Alliance Aviation Services Limited (AQZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Alliance Aviation Services Limited, AQZ, Half Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Scott McMillan, Managing Director. Please go ahead.

Good morning. It's Stewart Tully here, Chief Executive Officer of Alliance Airlines. Thank you for joining the results presentation for the half year 31 December 2024. Joining me today is Scott McMillan, our Managing Director, to my left.

Morning, all.

And to my right is our Chief Financial Officer, Andrew Evans.

Good morning, everyone.

This morning, we will walk through the results presentation, which is available on the ASX website. And at the end of the presentation, there will be an opportunity for questions and answers. I'll hand over to Andrew now to kick off the discussion.

Thank you. Good morning, everybody. Slide 2, please. Everybody can see Slide 2. So as it says there, we've had very strong revenue and profit results on the back of increased flight hours, as we've added aircraft to our operating fleet. All numbers are comparative to the same 6-month period to December '23. Record revenue of $339 million, up 11% on the same comparative period. Earnings before interest and tax and depreciation and amortization of $101.2 million, up 26%. Profit before tax of $41.3 million, up 9.5%. Operating cash flow adjusted for our aircraft acquisitions, which is treated as inventory of $27.2 million. Flight hours of 58,362, up 15% and we now have 76 aircraft in service, up 6% from the comparative period of 70 for the last half. Just quickly walking through our revenue streams. As I said, 98% of flights operated by Alliance are on the long-term contracts, so very solid revenue base. Our contracting charter business continues to be the stable and back -- important backbone of our business and it showed very good results compared to the previous period. Slight decrease in revenue really around the movement in fuel price and offset by CPI, but the fuel prices have passed through, so no direct impact on EBITDA. So very stable results there. As we alluded to or announced in the half, BHP Nickel West was moving to full care and maintenance in December '24. So we saw some slight downturn in hours during the period, but we'll see the full effect of that impact in the second half of this financial year. And as we said, there's no major contract renewals during the period that we've got much of it locked in for this half. Pleasingly, our wet lease revenue grew by $32 million, up 25% as we increase our wet lease with Qantas and Virgin. We now have 29 aircraft operating for Qantas at the end of the half, and we've delivered the final one under their option earlier this week. So we're full complement of 30. And then the other hours are pretty well on par with the same comparative period. Ad hoc charter, a little bit down compared to period as we had a reduction in aircraft capacity as we just supported the contract in the wet lease part of our business, but we see that capacity returning. So we hope to see increased additional ad hoc charter in coming periods. Aviation services fairly quiet as normal in the first half of the year with revenue of $4.9 million, but we see this as an area where we will expand our business and capitalize on a very asset-rich business. I'll pass over to Stewart Tully to talk about operational metrics.

With the increase in our E190 fleet, we're now taking advantage of the capital expansion program. And below, we can see the Fokker fleet, we had 38 aircraft that's made up of 24 Fokker 100s and 12 F70s. And in the Embraer fleet, 38 Embraer deployed. Within that 38 aircraft, all of those E190s are on dry lease at the moment. Andrew spoke a little bit in the last slide about flight hours. In the data below, you can see our flight hours grew from half in '24 from 50,793 to 58,000. As a percentage, you can see that there is a little bit of a switch there with contract revenue as a total percentage of revenue is down to 45%, and that is due because of the increase in wet lease hours as a total percentage of our revenue and income. Next slide, Andrew.

So please move to the next slide. Thanks.

Today, we've included a slide on industrial relations. Industrial relations has been a significant amount of time for our management at Alliance to manage over the last 12 months. We have had some positive news on the enterprise agreement negotiations with the completion of Brisbane Engineers, Queensland and South Australia pilots along with Perth cabin crew. We are awaiting fair work approval for those Queensland, South Australia pilots and Perth cabin crew, but it has been a difficult year. For the first time in Alliance's history, we did experience a protected industrial action with our Brisbane Engineers, and that created a very difficult time for our customers and for our business in general. The message here today is the result of these enterprise agreement changes and the agreements that we reached, there is an impact on our cost base. Our forecast for the EA for FY '25 is an increase of 7.5% to 8% of our total labor and staff costs, which is significant. And that's on top of our already agreed CPI increases that were applied during the year. IR continues to be a problem for not only industry, but whole commerce across Australia, hence why we're highlighting it today. And we are continuing to work with our staff and our unions to negotiate further enterprise agreements, as they come due. Next slide.

