Alliance Aviation is a wholesaler of airline capacity with a large and growing exposure to the resources and energy sector for FIFO activity. The quantum leap in new capacity is significantly due to wet leasing agreements with Qantas.
Prior to AQZ’s company-changing investment in a large fleet of E190 aircraft, it was clocking up around 38,000 flight hours of contracted and chartered flights across regional Australia. By the end of FY23f, AQZ will be recording nearly 140,000 flight hours with the difference solely due to the acquisition of a fleet of 33 E190 aircraft of which 18 will be wet leased (plane plus crew) to QAN.
The Embraer E190 has become the core aircraft of the AQZ fleet after the company committed to a number of transactions that bring the current total of E190s to 33 by the end of FY23f. The E190 is a twinengine jet aircraft that is only slightly smaller than a B737-800. It can fly up to 4,500km carrying up to 114 passengers making it an ideal aircraft for the FIFO (fly-in fly-out) routes in Australia’s main resources and energy towns and regions including the Pilbara and Kalgoorlie in WA, the coal mining towns across Queensland, and BHP’s Olympic Dam in SA among others. It is noteworthy that AQZ’s network has no contract presence in NSW or Victoria. Instead, the company has major bases in Brisbane, Adelaide and Perth with additional operations in Cairns, Townsville, Rockhampton and Darwin.
The wet lease network is a proxy for QAN’s eastern seaboard network minus the major city routes. It will fly some routes from Sydney, Newcastle, Canberra, Hobart and Melbourne. The wet lease agreements with QAN were recently materially increased with new aircraft deployments rolling out through to June. This takes QAN’s exercised options to 14 out of the current 18 available. AQZ is also expecting a significant increase in the utilisation of the first 8 aircraft from March onwards. Each of the agreements is for a term of 3 years. Most of the remaining E190s are to be used in wet leasing agreements with some allocated to FIFO flying in central Australia.
The company has chosen Rockhampton for a major $60 million maintenance hangar that will commence operations in early 2023. The 3-bay hangar will employ 100 people and will save approximately $5-7 million pa in base maintenance costs. The project is being funded by all three levels of government so the total cost to AQZ for this project is $30 million.
All but one of AQZ’s 33 E190s have been paid for as at 30 June 2021. The balance sheet had net debt of $154.7 million and net assets of $320.2 million at 30 June 2021.
Investment view
In effect, AQZ has become a leg of Qantas’ regional Australian capacity through the newly acquired E190 fleet. The wet leased AQZ capacity to QAN of 18 aircraft is approximately one quarter the size of the Qantas Link fleet of 70 aircraft, so QAN has effectively increased its regional capacity by roughly 25% and has done so using AQZ’s balance sheet.
AQZ is also counting on a strong and enduring increase in FIFO activity across Australia’s major mining regions. With much of this activity under contract, there is good visibility in AQZ’s earnings which is unusual for an airline business.
With QAN as a major shareholder and customer, AQZ’s business risk is slightly mitigated but remains subject to competitive, operational and financial risks.
Risks to investment view
The growth in contracted and wet leased capacity might not be sustained if activity decreased. Operational performance might not be sustained at acceptable levels which could lead to contract cancellations. Competition in the airline industry is intense. Cost increases could affect profitability.
Recommendation
We have initiated our coverage with a Buy recommendation.
