Regional Express: future strategy

Melburnian1

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Three years ago I asked how Rex (ZL) coped with its ageing fleet.

At the time, the median age of its SAAB340Bs was just under 22 years. It is now 24.6 years. VH-EKD is more than 29 years old.

Net profit in 2017-18 rose to just under $17 million, assisted by new routes gained in states like WA and Queensland. The airline has 'partnership agreements' with lots of rural councils that I assume involve some sort of subsidy from the council. Some State Governments also pay subsidies to Rex.

The share price is $1.46, good compared with what it has been at times. Directors increased the dividend from 8 to 12 cents.

However, the annual report (mentioning that Rex has 57 SAABs, but the Airfleets website says 55) lacks a comment about future strategy apart from how the aircraft are owned not leased, and how the company has exited loss making routes like Taree to Sydney.

Granted it has a good number of spare parts purchased that should help keep costly exposure to the US dollar down, butt what is it doing about its ageing aircraft?

As with any transport equipment, good maintenance is the key. Just because a train, bus or plane is 'old' is not necessarily a reason to scrap it.

However, AFF member bajar previously mentioned that SAAB was gradually exiting aviation, so that may be a concern.

The cost of new aircraft must be high. Will Rex need these in the next five years?
 
Their biggest problem is that there isn't a single product on the market that can replace the SAABs like for like. The 30-40 seater prop appears to be dead. Unfortunately for Rex, going into that next size bracket means trying to fill all those additional seats and in many ports would mean very costly security operations would need to be set up. It's a huge existential problem although I believe from talking to people who know what they're talking about may be still as much as ten years away given how lightly flown and how robust their Saabs are.
 
Bigger aircraft will kill them. And nobody makes same or slightly smaller. It will become a big issue.

Yes, a big issue not just for Rex, but also many of the communities they serve, particularly those under regulated agreements that can't support a 50 seater. I guess the contract routes could go back to smaller aircraft.

The list of failed regional carriers is long, Rex, QantasLink and AirNorth are the main ones I can think of that have sustained RPT flights over the long term.
 
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Yes, a big issue not just for Rex, but also many of the communities they serve, particularly those under regulated agreements that can't support a 50 seater. I guess the contract routes could go back to smaller aircraft...

dajop, what percentage of the rural airports in say NSW that have only SAAB340B ZL flights as their largest 'regular public transport' would need significant runway upgrading/ lengthening to support larger turboprops? I'm thinking of the Griffiths and Narranderas of the world.

Remember to some rural airports, Rex upgraded from what were 19 seat Metroliner aircraft if I recall.
 
I don't think the airports are particularly limiting. If the passenger numbers were there, you'd already be seeing Dash 8s. The problem is places that need about 20 seats per day, which are marginally viable with a Saab, but not even a consideration with anything bigger.
 
I don't think the airports are particularly limiting. If the passenger numbers were there, you'd already be seeing Dash 8s. The problem is places that need about 20 seats per day, which are marginally viable with a Saab, but not even a consideration with anything bigger.

This is exactly what I meant by "can't support a 50 seater". Commercially, not physically/technically. Even for that those that could commercially support 50 seater services, it could mean a loss of amenity, in terms of reduction in frequencies (3 -> 2 services a day for example).
 
Surely the obvious pick for Rex is the ATR42, which is still being manufactured, and a jump from 34 pax to 40 pax is manageable.

Is it? Many of Rex's routes involve 'partnerships' with local Councils, which I take to mean 'ratepayer subsidies.' Some of the places to which Rex operates are not exactly tourist hubs, are subject to the ups and downs of agriculture and are stagnant or perhaps slightly declining in population. Plus as others have said above, some routes may have a demand of 20 fare paying passengers per flight.

Perhaps the new aircraft is more fuel efficient? That might help, but the aircraft still have to be funded. With profits of $17 million in the latest year and a large fleet to replace at some stage (whether owned or leased), that's a huge amount of future expenditure.
 
