Less than two months after Regional Express told shareholders the company would end the 2023 financial year in profit, executive chairman Lim Kim Hai desperately began searching for a financial lifeline.
The airline’s cash reserves were “critically low” while domestic sales were “disappointingly and bewilderingly bad”, Lim told fellow board directors, and sought a $10 million cash injection from PAG – the private equity firm that loaned $150 million to Rex in 2021, according to documents filed in the New South Wales Supreme Court as part of the corporate regulator’s investigation into the collapsed business.
Former Rex chairman Lim Kim Hai in 2022.Credit: Louie Douvis
The Australian Securities and Investments Commission last month launched legal action against Rex and its four directors – including Lim and former Howard minister John Sharp – for misleading and deceiving investors about its profitability. ASIC has alleged the airline misled the market in February 2023 when it claimed it was “optimistic the group would have positive operating profits for the full year 2023 barring any further external shocks”.
But court documents allege Rex had not prepared a forecast for the 2023 financial year, had recorded an operating loss of $30 million in the first half, and knew that it generally generated lower revenue in the second half.
“On 21 March 2023, Lim received the year-to-date and monthly profit-and-loss figures for the Rex Group for February 2023, and Rex was thereby aware that the Rex Group had incurred an operating loss of approximately $46.2 million,” ASIC has alleged in documents filed with the NSW Supreme Court.
“On 14 April 2023, Lim made a request by email to [Lincoln] Pan and [Sid] Khotkar (copying Sharp) requesting $10 million in funding from PAG, describing the company’s cash reserves as ‘critically low’, domestic sales as ‘disappointingly and bewilderingly bad’, the February results as having ‘crashed’ and a lack of recovery in March.”
Lim’s email to his fellow directors included a spreadsheet showing Rex had recorded a before-tax loss of $7.2 million in February and an estimated before-tax loss of $2.5 million for March 2023.
In order for Rex to end the financial year in profit, as it had advised the market, the airline would need to drastically turn things around by earning a $46.2 million profit in three months. Instead, 10 days before the financial year ended, Rex issued a profit warning to flag a $35 million operating loss for FY2023.
In early May, Khotkar sent an email to Pan – who were both appointed by PAG – on Rex’s route performance, and observed the airline’s “load factor seems to have dropped more than the industry” and that April did not seem “to be showing significant improvement”. A high load factor, a key measure of profitability, indicates an airline has full planes with most seats occupied by passengers.
Days later, Lim, Sharp, Khotkar and Pan received Rex’s “Weekly Worm Report”, which showed the airline’s monthly passenger revenue in January, February, March and April was down compared with the previous year.
ASIC has accused Lim of drafting and approving the statement released to the Australian Securities Exchange on February 28, 2023, and failing to take steps to ensure the market had accurate information. While Sharp, Pan and Khotkar are alleged to have become aware of the company’s finances from April 14 – when Lim sought the $10 million cash injection – but failed to inform investors, in a breach of their director duties.
Rex entered voluntary administration in July after its failed attempt to run flights between major capital cities, prompting the federal government to pour in an $80 million lifeline to keep operating regional routes, despite ASIC chair Joe Longo briefing Treasurer Jim Chalmers and Assistant Treasurer Stephen Jones about its investigation.
Rex shares lifted 1¢ to $1.51 after the February update and fell from $1.21 to $1.06 after the June 20 downgrade. The stock was trading at 57¢ when it entered into administration.
Sharp declined to comment while the court case was under way, but previously said he would be “vigorously” defending the matter and did not believe he had breached regulations. A spokesman for Khotkar and Pan said the pair would be defending the allegations.
Lim and Rex administrators EY have been contacted for comment.
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