REX share price on watch after funding update

REX has published an update on funding its plans to compete directly with Qantas and Virgin on domestic services between major capital cities.

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The Regional Express Holdings Ltd (ASX: REX) share price is on watch today after the company released an announcement following the close of trading on Tuesday. REX is Australia's largest independent regional airline. The company originated in 2002 when investors purchased two small airlines owned by Ansett after it went into administration.

On 29 June this year, the company announced the board had approved a plan to begin domestic operations in Australia. Instead of only flying regional routes, this would mean flying between the major cities of Sydney, Brisbane and Melbourne. Accordingly, the Board approved an initiative to raise a minimum of $30 million to launch these domestic jet operations from March 2021.

Why is the REX share price on watch?

One of the ideas floated in the Board's initial proposal was a leaseback arrangement. For instance, the company would sell its aircraft fleet, or a portion of it, to a buyer and then lease it back. 

The company announced yesterday it had received term sheets from three different lessors. All expressed interest in the sale-and-leaseback of about 15 aircraft for $30 million. 

The REX Board is still actively considering alternative funding avenues, including funding from equity partners. Consequently it will make its final decision on the source of funding and the amount to be raised before the end of July 2020.

The crowded skies

With the easing of lockdowns, Australians can already fly between several state capitals. Presumably, before long, this will extend to almost all states depending on how the new wave of COVID-19 infections in Victoria plays out. Today, our main carriers are Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Limited (ASX: VAH), with the latter still operating while in administration. Moreover, the new owners of Virgin Australia appear to be moving towards a lower cost operation. 

Alliance Aviation Services Ltd (ASX: AQZ) has also embarked on an equity raising initiative to raise approximately $120 million in total. The company operates a diverse business model which includes charter flights and fly-in-fly-out services for resource companies. Alliance has targeted increasing its fleet to offer more services to existing clients, as well as new services for new clients. Additionally, the company specifically mentioned opportunities to expand its tourism operations.

This means REX will be going head to head with Qantas and a newly cost-conscious Virgin Australia, as well as likely facing new competition in its existing routes from Alliance Airlines and QantasLink. On 5 June, REX announced it would be increasing its flights in response to QantasLink having doubled its flights into ports in competition with REX.

The REX share price

The company's share price has fallen by ~5% over the past week. It currently has a price to earnings ratio of 8.52. At this price the company has a trailing 12 month dividend yield of 10.62%.

Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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