REX: Has a thorn in its paw with trading halt

Regional Express Airlines, known as REX, has halted trading on the Australian Securities Exchange (ASX) today (Monday 29 July 2024). REX sought the trading halt until Wednesday to deal with some boardroom turmoil. It’s dealing with an apparantely disruptive major shareholder. There is also a rumour that it is about to appoint one of the big four accounting firms to advise on a restructure. Its plans to become a big force in Australian domestic aviation appear to have gone substantially off the rails.

Let’s take each of those things one by one.

Trading halt

REX requested the trading halt on Monday, July 29. The ASX has granted the request until either REX makes a further statement to the market or trading recommences on Wednesday, July 31.

REX has chosen to make no further comment to the media while this halt is in process.

A trading halt is usually called when there are abundant rumours about possible actions or major announcements by a company. This may be due to a story in The Australian that suggested the airline was calling in a ‘turnaround team’ from Deloittes.

Share Price

The company share price has almost halved since a high of AU92¢ in January 2024 to today’s AU56¢. Due to shortages of parts and pilots, the airline has not been able to operate many of its regional aircraft. That has contributed to concerns about its financial performance.

REX has been working on reducing its losses since the COVID pandemic which adversly affected every airline worldwide. First half results notified in February 2024, showed a 4.6% incease in overall revenue. However its half-year loss was $3.2 million, down from $16.5 million previously.

Board trouble

There is also some board trouble. This gets convoluted, so bare with me as I try to unravel it.

Back at the beginning of June, it was announced that the COO had been move to the CEO position for two years. Also announced was that John Sharpe moved from deputy to actual Chairman.

Further, it was announced, that 17% shareholdrr of REX, Lim Kim Hai was no longer executive chairman, a position held for 21 years, although he remained on the board.

Just over a month later Lim Kim Hai, who had been demoted to mere board member requested a sharholder meeting, with a motion to remove four REX directors, including Chairman, John Sharpe, and Lim’s business partner, Lee Thian Soo.

Mr Lim did not propose the removal of Lincoln Pan, nominated by PAG Asia Capital, that provided $150 million to the airline to assist with their expansion to interstate routes.

Lim propsed two new directors: Lim Kang Song and Mukul Soul. A reason for the board changes was promised, but not provided. Only the trading halt has occurred. It should be noted that in April another director Sid Khotkar resigned.

The board, including Lee Thian Soo, unanimously decided to replace Lim as chairman in June. This occurred after ASIC (Australian Securities and Investment Commission) had queried related-party transactions and REX’s acquisition of National Jet.

Under the financing agreement that funded REX’s expansion, PAG’s $150 million debt could be converted into equity. The price is AU$1.50 a share. REX’s share price was AU56¢ a share before its trading halt.

Bring in the restructuring accountants

So, with a loss making airline, with major shareholder and board issues, and perhaps the need for additional capital, you can see things might need some input from a restructuring accountant.

REX in the past has emphasised the profitability of its jet business over its regional flights. Many contest this view, saying that the interstate operations lack scale and regularity. REX’s operations are also bolstered by some government subsidies for unprofitable regional routes.

Critics of the airline have pointed to low 60% capacity loads on the Brisbane, Sydney, Melbourne triangle, which they believe do not make the services profitable.

There is also a dispute about payments for spare parts, and an increase in the leasing costs of its B737 fleet.

For more details, your best bet is to read the excellent coverage in the Australian Financial Review.

Plans to become the new Virgin Australia

The aviation website Executive Traveller (ET) has come across a pitch deck that indicates at one stage that REX through it could become the new Virgin Australia. When that airline went into administration, it saw an opportunity to buy the airline as a distressed asset. This could have been the basis for its plans to create a new domestic airline.

It didn’t work out that way, with Virgin snapped up by Bain Capital for nearly four times what REX through it was worth. REX through it may be purchased for a billion, wheras Bain paid AU$3.6 billion.

That period at the beginning of COVID were very unpredictable for the airline industry. However, in retrospect the REX plans seem very naive. You can read a full account of what the pitch deck reveals on the ET website.

2PAXfly Takeout

This is an unfortunate turn of events for the Australian aviation industry, and potentially an issue for the Australian Government.

With the demise of Bonza so fresh in the public’s memory, the potential loss of another domestic and regional airline is something the government could do without. Many regional communities rely on REX services, subsidised or otherwise.

If these air services to the regions are threatened then the government has a problem in those communites.

The next few days should reveal how this story will end for the moment.

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