I must admit to being very overzealous about Alliance Airlines (AQZ), and I have taken my medicine. This is my hindsight analysis of where I went wrong in my thesis; it was costly.
That said, and it's no real comfort, I’m not the only one to have been blindsided. Viburnum Funds piled in much the same way as me, and right now they are sitting on a $38m paper loss. Now that is an epic Ouch!
Effectively, AQZ did the reverse of what conservative aircraft leasing companies like Helvetic and Nordic Aviation (Xfly) do. They adopt a “contract first, aircraft second” focus and then lease, not buy, the planes to operate a capital-light model.
AQZ (no doubt gulled by promises from QAN) bought the planes first, then sought wet/dry leases. Big mistake that has precipitated the massive debt problem.
And the marketplace (and me and Virburnum) was gulled into thinking they were smart guys for buying planes at the bottom of the cycle. Here we all were thinking the value of the plant and equipment was substantially less than the current realisable value, and I think if one revisits a Strawman video, the then MD made statements of substantial undervaluing of the P&E.
Lesson #1(a) – I need substantially more industry experience if I am going to take a big swing, which is probably lesson 1(b): don’t take big swings. Fortunately, I have made some very good past swings which still see me in a comfortable position, but chastened.
Lesson #2: CEOs (or company talking heads) are not your friends, and their commentary should be scrutinized against reality; though to be fair, it is damn difficult to ascertain realizable value and appropriate depreciation rates and capitalizations.
Lesson #3 – Audit Reports aren’t necessarily a bellwether and provide investors with bugger all comfort. So, it is now clear that maintenance expenses have been capitalized routinely over many years. Where were the auditors on this matter? I mean, in the 1HFY26 results, we have copped a $161m belt. Yes, appreciate that “impaired” is an individual event, but surely it doesn’t sneak up on you suddenly. I mean, $150m of it relates to the aging Fokker fleet, and the news was out there that they would be replaced by 2030.
Lesson #4 – AQZ directors and management did not properly draft ACMI (Aircraft, Crew, Maintenance, & Insurance) wet lease agreements, resulting in QAN wet leases being significantly underpriced. This is a very difficult one for investors, even industry insiders, to discern from the outside, so I guess this, too, comes down to mistakenly relying on the management's business experience and on-the-ground acumen and execution.
Perhaps, the nexus of the problem that has caused such a hollowing out of AQZ shareholder value comes down to an overambitious management strategy of Balance Sheet expansion, which was poorly executed to the detriment of cash stability.
From my recent studies of comparable businesses (and yes, I should have done this prior to the ‘big swing’), it seems the industry norm for ACMI lessors is a reinvestment of 40–60% of operating cash flow, whereas, for AQZ, it was well in excess of 100%.
On a lighter note, I am now cock-a-hoop…Mr. Obeya Mitamphulli, the Nigerian President's cousin, has just invited me to participate in the Nigerian Lottery. It’s a sure thing, he reassures me.