I never thought i'd find myself saying this about an airline but.. wow, Alliance is super impressive.
MD Scott McMillan clearly has a deep understanding of the industry and knows better than most the struggles most airlines face. He also struck me as a straight shooter -- even emphasizing some mistakes and negatives (entirely unprompted).
So the usual problem with airlines are all the variable costs, most of which are beyond your control, paired up with huge CAPEX requirements and uncertain/variable demand in a hyper-competitive (and often irrational and distorted) market.
AQZ mitigates this as such:
- extremely astute buying of assets, most of which are picked up opportunistically from the hands of forced sellers. pennies on the dollar type stuff.
- contracts which allow for regular (monthly) repricing to accommodate things like fuel, FX and cost inflation
- contracts (be that for FIFO or wet leasing) that are volume agnostic. ie. they dont care if the plane is empty or full
- work only with sound counterparties that have strong balance sheets
- diversity of exposure in terms of minerals and geography.
- bringing key services in house and, impressively, turning some of these into their own profit centers.
- A clear understanding of their strengths and a resolute focus only on areas where they have an edge (eg. zero interest in carrying regular passengers)
Like I said in the intro -- this company has never reported a FY operating loss since listing and generates ~10% net margins and ROE. Revenue has CAGR'd at 13%pa since the float and net profit has tripled. Clearly they are doing something right.
I dont believe any specific guidance has been given, but clearly they are expecting further growth. The 'north star' here, as revealed in the chat, was the size of the fleet. A bigger fleet = more revenue, and (in theory) better shareholder returns assuming a continuation of cost discipline and ongoing attractive return on capital.
And the PE is ~8 after they just reported a 66% lift in per share earnings!
Anyway, some highlights from the chat:
- They will only pay out dividends when there is no more opportunity to reinvest at high rates of return and after some debt has been pared back
- On debt, Scott clearly sees it as advantageous -- vanilla debt that is amortized over a long time frame, at low rates helps avoid dilution, juice returns and allow for further opportunistic purchases. It'll be wound back a bit down the track, but for now they are expanding the fleet.
- I really got the sense this is an MD who isn't worried about building an empire. He clearly sees little opportunity outside of AUS/NZ and even in those places its the regional routes they care about. I suspect at maturity you will see them payout a significant majority of free cash flows.
- What really matters with aircraft is engines -- the board spends 60% of their time thinking about this. And being able to service things in house is a huge edge and cost advantage (the new facility in Rocky should start to enhance things in the coming years)
- no budget on marketing, he considers AQZ a wholesaler
- He didnt quantify it, but suggested AQZ is by far the largest player in its chosen niche
- "Wet leasing" (where they provide the aircraft, crew, maintenance, and insurance to another airline, who then handle all the operational components) is, in effect, the same in nature to the FIFO work. These contracts are very long term in nature and essentially help 'solve' the capital investment requirements for customers, and allowing them to manage capacity better.
- no capital raises since 2020, where $100m was raised to bolster the fleet
- Qantas has a 19.9% stake, which it acquired without the board's say-so when they picked it up from Luthansa (who sold planes to Alliance, at bargain basement rates, for shares). Scott wasnt happy about that at first, but Qantas does not have a directorship or exert any control over Alliance’s operations, and they are now their largest customer. (I wonder if we see a takeover offer at some point?)
- There is a good amount of insider ownership, including from the original founding shareholders. Scott himself owns about 2.4% of the company.
- Scott expressed surprise by the market's reaction to the latest set of results -- despite the record numbers across the group, shares are essentially back at where they were in 2020.
I am going to initiate a small watching position here on Strawman, and (as always) keen for someone to throw some cold water on this. But I was very impressed with Scott.