Over the last couple of days managing director Scott McMillan has been doing some pretty decent buying.

15/12 - bought 88,339 shares ($250,459 worth) in the family investment trust. He also received another 46,047 shares as part of his performance bonus.

20/12- bought 21,661 shares ($64983) in his super fund.

That is a pretty strong statement about how he thinks the company is performing and where it is going. Nice bit of confirmation bias for me too.

Since september Alliance have now had two separate FIFO contract renewals from BHP, one for iron ore mines in the Pilbara (14 return services/wk from Perth) and one for Olympic Dam in SA (contract details not released). Both were for an initial 5yr base contract +2yr extension option. AQZ have had these contracts since 2009. This will make them a 21 year service provider to BHP. This is as close to ARR as you get - they charge a fixed fee and take on no passenger or fuel risk..

This slide from their annual results really sums up why they shouldn't be considered a typical airline. The key to this business is them getting more planes in the sky and flying more hours. As @PortfolioPlus lays out in his straw that is what they are doing, with the fleet size doubling by 2026/27

I think this is one of the most overlooked or misunderstood business's and I am expecting this to be a consistent compounder over the next 5 years. I bought more this morning and am expecting a positive update at the AGM next week, where they either confirm their guidance and hit an EPS of around 30c (up from 22c in FY23).

The ACCC has rejected the proposed ($4.75) takeover by Qantas on grounds that it will reduce competition, which I am sure it probably would have but thats never stopped them at other times! It took them a year to come to that conclusion. Qantas is appealing this decision, they do own 19.9%, so there is a risk that if they lose the appeal they become sellers. I don't know over what timeframe this appeals process would take.

I would have been happy to get this bid approved and take the quick money, but am equally happy to keep holding this one and let AQZ reap the rewards of their heavy investment of the last few years, I think the next few years will be positive for AQZ.

Since this bid was launched AQZ have commited to purchase another 30 Embraer jets over the next two years, and have increased the wet lease deal with Qantas from 18 to 30 planes. They have also increased the length of these leases from 3 to 7 years (through 2yr extension options), so plenty of revenue coming through. The total flight hours the planes are in the air is also rising month on month with a 50% increase from Jan 22 to Jan 23. Total flight hours to Dec 22 were 32000 hours, which should triple again with expected flight hours of approx 99000 by June 23. This is primarily driven by more planes in the air. Over the period I have been following AQZ, I haven't seen them lose a mining client when it comes to fly in/fly out contract renewals.

At the recent half year results the company has guided for PBT (FY23) of between $50-55m and are comforrtable with analysts consensus estimates of $74m (PBT) for FY24. This is an EPS of around 22c (FY23) and 30c (FY24). So at its current price of $3.20-30, they on a fwd PE of 15 (FY23) and 10 (FY24) respectively. I think they will keep falling a little bit more as the Qantas decison washes through and am hoping they will get back to sub $3 in the next few weeks, but this might prove to be too optimistic.

Alliance aviation reported their HY results and after the last 2 years of heavy investment in their new Embraer E190 fleet and a slower than anticipated roll out due to pilot/cabin crew shortages, they are now back to profitability and doing well. Revenue $235m (up 40% pcp) and $6.5m NPAT (vs $4.9m loss pcp). Operating cashflow of $23.6M. 64% of their revenue is under contract. Gave good guidance: PBT of $50-55m for 2023 (not sure if this is for calender or FY) and around $77m for 2024 FY.

-6 E190's joined the operational fleet in the last half. 62 aircraft now in service.

-Record flight hours for the half at 32365 (vs 20843 pcp)

-They now have 16 of the 18 Qantas wet lease planes operational as of Dec 22. Operating at 4000 hrs/month in January vs 2500 in July-September 22. Wet leases revenue guided to increase in 2nd half.

-The final 3, E190, planes will be delivered in the next quarter, bringing the final tally of the new fleet up to 33 (E190's) to be deployed by June 23. Still guiding for annualised flying hours of 99,000 by june 23.

-Wet lease flying times up 282% to 17248 hrs, mining contract hours were steady, with one contract currently being negotiated.

-Major capex projects- Rockhamptom hanger and aircrew recruitment and training nearing completion. Bottom line should expand again.

-Staff numbers increased to 1063 (vs 803) all related to the aircrew and engineers for the E190's

Pretty happy to keep holding this as it starts to get the rewards for their investment in the E190's. We will also hear next month on whether the Qantas takeover at $4.75 is approved or not so plenty of upside in either scenario.

It seems like the market has decided that the ACC will be a roadblock to the Qantas takeover plans. I have no idea how they will view the deal, but my guess would be that it will be ok as they aren't really competing in the same markets and I can't see how it will meaningfully reduce competition. But given that the business is going only very nicely and in the last month has announced two contract renewals from mine clients, I think it is not a bad place to park some money and either get a quick payback of $4.75 (Qantas takeover) or wait for the market to start assessing its value again, which I think will happen over the next 12 months when all of the new planes it bought are flying.

-CITIC Pacific Mining - 6 yr renewal for 22 flights per week

-Agnew gold mining - 3 yr renewal for 12 flights per week

AQZ is just slowly going about their buisness. So far this month they have announced that they bought an additional E190, the sister ship of two they already own and bringing the total fleet up to 33. Cost of this one wasn't disclosed but am assuming they got it for a cheap price given the price of the other 32 planes. I am also assuming that being sister ships they will have additionalmaintence benefits e.g quicker/cheaper etc., but still need to confirm this.

