Rex, Bonza making minimal impact on domestic flight ‘duopoly’, says ACCC

The nation’s consumer watchdog warns that airlines such as Rex and Bonza will need to grow significantly in Australia in order to apply pressure on price, service and reliability to challenge two decades of industry dominance by Qantas (ASX: QAN) and Virgin Australia.

According to the Australian Competition and Consumer Commission (ACCC), while the competition has been a welcome addition to competition in the domestic market, its impact has been minimal.

The  ACCC says Qantas and Virgin Australia flew 94 per cent of all domestic passengers in April this year, which compares with the duopoly accounting for 90 per cent of all domestic passenger travel over the last two decades.

In April, Rex flew 4.8 per cent of Australia’s domestic passengers in April, while newcomer Bonza flew 1.2 per cent. This compares with 36.1 per cent for Qantas, 33.2 per cent for Virgin Australia and 24.7 per cent for Jetstar.

“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 says.

“Without a real threat of losing passengers to other airlines, the Qantas and Virgin Australia airline groups have had less incentive to offer attractive airfares, develop more direct routes, operate more reliable services, and invest in systems to provide high levels of customer service.

“Rex’s expansion onto major intercity routes and Bonza’s launch have been positive developments for competition, but their share of the market is small and there are barriers to growth.”

In the ACCC’s latest report, cancellation and delay rates worsened, with 3.9 per cent of flights cancelled in April compared to an industry long-term average of 2 per cent.

Meanwhile, only 71.8 per cent of flights arrived on time - well below the long-term average of 81.5 per cent.

Qantas-owned Jetstar was the worst culprit, reporting it cancelled 8.1 per cent of flights and that 59.7 per cent of its flights arrived on time. To improve reliability, the budget airline announced last month that will recruit more airport staff, cabin crew and engineering team members.

Bonza cancelled 0.5 per cent of flights, while half of them arrived late as the airline adjusted to an additional eight routes on its network. Rex cancelled 2.8 per cent of flights, with 73.2 per cent of flights arriving on time.

Virgin Australia and Qantas reported 3.1 per cent and 3.3 per cent of its flights were cancelled respectively, with the latter being the best on-time performer at 78.4 per cent. Virgin reported that 67.7 per cent of its flights arrived on-time in April.

The ACCC’s report has also called on the federal government to reform the way Sydney Airport slots are allocated to airlines, with the rules currently allowing them to retain slots in perpetuity.

The watchdog also notes that airlines can exploit the scheme by acquiring and hoarding slots for strategic regions, such as preventing access to competitors.

To manage the problem, the ACCC recommends the airport remove the preference currently given to incumbent airlines seeking to change the time of a slot ahead of new entrant slot allocation requests.

In April, the industry cancelled 9.2 per cent of flights between Sydney and Melbourne, 8.8 per cent of flights between Sydney and Canberra, and 5.7 per cent of flights between Sydney and Brisbane.

A third of all flights were delayed on routes connecting Brisbane, Melbourne and Sydney.

“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,” the ACCC says in its report.

“Bonza CEO Tim Jordan also said that access to slots at Sydney Airport had been an impediment for the new airline, with Bonza not including Sydney in its initial network of 27 routes.”

The ACCC also has called on the government to establish an independent agency that can manage complaints against airlines due to growing complaints about poor customer service.

The watchdog describes the current industry-based scheme, the Airline Customer Advocate, as ‘generally ineffective’ and should instead be replaced an independent external dispute resolution ombudsman scheme.

“Separately, some advocates have called for the introduction of specific consumer compensation entitlements for delayed or cancelled flights,” the ACCC says.

“While consultation would be required to assess the impacts of such a scheme on the market and consumers, the ACCC considers there is merit in the government further considering and consulting on this.”

Domestic flying still below pre-pandemic levels

Data from April also indicates that about 4.6 million passengers were carried on domestic flights during the month – or 92 per cent of passenger volumed recorded in April 2019. Total seat capacity across all airlines hit 6 million, which was 93 per cent of pre-pandemic levels.

While April is typically a peak period of travel due to the Easter school holidays, the number of passengers was not as high as expected and declined from the previous month.

“The pent-up demand for air travel that characterised the industry for most of last year is starting to ease,” Cass-Gottlieb says. “Consumers appear to have become more price-sensitive as cost-of-living pressures have increased.” 

The easing of demand is reflected in cheaper airfares in 2023 so far, although they remain above pre-pandemic levels. The price of discount airfares fell by 14 per cent between February and May 2023 in real terms.

But the ACCC notes that airfares on some routes have increased and continue to be significantly higher compared to pre-pandemic levels.

Notable return fares include Coffs Harbour to Sydney, which was almost triple at $348 in May 2023, while routes that have more than doubled include Brisbane to Darwin ($622) and Launceston to Sydney ($228).

However, the price of jet fuel has now almost halved in real terms since its peak in mid-2022, which has lowered the airlines’ costs. 

“The downward trend in the price of jet fuel should enable the airlines to pass on more savings to consumers in the months ahead,” Cass-Gottlieb says.