But like many things, COVID-19 has changed everything. This week the Civil Aviation Safety Authority approved Rex to start flying Boeing 737 jets around Australia. Tickets are on sale for its first passenger service between Sydney and Melbourne on March 1 next year.
Peter Harbison, from the aviation consultancy CAPA Centre for Aviation, says Rex’s move is likely to be one of the most significant shake-ups to the domestic airline market since Qantas launched 100 years ago.
“People will say, ‘oh there’s only room for two airlines in Australia and look at what happened to the other ones that tried to start up’,” he says. “But this is different. In terms of likely lasting significance … this is the biggest change to the market, ever.”
Already there are signs of a fierce battle brewing. Virgin’s boss Jayne Hrdlicka has predicted it will “never have been cheaper” to travel in Australia as her airline (now owned by US private equity giant Bain Capital after COVID-19 pushed it into bankruptcy in April) and Qantas fight to maintain their market share against the new challenger.
And the stakes are high for Rex, which currently flies a fleet of 60 Saab 340 turboprop aircraft to 59 regional and remote destinations.
“It’s a very bold move and I’m actually, personally, quite scared because everything that [we’ve] built up over the past 18 years could be brought down,” he says in a rare interview from his office in Singapore, where he is based.
“In an airline anything is possible: we have all the know-how and efficiency but there are things we cannot control.”
While many people have learnt how to work remotely during COVID-19, the 63-year-old Lim has overseen Rex from his base in Singapore for the past 17 years, normally visiting here four times a year.
The pandemic has meant he has not been in Australia since March, and the entire launch of jet services has been coordinated via countless emails and video conferences with his executives.
Rex itself was born out the collapse of Ansett in 2001, when a group of investors salvaged and merged two of its regional subsidiaries, Hazelton and Kendell Airlines.
Lim was one of the major backers but the former defence engineer and underwater warfare specialist, had no airline experience. Despite that he ended up in charge of the now ASX-listed group after it ran into financial strife months after its 2002 launch.
The next chapter in Rex’s history was sparked by another airline collapse when the long-struggling Virgin went into voluntary administration in April after the pandemic forced it and other airlines around the world to ground their fleets.
The pandemic threatened Rex too, but it was propped up by government subsidies intended to keep vital air links to rural and regional destinations open. (That Rex faired so well through the pandemic and is now muscling onto their own turf has infuriated Qantas and Virgin).
‘You can see there’s a three-player market for two years, three years, five years. But what we’ve seen in the past is the first time another crisis comes along… they end up reverting back to a duopoly.’
Paul Butler, Credit Suisse analyst
“Very soon after [Virgin’s collapse] we started thinking of the space that opened up,” Lim says.
“That is when we said if we can find a backer we think this will work. Especially since everyone else is suffering, we think this can work.”
Launching what is essentially a new airline at the peak of a pandemic and industry crisis might sound foolish, but it is the pandemic that gave Lim the confidence to attempt what he previously thought impossible.
Before COVID, Australia was facing a pilot shortage. Now, Qantas and Virgin have laid off hundreds whom Rex is employing on lower wages. There were no peak-hour landing slots at Australia’s major airports; now they’re sitting empty. And there is a glut of jets that aircraft leasing companies are desperate to get off the tarmac. Lim says Rex has rented Boeing 737s that Virgin used to fly, but he’s paying half the price.
“There’s never been a better time to start an airline than today,” he says.
Rex will launch in March with three Boeing 737s flying nine return Sydney-Melbourne services daily, which will give it about a 10 per cent market share on that route based on pre-COVID traffic.
Two more jets will enter service by Easter, opening flights to Brisbane by mid-year. Rex plans to have up to 10 aircraft and flights to other capital cities by the end of 2021.
Lim says that if everything goes well, he thinks Rex can add a new plane to its fleet every six weeks over the next three or four weeks, ending up with about 40 jets flying on the country’s 10 busiest routes. If Rex fills all those seats, it will have around 30 per cent of the national aviation market – which is what Virgin had before COVID-19.
