Equity firms in line to buy Regional Express Airlines

[dijical]

Something is bound to happen there, it's just a matter of time I guess :{ Report in the Australian today:

"Regional Express Airlines may be on the radar of prospective suitors, with sources close to the carrier saying it has conceded that it would be a willing seller at the right price.

Various private equity firms are understood to have approached the airline, with the view of snapping up the carrier at a time when it posted its first half-year loss in a decade.

Virgin and Qantas are seen as the logical acquirers by many, but sources within the Virgin camp said an acquisition of Rex was not on its agenda, while the understanding is that Qantas would likely face opposition for a purchase from the Australian Competition and Consumer Commission, with a deal only likely to be possible for Qantas should the regional airline collapse.

Rex, which is listed on the Australian Securities Exchange, dominates regional routes rarely flown by Qantas and Virgin, and is widely regarded as having a good track record for on-time flight arrivals and departures.

The airline has the world’s largest fleet of the 34-seater Saab 340 aircraft, with 52 planes. Of those, 40 have been fully paid for in cash, and the rest with a two-year remaining mortgage. This year’s interim loss was at the time blamed on the cancellation of a lucrative contract with the Australian Defence Force, triggering at least $18 million in writedowns.

Despite the fall in earnings last year and the latest loss, the group still made $9.3m in net profit against $250m in revenue in the 2015 financial year.

The airline has an attractive balance sheet, and is considered to have been on a golden run for the past decade.

But last year the group reversed its guidance and declared it was facing another fall in profit for the 2016 financial year. Compounding the problems has been industrial action from its pilots over new pay conditions and a reduction in business from fly-in fly-out miners on the back of the challenges faced by the resources industry.

The company’s market value sits at around $85m, and it has about $281m of assets on its balance sheet, including $200m worth of aircraft and at least $20m of cash, while liabilities sit at just $86m, more than a quarter of which is debt and finance leases for aircraft."

The Australian (http://www.theaustralian.com.au/business/dataroom/equity-firms-in-line-to-buy-regional-express-airlines/news-story/26a9cc7350b00ad4ad6effcc34c864a4?login=1)

[TWOTBAGS]

I don't know whether to laugh or cry at this one...... another absolute gem of the journalistic flavour.

$200m worth of aircraft
Well they may be on the balance sheet for just under $4m each but you can get 340B for under $1M these days so even if fully referb'ed at double the price overvalues the fleet by 100%

Between Jurnos, Bankers, and Corporate Raiders......what a prize bunch, they deserve each other believing this piece of artistic licence.

You are only as good as your last landing and you're only worth what someone else wants to pay for you.

[dijical]

"Between Jurnos, Bankers, and Corporate Raiders......what a prize bunch, they deserve each other believing this piece of artistic licence."

With respect twotbags, the whole point is that (with the exception of the Journos) they DON'T believe this piece of artistic licence.

The entire company is valued at about $85m by the market (ie the Bankers and Corporate Raiders). Take away the $20m cash and say $15m for property and other hard assets and you end up at less than $50m for the aircraft. Which squares with your price of $1m or less for a 340B.

The more interesting question is whether anyone else can do better with the airline than the current management.

[Chris2303]

Won't it just be yet another asset strip as happened with Dick Smith Electronics?

[Stationair8]

Sounds like the private equity boys have been sniffing the Avtur pretty hard!

They can see themselves becoming a player in the global airline industry- Saab's today Airbus A380 next year!

The poor old private equity boys must have moved on from retail, there is only so many Myers and Dick Smith to buy and refloat to the unsuspecting mum and dad investors!

[Bootstrap1]

Private equity. This can only end in tears. There will only be one winner, the bloke who made a motza selling his pieces of pie.

[KRUSTY 34]

They certainly do sniff something.

The rumours of a Virgin buyout have been doing the rounds for some time. Until recently (Virgin's surprisingly high equity raising) an acquisition of REX would have been seen as something akin to the Ansett takeover of Hazleton, and we all know how that ended!

Now, with a cashed up VA, there may be some veracity to these rumours.

