F,
There is an old saying that there are no friends in business. Historically, DJ is reputed as being arrogant and also difficult to deal with, particularly under the previous MD. So, perhaps DJ may have met their match in any dealings they may, or may not have had with REX.
Contracting with a third party (you suggest Alliance), gives you just that, a contract, which can be broken and/or varied by either party in the future as needs may demand. Usually the party most desperate for the contract (Alliance?) gets the least favourable terms, particularly when it comes to price variations.
This model has been well tried in the U.S. and each time a supporting third party regional goes bankrupt due to the price paid per passenger being insufficient the major carrier simply re-contracts with another player, who re-paints their aircraft in the major's livery and the cycle re-commences.
Alliance, as the name suggests, undoubtedly would be very keen to diversify their business to serve DJ as NJS serves QF, but, have they got the $$$ to both guarantee the ATR leases AND lose lots of money in the fight for market share against Qlink with the Q400?
The capital cost of a new ATR isn't that much less than a Q400. So, if the fixed costs are similar the DOC's need to be much less in order to offer attractive ticket pricing, but, even Alliance pilots won't work for nothing, so the ATR DOC's won't be much less than Q400 costs AND the Q400 will be a lot faster on sectors over 200 NM's, guaranteeing greater productivity than the ATR. Which means the ATR schedule won't be competitive with the Q400!!
REX get around this problem by having cheaper aircraft, which lets them offer greater schedule frequency than their competitors. If, however, Alliance/DJ's 'new' aircraft costs nearly as much as the competitor's to own and operate, schedule frequency increases (ala REX), adds signficantly to costs and consumes the additional revenue. Economists call this - the law of diminishing returns!
DJ's flat share price will guarantee their having no interest in sharing losses with their contractor in a turboprop 'turf war'. Price and service wars are all about attrition and they continually bleed competitors until one withdraws on the basis of unsustainable losses. No prizes for guessing who will the the last kangaroo standing!
I metioned NJS earlier. Part of the reason why NJS has survived and partnered QF for so long is the very deep pockets of the UK parent Cobham PLC. Alliance is not in that league and therefore would be placing itself at considerable risk. Perhaps the proposed 'risk sharing' terms and proportions are/were the sticking points in any similar discussions DJ may or may not have had with REX?
The possible 'no risk' alternative I mentioned in an earlier post, would be for the investors to buy a stake in REX sufficient to force seats on the Board. Such an action gives you respect and under ASX guidelines guarantees your right to look after your investments. Whereas a business contract by its very nature is finite and often benefits one party more than the other!
Australian aviation history is full of risk takers. Some of the risks paid off spectacularly, such as Qantas, many of them proved to be costly pipe dreams. As was said earlier - time will tell!!
The Oracle
Last edited by THE ORACLE; 21st Dec 2010 at 03:36.