Referencing Slide 7 now, which is the income statement. I've already spoken at the high-level numbers at the start of the discussion. Nothing really to -- other than that to talk about profit numbers and revenue numbers, very solid and as per expectations. So I won't go into any more on that. Referencing Slide 8 now, just the balance sheet. I think the important note here is that our net assets increased by 7%, up from $410 million to $440 million, which just continues to show the strength of this business and have been asset rich. We have seen an increase in our inventory, but that is driven by the purchase of aircraft that we will be parting out or selling, which totals $43 million. And so the underlying revenue -- underlying inventory actually dropped by $19 million. We have continued to embark upon our acquisition program of aircraft, as we previously alluded to and we've settled 7 aircraft during the half, 4 which went into inventory and 3 which has run in property, plant and equipment. And this will continue into the second half of '25 and also in FY '26. Importantly -- and a number that is focused on is net debt. Our net debt increased from $306 million to $425 million, as we borrowed $112 million to fund the purchase of the 7 aircraft and also 2 additional hangars in Brisbane. And so -- but we had repayments of $3.7 million as well, making a change to the $425 million. Moving on to Slide 9, which is a statement of cash flow. The statutory net cash from operating activities is a loss of $15.1 million or a decrease of $15.1 million. But as I said, we used $42.3 million to purchase aircraft. So the underlying number is $27.2 million, which shows strong operating cash flow. Our payments for property, plant and equipment, $103 million, as outlined there, the expansion of the fleet, which is the 3 aircrafts, some fleet maintenance, which continues to be an important part of our business. The Rolls-Royce engine program, which we notified that ended at December 2024 and won't continue. Our purchase of the Brisbane hangars that were completed in October 2024 for sum of $19.6 million and then some general property, plant and equipment total of $4 million. Slide 10, which is capital expenditure. Total capital expenditure for the period is $145.7 million. And again, it's all around the supporting of our expansion. As you can see, we've got 21 aircraft that are going through post maintenance checks, and this will continue to be an important part of our business, as we increase our fleet and increase flight hours. I've already spoken about the growth CapEx, which is the increase in aircraft purchases and our Brisbane hangers as well. Slide 11, which is our approved funding. As we said in our end of year presentation, we're successful in raising $150 million through ANZ and Pricoa to increase our facilities to what we believe supports our business moving forward. Under the current acquisition program of the aircraft, we expect that to total $162 million for the full year of 2025 with $83.7 million of that coming in the second half of this year and then $79 million to conclude in FY '26. These capital commitments are going to be fully funded by the remaining debt facility and operating cash flow, which includes the aviation services activity, which Scott McMillan will explain on it later. We pegged our leverage ratio at our half year or our full year presentation at 2.42 at the end of December on our peak, and we have reached 2.44, so exactly where we said we would be, and we see this leverage ratio reducing from this point forward. Our total facility limits currently sit at $483 million, and the drawn is $445 million as we speak, but all banking covenants very pleasingly are well within limits. As again, reiterating that we see net debt reducing once our aircraft purchases have been completed in FY '26 and operating cash flows continue to increase. I'll hand back to Stewart to talk about the fleet expansion and our growth program on Slide 13.

Okay. Alliance will continue to add aircraft into the fleet, as we can at the earliest opportunity, which will accelerate during 2025 and 2026. We have settled on a further 7 aircraft, E190 aircraft from AerCap, taking that from -- to settle 17 out of our 30 aircraft. A further 6 E190s are expected to settle in the second half of 2025, the remaining 7 in '26. Six of those E190 airplanes at a 30 purchase have been earmarked for sale. And Scott McMillan will talk further in a minute around about aviation services, which is a growing part of our business. On the right-hand side of that slide is a slight change from previous graphs. And I just want to reiterate that the Fokker fleet will remain an extremely important part of our fleet into the future. However, owning those -- all of our aircraft gives us options to do what we need to do with the fleet. So you'll notice there that in '26, we have the F100 fleet moving from 24 to 22 aircraft. And what that means is we have options on what to do with these aircraft. We will make decisions -- simple economic decisions on the Fokker 100 fleet. And there will come a time where it is a better proposition to put more E190s in service and pull out some F100s rather than put them through the base maintenance check. So we're estimating in '26 that we'll move from 24 to 22. However, that just provides us options. We may not do that, if other opportunities arise with the Fokker fleet. Next slide. So Slide 14, strategy and outlook. I'll just touch on a couple of these points through the strategy and outlook. With the increase in fleet numbers, we're finally in a position to be able to start saying yes to more ad hoc charter revenue, which is high-margin revenue. So we are actively driving additional ad hoc charter revenue at the moment, and that will continue throughout the forecast period. As Andrew mentioned earlier in the presentation, Qantas have called with the 30 aircraft and 29 of those are in service with the 30th in service in February this month. On the dry lease side, we have concluded discussions with a customer for the fifth E190 dry lease, which will happen by the end of FY '25. We continue to heavily invest in technology to support our current operations and future operations in the areas of fleet and crew management and maintenance operations, which are critical parts of our business. Aviation Services, I'm going to hand over to Scott McMillan now, who will talk about Aviation Services and the growth we will see in that area.

