Can things get any worse for Australia’s third-biggest airline?

A board coup, administration and now taken to task by the corporate regulator for misleading shareholders. Most companies wouldn’t want to experience that in a lifetime. But for Australia’s third-largest airline Regional Express (Rex) that’s just the last 18 months.

While Rex’s collapse in July left a bad taste in the mouth of domestic travellers, this time around there will be a bevy of furious Labor politicians, given the Albanese government just stumped up $80 million to bail out the airline.

As the Australian Securities and Investments Commission (ASIC) boss Joe Longo pointed out on Wednesday, the government was made aware of the watchdog’s investigation into Rex before it tipped in the cash. Moreover, many of Rex’s issues were a matter of public record, so one needs to question why the federal government didn’t attach governance conditions on Rex when it agreed to become a funder of last resort.

Rex is responsible for flying about 5 per cent of Australia’s domestic passengers.

It’s the “Rex hex” striking again, and the latest in a series of unfortunate events that has punctuated the cascading corporate mess at the airline.

ASIC has alleged that Rex misled the market about its financial prospects in February 2023 and four of its directors breached disclosure obligations. The regulator is seeking to have these four directors, including the current chairman, also a former federal transport minister, John Sharp, fined and disqualified. (Sharp plans to defend the case vigorously.)

The other executives in the regulator’s sights are former chairman Lim Kim Hai, and two representatives of the airline’s major shareholder Lincoln Pan and Siddharth Khotkar.

On February 28, 2023, Rex released an ASX statement declaring it was “optimistic the group will have positive operating profits for the full FY23 barring any further external shocks”.

But ASIC says Rex did not have a reasonable basis for that claim, given it had incurred operating losses for that financial year, and had not even prepared a 2023 financial year forecast before releasing the statement to the ASX. On June 20, Rex stunned investors with a profit downgrade, forecasting an operating loss of $35 million.

ASIC says Lim should have known on February 28 that the profit guidance was inaccurate and alleges the other directors subject to this legal action were made privy to the financial information on April 14, which should have led them to pull the guidance.

In July, Rex was placed in administration and its regional services have continued to operate with the help of the aforementioned $80 million package from the federal government.

The airline’s woes are considered by many to be of its own making. The genesis of it was a decision to aggressively expand from its regional routes (and roots) in the immediate aftermath of COVID and take on Qantas and Virgin in the lucrative intercity markets, particularly the golden triangle of Sydney-Melbourne-Brisbane.

The plan was to capitalise on Virgin’s financial collapse in the early months of COVID. But as history now shows Virgin rose from the ashes after being acquired by private equity firm Bain and Rex ended up paying a heavy price for its folly.

What’s gravely disappointing is Rex’s failure despite it receiving a disproportionate share of financial help from the Australian government during COVID. The airline has been a prime beneficiary of the city/country divide that’s often exploited by the various political parties to win votes in the bush.

That said, without government assistance, Rex employees would have been penalised and a number of regional communities would have been left stranded. Given the prevailing market concentration, a number of regional markets would have also been turned into monopolies, leaving customers exposed to higher airfares.

So, the government may have had little choice other than to provide some support to Rex, or risk the wrath of regional Australians. Prime Minister Anthony Albanese at the time of Rex’s collapse gave the airline an earful for stepping out its lane and taking on the major city routes.

Perhaps imposing some conditions on Rex’s board may have also been helpful, given the airline’s senior management was already embroiled in a boardroom tussle in 2023, with a coup resulting in Rex’s largest shareholder, Lim Kim Hai, being replaced by Sharp, just days after the ASX queried the company about its related-party transactions.

A month later Lim Kim Hai, launched an audacious but unsuccessful bid to remove John Sharp and three other directors from the board and appoint two new ones.

The action taken by ASIC on Wednesday feels like yet another, albeit sensational, dot point in Rex’s burgeoning list of challenges. For now, the federal government will ensure that Rex’s administrators, EY (Ernst and Young) Australia, can keep going with the sale process and regional Australians can still keep booking Rex flights until June next year.

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