The annus horribilis for Australia’s aviation sector and its long-suffering passengers continues apace following the collapse of Regional Express Holdings (Rex) and Bonza, the two junior challengers to the Qantas-Jetstar duopoly.
The full disaster of Rex is now unfolding with corporate watchdog ASIC suing the company and four directors over alleged “serious governance failures”, including misleading investors about its financial position and breaching Australian Securities Exchange continuous disclosure rules, 18 months before the airline halted trading.
Reports have also emerged that the Albanese government is set to buy the debt owed to private equity group PAG Capital, making the government Rex’s largest creditor and giving it control of the airline should it work its way out of administration. PAG had leant Rex $141 million to finance its 2021 expansion into capital city routes.
Why is Rex being sued by ASIC?
“We will allege four of Rex’s directors breached their duties because they failed to take steps to ensure the market had accurate information about the company’s financial performance,” ASIC chairman Joe Longo said in a statement yesterday.
The four individuals involved are former Howard-era transport minister John Sharp, former executive chairman Lim Kim Hai, Lincoln Pan and Siddharth Khotkar. ASIC is seeking to fine them and ban them from serving as directors.
ASIC will allege Lim contravened his directors’ duties between February 28, 2023 and June 20, 2023 by drafting and approving the February 28, 2023 announcement that the company was “optimistic the group will have positive operating profits” for the 2022-23 financial year, “barring any further external shocks”.
It will also allege Lim failed to take steps to prevent Rex from breaching continuous disclosure rules by not alerting shareholders of the troubled state of company finances. Rex posted a loss of $35 million for 2022-23.
ASIC will also allege the other three directors became privy to financial information from April 14, 2023, which should have led them to take steps to ensure Rex updated the market per its continuous disclosure obligations.
In 2021, the airline was fined $66,000 for breaching continuous disclosure laws. In May this year, ASIC queried Rex over a related party transaction with Lim’s brother-in-law Thian Song Tjoa during Rex’s 2022 acquisition of National Jet Express, where Thian held 30% of shares. This triggered a boardroom split ahead of the company’s collapse.
Who are the people accused?
Pan is a partner of Asia-Pacific private equity group PAG Capital, which provided Rex with the funding facility to launch its east coast capital city services on leased B737s that would eventually prove its undoing. As such, Pan was PAG’s representative on the Rex board and was unable to be removed under its funding deal.
Rex deputy chairman Sharp, who has vowed to defend the charges “vigorously”, is also a director of at least three other companies. He earned $140,000 per annum for his role and was the public face of the company. He holds positions on several other trusts and organisations.
Lim is the largest shareholder in Rex with 19 million shares, and chairs two other companies. Khotkar is no longer on the board.
Neither Khotkar, Lim nor Pan have made any comment. None of these directors were paid a salary.
What did the government know about Rex and when?
Rex halted trading on the ASX in July before being sent to administrators Ernst & Young, which has been conducting a protracted sale process. The joint failures have left Australian airline travellers at the mercy of Qantas and Virgin, which now control 98% of the domestic aviation market.
The government handed Rex an $80 million lifeline last month — which Transport Minister Catherine King described this week as a “conditional loan” — in order to keep Rex’s regional services running until June 30, 2025 — after the federal election. The government did this despite having already been briefed on ASIC’s investigation, as was revealed this week.
Questions have been raised about what assurances, if any, the government gained from this investment. “It’s really a matter for the government as to what its reasoning was and what position it took in making that funding,” ASIC chair Joe Longo said.
The government reportedly rebuffed offers for Rex from other regional players, and Ernst & Young also dismissed at least one offer for the company. No details have yet been released regarding how much of Rex’s $141 million debt the government is covering, or whether this amount is in addition to previous funding lifelines.
“The government needs to come clean on whether Australian taxpayers are bailing out foreign investors and what can Australians expect in return,” opposition transport spokesperson Bridget Mackenzie told Crikey.
What might happen next?
The Transport Workers Union has urged the government to take an equity stake in the airline to give certainty to its workers, citing an October YouGov poll that showed 71% of respondents support the federal government intervening to ensure Rex continues servicing critical regional routes.
But industry observers believe the government may have missed its chance to back Rex as a viable competitor to the Qantas-Virgin duopoly. Rex now only operates its Saab propeller regional fleet and has been reported as having problems retaining pilots, already a common problem with regional airlines in Australia. Rex’s 737 aircraft have been returned to its lessors or taken over by Virgin. Its pilots have all been snapped up by Virgin and Qantas.
Still, perhaps the government has a small window, with it still holding approval for Qatar Airways to take a 25% stake in Virgin. That could be made conditional on it supporting a third airline, but that would require a substantial investment of taxpayer funds. Its primary aim appears to be staving off any final end to Rex until after the federal election.
The government is remaining tight-lipped for now. But expect plenty of promises on regional travel from both sides ahead of next year’s poll, bearing in mind that neither has ever done anything substantial to improve competition in aviation.
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