Australia’s Regional Express, better known as REX, has announced today that it will consider running mainline jet flights on Australia’s domestic trunk routes from March 2021. This follows the airline entering into a trading halt pending a market announcement.
The established airline now links regional centers and towns to Australia’s capital cities. It operates a fleet of 57 Saab A340 turboprops and has a1% share of the Australian domestic market. Described as a tidily run low-cost operation, REX usually manages a small annual profit, last year posting an after-tax profit of $11.4 million.
REX had previously dismissed speculation it was interested in expanding
Last month, REX dismissed speculation it was looking at picking up some regional routes following the collapse of Virgin Australia. REX’s Vice Chairman John Sharp told ABC Radio on April 16;
“There’s no question a company like REX would have the ability to run a company like Virgin, it’s a question of whether we have enough capital to do it and I would suggest to you that we aren’t in a position at this stage. We don’t have the capital to take on the liabilities of running a company as large as Virgin.”
A spokesperson for REX also told Simple Flying that they simply didn’t have the right type of aircraft to pick up any Virgin Australia routes.
That seemed to put that speculation to bed. Then last week, REX’s Chairman, Singaporean Lim Kim Hai hit the headlines when he painted the operations and subsequent administration of Virgin Australia in a very unflattering light. He called the airline’s board dysfunctional and suggested the administrator, Deloitte, wasn’t interested in changing the fundamental problems at Virgin Australia.
In fairness, REX has a history of outlandish statements and has fired off quite a few verbal volleys this year. This could be seen a just more color and movement from the airline.
A sharp turnabout on morning radio yesterday
Yesterday, John Sharp was back on ABC Radio. In a marked turnaround, he now said REX was looking at stepping into the void created by the collapse of Virgin Australia.
“REX has been approached by a number of private equity banks and firms with the proposition that we should be commencing services between the capital cities around Australia.
Presently REX flies from regional centers to all the capital cities in Australia. The proposition is that we add to that by flying between them and provide a domestic air service in place of the services that were once provided by Virgin.”
According to Mr Sharp, $130 million would need to be raised to lease 10 Boeing 737s that would fly the trunk routes between Australia’s capital cities. That amount is double REX’s current market capitalization, but REX’s new private equity friends assure them that won’t be an issue. There’s also a lot of spare 737 aircraft parked around Australia likely to be looking for new lessees.
In a market announcement just published REX has said;
“The REX board believes that with sufficient capital injection, there is a confluence of circumstances which render the start of domestic operations by REX a particularly compelling proposition.”
Just a half-cooked thought bubble or something more?
An initial reaction was to dismiss this as a half-cooked thought bubble. After all, commuter airlines expanding into mainline trunk services do not have a great history in Australia. Remember Impulse? EastWest? Skywest?
Jumping from turboprops to jet aircraft and moving into mainline trunk routes seems to be the aviation kiss of death. Costs, complexities, and expectations all increase exponentially.
Despite their occasional media shrillness, REX is an exceptionally well-run airline. Mr Sharp suggests that despite the boosterism surrounding Virgin Australia, it is going to be tough for the airline to be re-booted. There are significant issues with cost burdens, debt, and wages the collapsed airline carries.
That makes Lim Kim Hai’s outburst last week no slip of the tongue. Described as part of the “Singaporean commercial fabric,” raising a cool $130 million shouldn’t be a challenge for a man with his connections.
Is this a front for wider Singaporean interests?
One aviation analyst ventured that this could be a front for a larger Singaporean play. Neil Hansford from Strategic Aviation Solutions told ABC Radio yesterday;
“I’m not sure that this is not a front for some wider Singapore interest like Singapore Airlines, which is owned by the government. I think they’ve (REX) seized an opportunity, and they don’t do things idly. They think things out. They are a very tidily run low-cost operation, and they meet the requirements of the Australian regulator and could be up and running very quickly.”
Perhaps the idea isn’t as bonkers as it first seems. And if it is a front for broader Singaporean interests, it raises some delicious scenarios.
Singapore Airlines has a now almost worthless 20% stake in Virgin Australia. The Singaporean Government owns Singapore Airlines via Temasek Holdings. The Singaporean Government has previously denied it is interested in buying Virgin Australia. Nonetheless, the national airline has been linked to key bidders in the Virgin Australia restructure process.
If the Singaporean commercial interest theory is correct, it suggests that like US-based Indigo Partners, Singapore is looking outside the Virgin Australia bidding process to get a stake in Australia’s domestic aviation sector. It’s something Singapore Airlines has long been interested in doing.
REX says they will make a final decision within the next eight weeks with a view to commencing domestic operations in March 2021.