Breaking News
Investing Pro 0
Cyber Monday SALE: Up to 54% OFF InvestingPro+ CLAIM OFFER

'Poking the bear': Regional airline Rex using downturn to challenge Qantas, Virgin

Stock Markets Sep 30, 2020 11:00PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: REGIONAL EXPRESS AIRCRAFT TAXIS ON MAIDEN VOYAGE FROM CANBERRA.
 
BA
+2.01%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
REX
0.00%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
ROL
+0.68%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
AQZ
+0.99%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
SHCAY
-0.58%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
QAN
+1.40%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

By Jamie Freed

SYDNEY (Reuters) - As Virgin Australia shrinks to survive the pandemic, tiny Regional Express Holdings Ltd (Rex) (AX:REX) is picking up some of its larger rival's planes and staff on the cheap - and attracting investors who see profit in the high-stakes plan.

A Boeing Co (N:BA) 737 leasing deal announced on Wednesday is the latest step in Rex's gamble to take on Qantas Airways Ltd (AX:QAN) and Virgin starting with Sydney-Melbourne, the world's fifth-busiest domestic route before the pandemic.

The move by Rex, until now an operator of ageing 30-36 seat turboprops, is a rare example of an airline expanding into new markets as the pandemic cripples air travel.

Shares in Rex and charter operator Alliance Aviation Services Ltd (AX:AQZ) have risen this year as investors look for counter-cyclical growth stories. Rex's shares reached a one-year high on Thursday.

Graphic - Regional carriers Regional Express and Alliance Aviation are outperforming larger peers as they undertake counter-cyclical expansion plans: https://fingfx.thomsonreuters.com/gfx/ce/bdwvkkyqqvm/AustraliaRegionalAviation.png

Rex entered the pandemic with a licence, little debt, a paid-off fleet and no planes on order. Last week it signed a term sheet with Asian investment firm PAG Asia Capital for up to A$150 million ($106.23 million) of convertible notes to pay for service to big cities, funds Rex Deputy Chairman John Sharp (OTC:SHCAY) told Reuters will be kept separate from its government-subsidised regional operations.

But even with those advantages and the ability to sign cut-rate contracts, analysts say Rex faces formidable odds in competing against larger players. Those well-established brands have strong loyalty programmes, more frequent flights and fancier airport lounges, and will scramble to win back share as demand recovers.

"They are really poking the bear here," Rico Merkert, a professor of transport at the University of Sydney Business School, said of Rex. "Qantas will do everything they can to defend their market and rightly so. It is about survival."

Before the pandemic hit, Qantas' Sydney-Melbourne route was the second-biggest revenue generator for an airline globally, contributing $861 million in 2018, according to data firm OAG, ranking behind only British Airways' London-New York route.

Under new owner Bain Capital, Virgin is scaling back on regional routes to concentrate on major ones, including Sydney-Melbourne.

"Although Qantas-branded flights probably won't be priced much lower, Jetstar and Virgin will slash fares in an attempt to kill Rex's jet operation in the cradle," said Judson Rollins (NYSE:ROL), managing partner of Auckland-based consultancy Propel Aviation Solutions. "But Rex will have a significant cost advantage over even Jetstar."

TOUGH MARKET

Australia is the worst performer among the world's major domestic markets, according to the International Air Transport Association, largely because of state border shutdowns meant to keep a lid on COVID-19.

Passenger numbers were down 91.5% in August compared with last year, and capacity is running at only 20% of normal, though the federal government expects more state borders to open by Christmas.

Qantas and Virgin have halted all international flying and are itching to put more planes in the domestic market to cover financing costs and stand up staff now on government benefits.

Rex's Sharp said that despite its size, his airline would have a cost advantage because it did not have surplus aircraft or staff.

"We'll grow as the market grows," he said. "We think our customers will be leisure travellers and we believe we will attract small businesses and we will attract government travellers on the best price of the day."

Rex on Wednesday announced deals to lease six 737s once flown by Virgin, and it has begun advertising for experienced crew members, aiming to keep employee costs about 10% lower than Jetstar.

Brendan Sobie, a Singapore-based independent aviation analyst, said that the way forward for Rex was not easy but that it had a shot at surmounting the challenges.

"I think there are a lot of things going for it – their timing, their cost structure and the fact that they are coming in as a new entrant on trunk routes with a different approach," he said.

'Poking the bear': Regional airline Rex using downturn to challenge Qantas, Virgin
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email