anxiety felt by staff, those who are now former employees are unable to access any of the airline’s administrative systems, including their emails, after being blocked at 3pm on Thursday.

‘It’s Regional Express, not City Express’

There is an overwhelming negative sentiment amongst staff — both past and present — towards the airline’s management.

Details outlining the timeline in which Rex’s directors had been dealing with EY since early May has infuriated employees, as has the lack of communication from the company’s top brass.

Several staff are also particularly suspicious of a variation to CEO Neville Howell’s employment agreement, shared to the ASX on July 25 — five days before entering administration.

Effective immediately, the release stated that in the event Mr Howell was let go from the company, he would receive a 12 month payout. The change was approved by the airline’s board.

Notice of his appointment to the role on June 5 stated that Mr Howell’s annual remuneration was $352,600, which also noted that there were “nil” special termination payments or conditions associated with his position.

On Friday, Mr Sharp told the Australian Financial Review that the adjustments to Mr Howell’s employment were necessary in order for the airline’s regional flights to continue operating.

While there has been speculation that slot hoarding is to blame for its demise, the belief amongst staff across various divisions of the business is that it is ultimately the decision to fly between the capital cities that was the nail in the coffin.

“It was a stupid bloody decision from the get-go,” one staffer told the ABC, speaking on the condition on anonymity.

“I mean, for God’s sake, we’re called Rex for a reason — it’s Regional Express, not City Express.”

Others high up in the business have said the company was “obsessed” with keeping up appearances, including its on-time performance and cancellation rate.

“There is a real ‘whatever it takes’ attitude, and clearly that has come at the expense of the people who kept them in the air,” one insider told the ABC.

“What’s worse is that these concerns were raised — how running jet services with 10 people on board was a ridiculous operating cost — and it was ignored.

“Look where that’s got us.”

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