I first wrote about Alliance Aviation Services (ASX:AQZ) 12 months ago. Since that time almost every metric has improved except one. The share price. The price has gone from $3.05 to $3.14 a rise of 3%. Given they pay no dividends, that is a pretty mediocre return, especially when compared to the market return of 13.3% over the same period.
So if everything is soaring, why is the share price stuck on the ground?
Alliance is one of the most significant airlines in Australia with 70 aircraft currently in operation and firm purchase commitments in place to add another 24. Their fleet increased by eight aircraft over calendar 2023 and has more than doubled over the last five years as represented in the chart below.
Source: Alliance Aviation Services, Half Year Ended 31 December 2023 Results Presentation, 7/2/24
Yet most Australians have probably not heard of them. That is because they operate few regular public transport flights and are reducing this still further.
Their strategic goal is to be a wholesaler of aircraft capacity. Their largest source of revenue is contract revenue which accounted for 51% of revenue in the first half of FY24. This is typically in the form of contracts with mining companies where they fly mining staff from the major ports to remote mining locations. These are known as fly-in-fly-out (FIFO) workers.
Their second largest source of revenue is through wet lease agreements. This is where Alliance own the aircraft but lease them to Qantas Airways (ASX:QAN) and Virgin. In addition to providing aircraft capacity, they also provide the staff, and take care of all aspects of servicing the aircraft. This side of the business has been growing rapidly and now accounts for 42% of total revenue. Wet lease revenue was up 106% in 1H FY24 and flight hours increased 104%.
Alliance Aviation’s business model is very different from most commercial airlines. They currently have about 15 long-term contracts with clients. For example they have just renewed their contract with Newmont for another five years. They have been servicing Newmont since 2011, operating FIFO flights to the remote Tanami mine in the Northern Territory from Perth, Darwin, Alice Springs and Brisbane. This means they do not carry the passenger revenue risk like other airlines do.
Revenue is…
