An accounting issue has wiped out profits on a solid first half for Rex, although regional flying is hurt but is slowly getting better.
After many years of unbroken profits from regional flying, Australia’s independent airline Rex finds its profits are now coming off the tail of 737 domestic services. Rex described regional operations as “a drag on the Group’s performance,” which it attributes to predatory behavior from Qantas.
For the six months ending December 31st, 2022, Rex posted an after-tax loss of AU$16.5 million ($11.3 million). This period is the first half of Rex’s financial year (1HFY23), ending on June 30th, 2023. While posting any loss is disappointing, this result is a 55% improvement from the same period last financial year (1HFY22). There is also a significant financial adjustment that has impacted heavily on Rex’s accounts.
Strong cash flow boosting Rex’s performance
In a statement released on Tuesday, Rex advised that the first-half loss included the following:
“a negative impact of A$23 ($15.7 million) related to mark-to-market valuation of the Convertible Note and Warrant facility entered into with PAG in 2020. This loss is not cash in nature and was brought about by the increase in value of Rex’s shares.”
Photo: Rex
The operating loss after tax for the period was a much more respectable AU$1.9 million ($1.3 million). Still, despite that, Rex said the cash in the bank almost doubled compared to the prior period. For the six months, revenue (excluding government grants) improved by 282% year on year, and the government grants and subsidies declined by 93% to AU%1.9 million ($1.3 million). Passenger revenue was SAU$292.9 million ($199.1 million), and total group revenue (excluding joint-venture) reached AU$339.8 million ($231.7 million).
Rex fully resumed its Boeing 737 domestic services in February 2022, and since September it has recorded monthly profits on the jet routes. The routes, which include services to/from Sydney, Melbourne, Brisbane, Gold Coast, Canberra and Adelaide, produced consistent growth between September and December in 1HFY23. Rex currently operates seven Boeing 737-800s on domestic routes, but based on surging demand, it announced it had located two more 737s to add to the fleet in June and July.
Regional is turning around
On the regional side, where the airline uses a fleet of 61 Saab 340s, Rex has had an ongoing battle with Qantas over alleged predatory pricing by Australia’s flag carrier for more than two years. In very simple terms, Rex says that Qantas has entered regional routes it was flying that were barely sustainable for one carrier, let alone two. Since February 2021, Rex has closed a number of these routes due to what it says is predatory pricing and capacity dumping. Qantas has denied this, and the two airlines have traded barbs ever since.
Photo: Steve Worner/Shutterstock
In Tuesday’s statement, Rex raised it again by saying regional operations had been affected “due to Qantas’ predatory behaviour in entering routes that are too small to support two operators.” The good news is that regional services produced positive EBITDA for the last four months of the half and are expected to return to profitability in Q3FY 23. Executive Chairman Lim Kim Hai said:
“The results are pleasing considering that domestic jet services only really operated in a relatively COVID-free environment since late February 2022. To achieve profitability in such a short period under a normal environment is fairly unprecedented in the world.”
In its investor presentation submitted to the Australian Stock Exchange, Rex said, “barring any further external shocks, the Rex Board is cautiously optimistic that the Rex Group will be operationally profitable in FY23 due to the positive developments cited.”
Have you flown with Rex lately? Let us know in the comments.