The interesting thing about the stated value of REX, is that far from being valued at $85M, the company has cash reserves alone in excess of $110M, As stated in the latest financial report! So the Private equity boys are either surprisingly inept in their appraisal, or as is the case, truth is the first casualty in war.

[Sunfish]

the PE boys will want to buy the cash flow, nothing else. Take the cash, replace it with debt, refloat it to the suckers on the stock exchange. Rinse, repeat.

[moa999]

First question in due diligence
So you have some very old planes. What's the plan to replace them?
Crickets

[1a sound asleep]

First question in due diligence
So you have some very old planes. What's the plan to replace them?
Crickets

This is the key. Their profits have come about due to operating a very large number of single type that are old and cheap. Reality is if they had to buy new a/c they would be broke. They have installed new avionics but they have another 10 years max.

So wheres the 10 year plan with replacement a/c and accompanying profit/loss forecast??? Truth is it's not very economical to fly regional jets on most routes that are currently served by Saabs

Let's see the financials with a fleet of new Dash 8s :ugh:

[Cessna Jockey]

Sound Asleep the problem is current Dash 8's or ATR's from the factory floor are well above the required size for what Rex needs - even the smaller ATR42 seats 50. They make their money on a 34 seat turbo prop to small regional ports which they only just manage to fill - anything larger than that will result in empty seats.

So the question is, does a turbo-prop upgrade even exist for their 30 seat niche market? Most of them went out of production in the 90's

[On eyre]

1A Sound Asleep & Cessna Jockey you are on the money. Five years ago I predicted to colleagues in the industry that Rex had about a ten year life left in it.
I was lucky to have operated to a similar model (much much smaller I might add) for ten years until the fairy godfather and dragon lady came along. Cheers all.

[Cessna Jockey]

Well a quick Google search points to just one modern replacement for the Saab which has just been put back into production in Turkey, courtesy of the Germans:

Aircraft | TRJet (http://www.trjet.com/Aircraft//)

If they're not keen on that, then they'll have a lot more seats to fill on a far bigger aircraft type.

[LostProperty]

Just out of curiosity, is there any limit to a commercial aircraft's lifespan assuming that new or recycled parts remain available and the owner is prepared to wear the cost? Does the manufacturer or any aviation authority specify that after a certain number of flight cycles, an airframe has had enough?

[mikewil]

Just out of curiosity, is there any limit to a commercial aircraft's lifespan assuming that new or recycled parts remain available and the owner is prepared to wear the cost? Does the manufacturer or any aviation authority specify that after a certain number of flight cycles, an airframe has had enough?

There's an airline in northern Canada that still flies radial pison aircraft from WWII like DC-3s.

As long as the Saab 340 remains cost effective to operate (and parts are still readily available), there is no reason for Rex to replace them.

[thorn bird]

Cessna jock,

An interesting link you posted, in more ways than one.

Set my mind to wondering why it is that Australia has never developed an aviation manufacturing industry past the plastic fantastics or very small utility types? Even those seem to be continually battered by the Australian regulator.

Now Turkey, following the successes of countries like Canada, Brazil, Ireland and New Zealand.
Australia seems unable or unwilling to make anything other than big banks, miners or property developers.

[TBM-Legend]

TB is right. We also whinge and whine about overseas interests buying our farms etc but as Australians we will not invest in anything other than an overpriced house and car plus poker machines and want the Govt to provide free everything.

Governments in the countries mentioned take long term views on helping to create business and see the export potential. Why didn't the Govt or investment funds get behind the manufacturing and producing industries and aim for export?

[mikewil]

Some sort of cabin and cockpit refurbishment would be nice to see though, bring the aircraft into the 21st century. They already got their cockpit 'refurbishment', looks like this was the only money Rex was going to throw at the Saab in terms of avionics....

Rex installing new cockpit displays on Saab fleet | Australian Aviation (http://australianaviation.com.au/2015/05/rex-installing-new-cockpit-displays-on-saab-fleet/)

[Capt EFIS]

Like dehg5776 said, the Thompson screens are not an upgrade, they only display the same information that was on the CRT's they are replacing. I heard that it would take about $500k per aircraft to bring the avionics up to date.