Flying through the fog …

Regional Express FY2015 results

Rex recently announced its FY2015 results and it was a mixed result with both favourable and unfavourable elements.  Let’s start with the bad news:

  • Passenger numbers were down again. YOY it fell another 2.7% and this is the 7th year of continuous fall in passenger numbers.  I am convinced that the ticket prices are too high as the passenger numbers have fallen in spite of winning so many new routes in Queensland.
  • Salaries continuing to grow at a faster pace than revenues. This may be due to the mobilisation cost for new Queensland operations.
  • Rex fell to 2nd spot from 1st last year on the airline reliability index which measures on-time departures.

There were a few positive developments as well:

  • Significant expansion of the routes in financial year with the Queensland routes increasing the route network to 53 destinations from 36 last year. Rex now has the scale to further expand the route network in Queensland.
  • Fuel for FY2016 hedged which will bring savings of $4.5 million.
  • Cash generation still good. Cash from operations was $23 million, which is very similar to adding back depreciation ($15.8 million) to net profit ($6.7 million)
  • Borrowings were paid down and net debt is now $12 million compared to $22 million last year.
  • WA will call tenders for the provision of RPT services to various regional towns and Rex may tender, which is a good opportunity to further expand the network.

So what does this mean?

I think Rex’s strategy of increasing ticket prices to offset operating cost escalating is not a sustainable strategy as I’m convinced that the high air fares are driving away passengers. Load factors have decreased from the high 60s in 2008/09 to the mid 50s (2013 onwards).

Having said that Rex still has a dominant position in the regional aviation sector and it’s ability to generate cash flow is excellent.  Capital expenditure is lower than depreciation so free cash flow is higher than the reported net profits.  The Saab 340s will operate for at least another 10 years so I expect capital expenditure levels to be broadly flat.

Rex is still trading at a significant discount to the book value which means the down side is low.  However, for the share price to move up, the market must see some growth and the escalating airfares are not helping the passenger numbers to grow. At the current share price ($0.90), I’m holding my position until I see a reversal of the trend in passenger numbers.

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