PAG poised to invest in Australian airline

The capital would be used to support the launch of domestic service connecting major cities. Pre-COVID-19, the company had a fleet of 60 small aircraft – seating around 30 people – running 1,500 weekly flights to 59 destinations. These are primarily short-haul routes serving towns within the Sydney, Melbourne, and Adelaide catchments.

John Sharp, Rex’s deputy chairman, told Australian Aviation in May that the company would add 10 narrow-bodied jets to its fleet and run services between Sydney, Melbourne, Brisbane, Adelaide and Perth. He said this would make Rex “halfway between a full-service airline and a low-cost airline” and pose a meaningful domestic competitive threat to Qantas, Jetstar and Virgin Australia.

The company subsequently confirmed that it had been approached by several parties interested in providing equity financing for the expanded service offering. It estimated that around A$200 million would be required to support the launch.

PAG’s funding will take the form of secured convertible notes, with an initial A$50 million to be committed on completion of the transaction, targeted for year-end. The balance will be drawn over the following three years, according to a filing.

Rex was founded in 2002 comprising two assets – Kendell Airlines and Hazelton Airlines – that were part of Ansett. The company now also owns Pel-Air Aviation, an air freight, aeromedical and charter operator, and two pilot academies. It listed in 2005.

In March, Rex called on the government to bail out smaller regional carriers hit by the COVID-19 pandemic. The company later announced a shutdown of all routes outside of Queensland – where services are underwritten by the state government – but backtracked when the federal government offered to support the continuation of a minimal weekly schedule to regional and remote locations.

Rex posted revenue of A$321.8 million for the 12 months ended June 2020, up 1% year-on-year. However, reduced passenger numbers resulting from travel restrictions imposed to contain the pandemic meant a net profit of A$17.5 million in 2019 turned into a net loss of A$19.4 million in 2020.

The consequences of COVID-19 were even direr for Virgin Australia, which entered voluntary administration in April, carrying nearly A$7 billion in debt. Fighting off competition from other private equity investors, Bain Capital agreed to acquire and recapitalize the business in June.

PAG has approximately $40 billion under management across private equity, special situations and real estate. The firm is currently deploying its third pan-Asia buyout fund, having achieved a final close of $6 billion in 2018. Current portfolio companies in Australia include quick-service restaurant operator Craveable Brands, specialty retailer The Cheesecake Shop, and property services business DTZ.

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