Treasure Chest | Nov 12 2021
This story features ALLIANCE AVIATION SERVICES LIMITED, and other companies. For more info SHARE ANALYSIS: AQZ
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Alliance Aviation is primed for a resurgence in domestic flights and concerns about the deployment of its E190s have eased
-Underperformance primarily related to concerns over the deployment of new E190s
-Alliance Aviation services with Virgin Australia nearing pre-pandemic levels
-Progress being made on expansion of FIFO opportunities in Western Australia
By Eva Brocklehurst
As the aviation industry welcomes the re-opening of borders, Alliance Aviation ((AQZ)) is primed for action, with the deployment domestically of its E190 fleet. A delay in aircraft deployment had been of major concern, as NSW and Victorian lockdowns ensued in July and August.
Restrictions resulted in just five E190 aircraft being deployed by the end of the first quarter compared with an initial target of 11. Now there are 13 that should be deployed by the second quarter, just one less than the prior target of 14.
Furthermore, with contract flying being the company's core business, growth has been assured through the renewal of existing contracts that have increased scope, as well as the writing of new contracts amid general increases in aviation activity.
As the acquisition of the E190 fleet is completed net debt should peak at the first half result, Morgans points out. The board is also expected to resume paying dividends with the full FY22 result.
Management has signalled short-term charter services will continue at current levels subject to availability, while full deployment is anticipated in FY23 when Alliance Aviation will operate with 72 aircraft.
Wet leasing (whereupon Alliance supplies the aircraft and crew to other airlines) will take up most of the new capacity and the company expects 12-16 aircraft will be operating on these services by the end of March 2022.
Moreover, this includes a recovery in services to Virgin Australia, which is close to returning to pre-pandemic levels. Morgans also highlights the company has eliminated the commercial risk on regular travel routes and will operate via a code-share agreement with Virgin Australia.
The wet lease agreement with Qantas ((QAN)) is also progressing as that airline has committed to eight aircraft and Alliance is confident the final 10 will be called on. The initial eight will operate from the Alliance bases in Adelaide, Darwin and Townsville, servicing 13 new domestic routes.
Qantas has been quoted as stating it intends to operate at 120% of pre-pandemic domestic capacity by April 2022. This leads Morgans to upgrade estimates, having noted Alliance Aviation has underperformed the broader market since its FY21 result.
Given a materially higher utilisation rate of the E190 under a Qantas wet lease agreement (around three times a Fokker fleet) the broker also suspects its earnings expectations may provide conservative.
The recent underperformance in the share price is primarily attributed to delays regarding the deployment of the fleet. Domestic policies on borders will still need to be monitored but Morgans is confident the company is on track.
Wilsons assesses the main concerns have arisen from anticipated delays in the deployment of E190s by Qantas, largely because of misconstruing that airline's fleet renewal plans.
Concerns are being excessively discounted in the share price of Alliance Aviation as a wet lease arrangement offers a low-cost solution for Qantas, the broker points out, considering the capital cost of aircraft.
There were reports that Qantas was studying the possibility of the Airbus A220 and Embraer 2 to replace a regional fleet of 20 Boeing 717s and 18 Fokker 100s. Realistically, Wilsons suspects this is more about forward planning for the renewal of the existing internal fleet rather than internalising activity from a third-party such as Alliance.
Alliance has one aircraft on dry lease (for which the airline uses its own crew). A second dry lease contract is close to being executed and others are being evaluated.
Wilsons notes earnings per aircraft increased through the second half of FY20 and the first half of FY21 before returning to more normal levels in the second half of FY21. While the broker has lowered estimates for FY22 operating earnings because of the reduced operating timetable, the outer year forecasts are broadly unchanged.
Progress is being made on the FIFO opportunities in Western Australia and tenders have been served that offer to take a total five new aircraft to that market. Wilsons notes this could mean Alliance will be in a position to relocate five Fokker aircraft and backfill services with its E190s.
Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, recently upgraded to Overweight with a target of $4.50, having noted the share price had materially declined from recent highs. FNArena's database has three Buy ratings for Alliance Aviation, with a consensus target of $5.20 that suggests 25.3% upside to the last share price.
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