Today they announced that Qantas had exercised the four remaining options on the wet lease deal, bringing the total number of planes up to 18. These four planes are set for deployment between Nov 22 and Jan 23, with each lease set for a 3 year period.

In the Feb results Qantas had excercised 10/18 wet leases. So I am now thinking that they must have comitted to use all 18 planes, but haven't set a start date for four of these leased planes (14/18 have start dates). I am taking this as a positive in that Qantas sees travel numbers increasing from next year and wants to lock in the seat capacity.

I am also expecting to see the total number of flying hours increasing from the 33K (dec 21) to >90K (Dec 22) as per their forecasts in their results presentation.

The headline result wasn't great with a $3.4M loss for the period, however overall the quality of the report was pretty good. Its a messy result but the headline loss is mainly due to investing for growth in the E190 program (crew and fitout costs) and covid impacts on a reduction in use by the Qantas wet leases. It looks like everything is still on track and it is just a bit delayed, outlook for E190's to "reap significant rewards from April 2022". Contract flying is up and they are confident this will continue to grow organically and operating cashflow is still very healthy so no real risk of defaults etc.

Key takeouts

-Revenue up 16% to $171M vspcp

-Underlying operating cash flow of $50.5M

-Debt increased by $11.4M

-$12M cash on hand down from $36M

-$69.6M cash expenditure - Fleet operations and services ($18.4M), $51M on E190 introduction costs and rockhamptom maintenance hanger.

-Staff costs up $19.2M -- added 78 pilots, 77 cabin crew, 36 engineers, 25 corporate staff (shows confidence that the demand for these new planes is real)

-8 of the E190's are in service - 2 in dry lease

-Only 5 of the 10 wet leased (Qantas) planes were flying through the period (covid impact)- added $14.3M revenue but lower than forecast, expected to increase from April.

-56 planes flying up from 43 in pcp.

-13,892 total flying hours up 6% from pcp.

-on time performance at 97%

-Expect all E190's to be in crewed and operating by December 2022.

-Maintained no dividend payout but do have 9M franking credits on the books.

FY guidance for underlying PBT between 45-50M (was 20.7M for the half)

Without covid I don't think I would have really given Alliance aviation (AQZ) a second look, but the way they have managed the impact and used it as an opportunity to expand and unpgrade their fleet is very impressive and speaks volumes to the quality of the management in this buisness. They also cancelled their dividend in 2020-2021 to direct funding towards growth (did a cap raise and took on some debt too), which I think were excellent capital allocation decisions.

In the initial months after the covid shutdown in 2020 when most fleets were grounded they did two deals with distressed sellers to buy 30 x E190's (includes spare parts, spare engines, tooling and a full flight Simulator) for a bargain price of $165M (5.5M/plane). Basically they were able to upgrade and expand the quality of their current fleet from older Fockker aircraft to modern jets with better range and greater fuel efficeincy.

These aircraft are being crewed and deployed during FY22 and from their FY21 presentation - the number of aircraft (E190's) deployed and total flying hours will increase greatly this year. The 43 x Fockker fleet (F100 x 24, F70 x 13 and F50 x5) are still in the air with the E190's primarily being used for expansion not replacement. Total flight hours for AQZ in 2020 and 2021 was 36-37K, in 2022 this is forecast to be between 113-130K hours for the group.

Main customers are resource companies where they do contract work using them for FIFO workforce at mine sites, the thing I like about these contracts is that they don't take any fuel price risk as this is just passed on to the customer. These contracts are generally long lived and are usually renewed. Three are up for renewal in 2022 and four in 2023 but I will be surprised if the majority of these are not renewed as they seem to provide a quality service and have an ontime performace of 93-95% over the last 2 years. 70% of AQZ's revenue comes from contract flying so a downturn in mining would be bad but I think that is unlikely to happen anytime soon.

-10 (can increase to 14 if needed) of the new E190's have been wet leased to Qantas. They fly them using their pilots under the Qantas banner. They expect 5% of total revenue (worth around 15M) to come from this deal.

-Have a similiar deal with Virgin but the details are less advanced. In total AQZ have said they expect 12-16 aircraft to be wet leased by March 22.

The addition of the E190's gives them the capacity to expand there charter flight revenue, whcih I think is higher margin but more sporadic and I consider this to be an opportunistic bonus but not core to the valuation.

The key to the valuation will be the utilisation of the E190's and so far nothing from the company indicates that this isn't going to plan. In 2021 NPAT was up 23% to 34M

Underlying cash flow was 75M

Total debt - 178.5M

Consensus forecast EPS - 0.26 (FY22), 0.36 (FY23)

At a PE ratio of 15 Fy22 it is worth $3.90 and has a FY23 value of $5.40. I think 15 is justified given the quality of management and the contract revenue they have and their ability to manage expenses. I just use this as a rough ball park anyway. This one isn't a load up the triuck bargain, but I like this company and I think it will be bigger in the next few years and I am planing on increasing my holding in RL. I also think they will surprise on the upside as the E190's take off.