Rex’s pitch to win customers is “Qantas service for Jetstar prices” – something Lim says it can do because of its lower cost-base courtesy of those cheap aircraft, lower wages and the fact launching jet services adds relatively little to its existing operational overheads. Rex estimates its cost base will be about 35 per cent lower than Virgin before its collapse and 20 per cent lower than Jetstar’s.
That sets up two possible outcomes, he says: either Rex will win customers and market share with its superior value product, or Qantas and Virgin will try to crush Rex with cheap airfares and capacity.
“If they behave in a rational, commercial manner, then we think that within a year we will be profitable,” he says. “Of course they may choose not to do so.”
However Lim says Qantas has been weakened by COVID and needs to repair its balance sheet while Virgin’s new owner Bain will want a quick return on its investment in the now trimmed-down airline, meaning they will be reluctant to revisit the 2012-2014 capacity and airfare war that devastated both their finances.
Secondly, Lim believes he will be protected by the Australian Competition and Consumer Commission. The federal government ordered it in June to closely monitor airlines for anti-competitive behaviour and ensure Qantas did not squash a relaunched Virgin or any airline that tried to replace it.
With a market value of just $224 million, Rex is a minnow compared to the $9 billion Qantas and Virgin, now backed by the $US105 billion Bain Capital.
But it now has the backing of another private equity giant, the $US40 billion PAG Asia Capital. It’s issued Rex with up to $150 million of convertible notes to fund its launch plans. Based on Rex’s current equity that can be swapped for up to a 47 per cent stake in the company.
Existing investors appear to be on board, with Rex’s shares trading almost 80 per cent higher today than they were a year ago. (Lim himself owns 17 per cent of the company. Altogether, 33 per cent is held by Lim, his business partner and Rex director Lee Thian Soo and their wives).
CAPA’s Harbison says the availability of slots at Sydney Airport due to the pandemic is crucial for Rex. “That’s always been the thing that has killed startups in Australia,” he says. Tigerair suffered that fate after its launch in 2007 (Virgin took it over five years later), while Virgin itself only survived because Ansett collapsed.
Harbison cautions though that things will get tougher for Rex as it grows larger and the aviation market recovers from COVID-19. “Unless you really do some serious damage to Virgin, he’d be wiser not to get too ambitious,” he says, noting that if Rex were to gain a 30 per cent market share as Lim suggests then it would be “bye-bye Virgin”.
Credit Suisse aviation analyst Paul Butler says that if Rex’s cost base really is as low as it says, then it has a reasonable chance of being successful. That will end the calm Qantas and Virgin have enjoyed since their airfare truce in 2015 and could lead to a showdown with Virgin.
“There’s some big investments on the table from Bain – they’ve put a significant amount of capital into Virgin. Rex is potentially at a much better cost position than Virgin and there’s got to be some question marks about whether a three-player market is sustainable,” Butler says.
“You can see there’s a three-player market for two years, three years, five years. But what we’ve seen in the past is the first time another crisis comes along… they end up reverting back to a duopoly.”
Things appear to be heating up already. Along with Virgin’s Hrdlicka predicting ultra-cheap fares next year, Qantas’ budget arm Jetstar says it will have more planes flying around Australia in March than it did pre-COVID as its international destinations remain shut off.
And Rex this week accused Qantas of anti-competitive and “unconscionable” behaviour by “flooding the regional airline market” with flights after the larger carrier said it would launch services on seven new regional routes.
There have been bumps for Rex too. This week the Australian Securities and Investments Commission banned it from using exemptions for reduced disclosure in fundraising documents for one year as punishment for a continuous disclosure breach. That came after Rex’s deputy chairman, the ex-Nationals MP John Sharp, told a journalist about its capital city launch plans – and the $200 million in new equity needed to fund it – before Rex told the market.
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Business reporter at The Age and Sydney Morning Herald.