Ann: Notice of Meeting and Explanatory Statement, page-3

Some observations having studied the material further:

• The Leadenhalll valuation approach applies weighting’s to four main trunk outcome scenarios - Low 25%, Base 60%, High 5% and unsuccessful 10%. (Source pages 42 to 45 of the Leadenhall report). The three success levels have varying numbers of flights, load factors and average fares. Changing the assumed weighting’s obviously impacts the valuation outcome.
• There are limited alternatives available to REX that provide the financial flexibility that the PAG proposal provides. The following alternatives are canvassed and dismissed - capital raising from Private Equity, High net worth individuals and institutions, cash issue to existing shareholders, sale and leaseback of existing Sabb fleet, (source pages 53 and 54 of Leadenhall report).
• PAG will effectively control REX through the conversion of the convertible notes or the exercise of warrants. PAG aren’t paying a premium for effective control.

So for me the question is whether the power balance is fair as between the existing shareholders of REX and PAG. Due to the convertible note structure, existing REX shareholders stand to loose significantly if the main trunk services are unsuccessful (because they need to use shareholders funds to repay the convertible notes) whereas if the main trunk services are successful, PAG shares significantly in the upside. REX doesn’t have other funding alternatives that are at least as favourable which is a big concern - they haven’t been able to convince other Australian based parties on the attractiveness of the main trunk opportunity. These investors are in the same market as the passengers REX needs to attract, so their scepticism is a worry. I can understand the excitement of REX on the potential to create something special, but for me it looks like it comes at a significant financial cost to the existing owners.

While in most overseas aviation markets the size of Australia there would be room for more than two players, history has shown that it is difficult for a third carrier to make a go of it in Australia. Sure the world is different now and COVID has created an opportunity to enter with a very low cost structure, the proof will be in REX attracting sustainable load factors at the required or better yield. If REX is to succeed, then the ACCC has a role to prevent predatory behaviour from QF and VA as both of them have access to capital that would mean that short term losses to see off REX would appeal to their masters as a good investment to make (REX only having access to $150m isn’t a large amount from QF and VA’s perspective). The recent ramp up of regional flying by QF shows they aren’t going to rollover and REX have an easy run). The real profits in domestic aviation come from business travellers who are less cost conscious, are motivated by frequent flyer rewards, network coverage and where timetable flexibility is valued. Can REX capture this market segment?

So if I was a REX shareholder, I would be asking directors:

1. Why have they been unable to attract other investors to fund the main trunk services?
2. Are the financial rewards of successful main trunk services a big enough reward for the risk existing shareholders are taking?
3. Why are they comfortable in the value transfer to PAG through implementing the proposal?
4. How much of the $150m will need to be spent before REX knows if the main trunk services will be successful?
5. If the main trunk services are unsuccessful, can the existing REX survive the losses?