Australia’s largest stand alone regional airline, REX or Regional Express, has cancelled its frequent flyer loyalty program and blamed the Gillard Government for bringing it to the verge of ruin.

This is how it broke the news on its website this morning.

Dear Customer Regional aviation is facing its greatest fight for survival come 1 July 2012 as draconian government measures translate into astronomical cost increases, which for Rex alone amounts to more than $5 million per year. To put this into perspective, this would be equivalent to the Qantas Group facing a $300 million cost increase, which is more than the $200 million profit the Qantas Group posted last financial year.In order to ensure that the majority of its regional network continues to be serviced, Rex has to implement a series of radical initiatives to reduce the cost base.  One of the most painful we are compelled to take is the termination of the Rex Flyer program. With immediate effect, existing memberships will not be renewed at expiry date and neither will any new members be accepted.  Members are strongly encouraged to check the membership expiry date online at www.rex.com.au. As per the Terms & Conditions, only points accrued by the expiry date will count towards the reward flight. Any reward flight earned will need to be redeemed and flown within 6 months of the date earned. Rex would like to take this opportunity to thank all members for their support over the last 9 years.

Before the leader of the Opposition, Tony Abbott, rushes out to the nearest REX hangar to pose in front of one of its stricken SAAB 340 turpo-props, some perspective is offered.

REX is a very smart, very savvy, and very profitable airline, and delivers an outstanding service.

But it does live on a knife edge, as it always has, in that with room for no more than 33 passengers per flight, and sometimes less, it only has to see a drop off of two or three passengers, or a decline in yields or margins to have a route pushed into loss.

Conversely, it only has to win a few passengers per flight to make an overall profit margin that Qantas or Virgin Australia managers dream about, if they could apply them to jets that fly with hundreds of seats at a time rather than dozens.

REX also has no real competitors on many of its routes, other than the remote risk that customers might actually drive to Sydney, Melbourne or Adelaide, which over much of its network, is a costly and time consuming option that doesn’t really make sense.

The REX loyalty program was a number of things.

It was by far the most honest and straightforward. You earned a free flight for every ten flights, just like getting a free haircut at the barbers, or a special deli reward at your favourite country bakery.

While the Qantas and Virgin Australia schemes offer much flashier rewards, they are also much harder to get, they come with more conditions than a farmer’s mortgage, and they have largely morphed into data base selling programs rather than reward programs, especially as they make increasing amounts of money out of third parties like grocery chains and bank cards and create points to reward people who needn’t ever fly with Qantas as a paying passenger in order to compete with some schmuk who mistakenly thinks buying Qantas fares earns the entitlement to first dibs on a free seat.

Nah, nah and nah. The last thing modern complex loyalty programs reward is loyalty.

This makes the loss of the honest and simple REX program the sadder.

But somewhere in REX someone no doubt did the sums and worked out that Gillard Government or no Gillard Government, its loyalty program was costing it too much to retain customers it wasn’t likely to lose anyhow, since driving is seldom an option, and where there was a Qantaslink alternative, it would take an extraordinary frequency of flying between Wagga Wagga and Sydney to qualify for anything.

The bottom line is that REX understands how tough the regional aviation environment has always been during its nearly 10 years of operations, and taking decisions like this is why it has survived and prospered in a sector that has annihilated the hopes and fortunes of dozens of would be country airlines.