REX: Australian Government to become biggest shareholder in failing regional airline

It’s a weird one, but there is reason in this apparent madness. The Australian government will spend AU$50 million to become the biggest stakeholder in Regional Express Airlines (REX). It will purchase the stake from PAG Asia Capital. This will make the Australian Government the airline’s biggest creditor, thus giving it a say in the voluntary administration of the airline.

Background

REX went into administration on 30 July, 2024.The federal government has already injected AU$130 million to keep the regional airline operating, keeping dozens of regional towns connected by air.

The airline failed due to insufficient funding for its unsuccessful move into capital city flying. REX has also been plagued by an ageing fleet, requiring higher maintenance levels. That has not been helped by supply chain issues with maintenance and replacement parts, which has led to much of its fleet staying on the ground.

Future

According to court filings by the administrators, EY, it is unlikely that a creditable buyer will emerge from the administration process, despite some interest. The most likely scenario is a liquidation of the airline, leaving may regional towns without freight and passenger carrying air services.

The injection of funds gives the government a say in future developments. It looks like the present government sees REX as too important to fail. Other interests would welcome the failure of REX, so that other smaller players could expand to fill the gaps left by its demise.

EY says the additional funds will enable it to ‘undertake a business improvement process aimed at re-establishing the regional business’ ability to operate its regional network in a financially sustainable manner, following which the administrators would recommence the sale process for the sale of the regional business.’ That makes it sound like REX was not operating an optimal or efficient regional service prior to the administration.

What’s going on here?

It looks like PAG, who invested AU$150 million in the airline to ‘fund’ its capital city expansion, is being made ‘whole’. Various assets have been sold including the Pel-Air ambulance service to Toll Holdings (AU$47 million). The administrators have also sold a half interest in National Jet Express (AU$12 million). Other real estate assets have also been sold. These sales plus the AU$50 million government injection, have paid off the PAG investment bar about AU$10 million.

Virgin Australia was in talks to take over REX just before it went into administration. But the deal fell through at the last minute. Instead, Virgin took on three leased Boeing 737 jets. It also agreed to fly passengers potentially stranded by the demise of REX capital city services.

But that’s not all the turmoil. ASIC (Australian Securities and Investments Commission) is also in the process of prosecuting four of Regional Express’s directors. That includes Mr Lim, former transport minister John Sharp, and Lincoln Pan and Sid Khotkar, two PAG-appointed directors. The accusation is that they made misleading statements about the airline’s profitability.

2PAXfly Takeout

The timing of the REX trouble has possibly been decisive in government action. No Australian government wants to go to an election risking the regional and remote vote. With an election within the next three or so months, the government cannot afford to turn regional voters off by letting REX die.

That’s unfortunate for possibly more efficient smaller players looking to expand to take up REX’s routes. Don’t forget that many of the Regional Express routes are government-subsidised, as they would not be commercial if not supported by taxpayers’ cash.

That’s a tasty pie to get a piece of.