I'm sure there are plenty of second hand ATR42's out there that would give Rex aircraft that are maybe 5-10 years old, much better than the current 24 years. The newer aircraft are more efficient to operate, and its not so much the number of seats that makes a difference, its the breakeven load factor, and I believe the ATR42 had a quite low breakeven factor. So Rex might be able to remain profitable carrying the same number of pax in the 42 seater as they currently do in the 34 seater. As for purchase cost, they won't get any sympathy on the call, as every airline has to factor in fleet costs. They've already spent money updating from early model A340's to 'newer' models, and now they have to allow for the next step up.
 
I think you're making some untenable assumptions here.

I'm sure there are plenty of second hand ATR42's out there that would give Rex aircraft that are maybe 5-10 years old, much better than the current 24 years.

There are plenty on the market, as are most aircraft types. But, from what I can gather, they're not particularly loved.

The newer aircraft are more efficient to operate, and its not so much the number of seats that makes a difference, its the breakeven load factor, and I believe the ATR42 had a quite low breakeven factor.

Even though it's not new, the SAAB is actually quite an efficient aircraft, and the newer ones are not necessarily much more so. The operating costs of the SAAB are about $300 less per hour than a Dash 8, and about $600 less than an ATR.

Load factor is, of course, a percentage, so even if the ATR were to break even at the same % as the SAAB, you'd actually need to find more passengers. And that's a big issue with many of Rex's routes. So, ignoring any purchase price issues, you're going to need to find enough extra passengers to pay for that $600 per hour.

It isn't really a case of REX needing to go to that next step up. If larger aircraft were viable, then they'd already be there, just in different colours. They need to be able to continue operating at their current level, and there don't seem to be many aircraft options that reasonably allow that.
 
...the SAAB is actually quite an efficient aircraft...If larger aircraft were viable, then they'd already be there, just in different colours.

Would have to be one of jb747's non-QF best contributions. It gives new (and very interesting) information.

The refleeting issue probably is not (as yet) "material" in the ASX sense to Rex's profit discolsures, but there will come a time when it will be. Going by what others suggest, that may be in the next five to 10 years.

I wonder if stockmarket analysts are 'on to' this headwind for this 'little Aussie battler' (albeit Singaporean-owned) company?
 
What happened to the Beech 1900Ds that Impulse were flying on regional routes when they first started? Seemed a much nicer aircraft than the Metros and Twotters that get about in the regional markets.
 
What happened to the Beech 1900Ds that Impulse were flying on regional routes when they first started? Seemed a much nicer aircraft than the Metros and Twotters that get about in the regional markets.

It's a 19 seat aircraft, that went out of production 16 years ago.
 
A year ago, Regional Express said it expected a 'double digit' rise in profit in 2018/19.

A week ago, it reported a profit rise of 3.6 per cent (as revenue rose 7.5 per cent.)

Not only did it fail to meet its original forecast, but profit did not rise in step with revenue.

It's creditable that it remains profitable - helped by some contracts with government, and subsidies from state governments and/or local councils - but this doesn't take away the question as to how it will fund a suitable replacement fleet (bearing in mind the points above that there may not be ;perfect fit' replacements.)
 
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A year ago, Regional Express said it expected a 'double digit' rise in profit in 2018/19.

A week ago, it reported a profit rise of 3.6 per cent (as revenue rose 7.5 per cent.)

Not only did it fail to meet its original forecast, but profit did not rise in step with revenue.

It's creditable that it remains profitable - no doubt helped by some contracts with governments that it has, and some subsidies from state governments and/or local councils - but this doesn't take away the question as to how it will fund a suitable replacement fleet (bearing in mind the points above that there may not be ;perfect fit' replacements.)
Maybe they think that 3.6% is a double digit?...
 
It's creditable that it remains profitable - helped by some contracts with government, and subsidies from state governments and/or local councils - but this doesn't take away the question as to how it will fund a suitable replacement fleet (bearing in mind the points above that there may not be ;perfect fit' replacements.)

Not detracting from your original question, which remains important ( maybe someone should ask at AGM? :)) but worth noting regional aviation in Australia is littered with failures, even with government contracts and subsidies. Kudos to the organisation for leveraging this and negotiating deals with said councils and governments. They have a very aggressive government relations strategy that appears to be working.
 

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