Is Rex (ASX:REX) doomed to fail?

Nick Sundich Nick Sundich, June 28, 2023

Rex (ASX:REX) shareholders have done it tough.

After launching capital city jet flights and thinking that business could become Qantas’ main competitor, it is now even struggling in its regional turboprop network.

What is the way out of this dilemna?

 

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How Rex reached this point

When Virgin Australia collapsed, it announced plans to offer jet flights on Australia’s domestic triangle (consisting of flights between Sydney, Melbourne and Brisbane) – inevitably replacing the void they would then leave.

It appeared a great situation and as a result, shares rose in the 2nd half of 2020.

 

REX (ASX:REX) share price chart, log scale (Source: TradingView)

 

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Unfortunately, not only did Virgin survive, but it emerged stronger than it was before. Still, by the time it launched in March 2021, perhaps there would be space for Rex to co-exist alongside Virgin.

And in any event it had a substantial regional operation, using Saab turboprops on several routes that were often high-yielding monopoly routes.

Despite individual months seeing profitability (with a reported $2.8m profit in November 2022), the capital city operation has struggled to make an impact on the top line.

 

Rex is expecting a loss in FY23

Indeed, Rex told shareholders last week tat it would post a loss of around $35m for FY23. Although this was down from $46m in FY22, you’d expect a better result considering FY22 was impacted by the Delta lockdowns and also considering how quickly Qantas’ bottom line has turned around – as well as Virgin Australia’s.

The airline admitted demand was softening post-Easter as corporate travellers began to cut back their budgets.

And its regional services are being impacted too. Up to a third of Rex’s regional Saab turboprops are grounded due to supply chain shocks.

The airline still plans to expand its domestic operations and become profitable in FY24 as a consequence of that as well as FIFO contracts from its subsidiaries.

 

Two factors will inhibit Rex’s growth prospects

In our view, Rex needs two things for future success and both are easier wanted than obtained.

The first of these is new planes, particularly turboprops. There is no obvious modern replacement for the Saab 340 aircraft.

Rex did sign an MOU with ATR back in mid-2020, but nothing has eventuated from that.

The second is further slots at Sydney Airport, something without which it will be difficult to introduce new services.

Investors might think this problem will go away once Western Sydney Airport opens in 2026, but this is a fair while away and it remains to be seen how compatible it will be to Sydney Airport.

Will Rex’s clientele put up with going out to a place only accessible by road or a train from St Marys for a 1-2 hour domestic flight? Only time will tell.

It may well ultimately resolve these problems. But for now, we think shareholders should avoid Rex while these issues remain unresolved and uncertainty remains in the aviation market and the economy generally.

 

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