FIFO dreaming

ACCC REJECTS AQZ ACQUISITION

Need To Know

• ACCC rejected QAN proposal to acquire rest of Alliance Aviation (AQZ)
• QAN already AQZ’s main customer, wet leases ~50% of AQZ capacity
• QAN $4.75/sh offer (May22) a massive PE premium to aviation market multiples

The takeover offer from QAN values AQZ at approximately $614m so this deal is not hugely material to QAN. But QAN has pursued AQZ since Feb 2019 when it announced it had accumulated a 19.9% stake.

AQZ’s capacity has grown approximately 75% (seat numbers) in the last two years, solely due to the acquisition of a near new fleet of E190 aircraft, all of which are (or will be) wet leased to QAN. A wet lease is where the lessor (AQZ) provides both the aircraft and crew and maintains operational control. In the 1H23 result for AQZ, wet lease hours grew to over 50% of total hours flown from almost nothing two years ago. And this will only increase further as the extra 12 E190s are added to the existing 18 E190s already on the tarmac for AQZ. Contracted flying is AQZ’s other main source of revenue, and this has held steady over the same time frame.

The ACCC has inexplicably missed the fact that QAN is now AQZ’s main customer, albeit an intermediary element between AQZ and its resource company FIFO workers who appear to embrace the AQZ service. The ACCC described AQZ as an important competitor to QAN, but the wet leases suggest otherwise. It is a symbiotic relationship.

As QAN correctly pointed out, the ACCC has taken an eternity to assess the impact of QAN’s 19.9% stake on AQZ’s competitive position in its markets in WA and Queensland. No concerns have been raised on any aspect of AQZ’s operational and competitive activity since QAN established its 19.9% stake back in February 2019. Indeed, since announcing its full takeover offer in May 2022, the ACCC has dawdled to its conclusion that allowing the takeover to go ahead would lessen competition in the markets identified. 

Investment View

The ACCC has done a reverse ‘Steven Bradbury’, in our view. QAN will surely pursue an appeal of the decision as it seems so obvious that the majority of AQZ’s business, and more in the future, will be dominated by the QAN wet leases. QAN has no Board representation and therefore only exerts influence on AQZ as its major customer.

It could be argued that all the resource companies enjoying the creature comforts of the new E190 fleet are only doing so due to QAN’s wet lease deals. The older F100 aircraft of similar capacity may be eased out of the AQZ fleet in due course thereby lifting the quality of the fleet. QAN does not have to do this deal and would not lose too much by walking away.

Figure 1: AQZ FLEET AND FLIGHT HOURS