Wet Lease Expansion And Fleet Transition Will Support Long Term Earnings Resilience

Catalysts

About Alliance Aviation Services

Alliance Aviation Services provides contract, charter and wet lease aviation solutions to major airlines, resources companies and government customers across Australia and select regional international routes.

What are the underlying business or industry changes driving this perspective?

• Full year contribution from the 30 aircraft wet lease fleet with Qantas, alongside potential extensions and expansions with both Qantas and Virgin, should lift recurring flying hours and support continued growth in revenue and EBITDA.
• Ongoing demand for reliable FIFO and regional air services from large, well-capitalised resource clients, particularly in gold and other essential minerals, underpins contract renewals at higher rates and supports margin resilience.
• Scarcity of suitable 100-seat jets and heightened demand for GE-powered Embraer E190 engines globally positions Alliance to monetise its owned fleet and engine pool, adding high-margin aviation services income and accelerating earnings growth.
• Transition from Fokkers to more efficient E190s in key bases and scaling of in-house base maintenance capacity at Rockhampton should enhance operational efficiency, reduce unit costs and progressively improve net margins.
• Capital-light aviation services transactions, inventory monetisation and disciplined engine capital deployment are lowering balance sheet capital intensity. This supports stronger cash conversion, faster net debt reduction and, by extension, higher sustainable earnings and dividends.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Alliance Aviation Services's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.4% today to 3.9% in 3 years time.
• Analysts expect earnings to reach A$31.4 million (and earnings per share of A$0.2) by about December 2028, down from A$57.3 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, up from 3.4x today. This future PE is greater than the current PE for the AU Airlines industry at 6.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.72%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The shift in strategy from rapid fleet expansion to modest steady growth and efficiency gains suggests that past double digit growth rates are unlikely to be repeated, which could cap revenue growth and limit upside in earnings over the long term.
• High capital intensity from ongoing aircraft and engine spending, alongside elevated but only gradually declining net debt, means the business remains exposed to interest rate and refinancing risk, which could pressure net margins and reduce future free cash flow available to equity holders.
• Rising labour costs, tight skilled labour markets and the concentration of staff in regional hubs such as Rockhampton, together with the need to renegotiate enterprise agreements and increase customer pricing, create execution and cost inflation risks that could compress operating margins and dampen earnings growth.
• Increasing dependence on a small number of major counterparties for wet lease flying and aviation services trading, combined with exposure to cyclical resources and FIFO demand, heightens contract renewal and volume risk that could negatively affect flight hours, revenue and EBITDA in a downturn.
• Reliance on ageing Fokker aircraft and complex engine trading strategies in a constrained global supply environment raises operational reliability and residual value risks, where unexpected maintenance issues or misjudged engine capital deployment could elevate depreciation and maintenance costs and reduce net profit.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$1.5 for Alliance Aviation Services based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$799.8 million, earnings will come to A$31.4 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 11.7%.
  
• Given the current share price of A$1.22, the analyst price target of A$1.5 is 18.8% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.