Thanks, Stewart. And again, good morning, everyone, and thank you very much for your time today. In the first half, it was at $4.5 million, $5 million worth of aviation services. There weren't a lot of transactions in that. We did flag during the half that we sold 6 airframes to EirTrade in Ireland. We've delivered the first one of those in the first half. The balance will be in the next 2 months. So in the second half, we'll see all of that revenue and profit come in. Really important part of what we're doing is that those aircraft are being disassembled in Ireland. We retain ownership on the engines, the airframe -- sorry, the engines, the undercarriage auxiliary power unit, which represents about 80% of the cost of the whole aircraft. All of that component will stay on our balance sheet in inventory and is available for sale. We are well advanced on the sale of a number of additional surplus engines and [indiscernible] we don't need this year or the next year. And as we've said elsewhere in the presentation, you're going to see a significant uplift in activity in that aviation services, part of our business in the next sort of 18 months, but particularly in the next 6 months as we monetize the inventory and assets that we've acquired over the last couple of years. One thing I think those of you who have been following our business for a number of years will know that we are traders, we do buy in bulk and we do buy well. And now this is a perfect opportunity for us when there's a real shortage of aircraft engines and componentry around the world, which isn't getting any better anytime soon. But now it's a great place to be a buyer at fixed costs from AerCap and a seller at variable cost to the rest of the market. So we're in a very, very strong position on that. And I've said there's going to be a very significant uplift in that activity during the second half of this year, but it is ongoing and sustainable business well into the future. So back to you, Stewart.

Just before we move off the slide, I just want to reiterate the last point there in the strategy and the outlook is that the guidance that we provided in our AGM in October last year remains unchanged with the consensus forecast of $92.9 million PBT and $202.1 million EBITDA. Can we move to Slide 20, please, for the operational outlook -- operational performance. On-time performance is a key KPI for all of us at Alliance Airlines, and that is a key differentiator and contributor to the outstanding success in securing and maintaining contracts. However, during the first half, we absolutely fell short of our on-time performance, and there are a number of reasons for this. Protected industrial action during September really hurt our on-time performance and our customers. Aircraft ground damage, we have had 3 serious ground damage events, which we could not control. One was a catering truck into an E190 that took that aircraft out of service for 3 months. Others were active gone through bird strikes and lightning strikes with significant damage of those aircraft, which seriously impacted our on-time performance taking the aircraft out of our fleet. There were delays to aircraft entering service, which we're overcoming now, along with significant weather events and technical issues. So we had the whole gamut there. However, OTP is the top priority behind safety for our team, and we've got a number of ongoing initiatives to focus on those controllable delays, which we will hope to turn around very soon. On our safety certifications, our #1 KPI at Alliance, we're very proud to hold and maintain the IOSA, IATA safety accreditation along with BARS and IOGP. They're very important for our FIFO and our wet lease business.

I think that ends the presentation part of the webcast, and we now open it up to Q&A.

[Operator Instructions] And today's first question comes from Phil Chippindale with Ord Minnett.

Firstly, just on that Slide 5 and the impact from the enterprise agreements. Can you talk to what the 12-month impact of this change? Is in sort of dollar million terms? And then secondly, how much of that number impacts the second half FY '25 results?

Yes, for the total FY '26 impact, it will be circa $21 million above CPI. For FY '25, the number is about $10 million. That sounds a little bit on that half, but it's -- we see the enterprise agreements that are currently with work to be approved. We forecast that they will be approved as of the end of February, but we're not certain when that will occur. We've estimated $10 million on the basis of that period, plus you've got the onetime noncash impact of the increase on the balances. So $10 million in FY '25 and $21 million in FY '26 above CPI.

Okay. And then just in terms of your efforts to try and offset that impact, how are you going to go about that?

We are working with our customers to look to offset some of that impact. As contracts come up, clearly, we will talk about increases, and we're talking with existing customers to help cover some of those increased costs.

Okay. Just pivoting to the net debt position, it was around $425 million as at 31 December, which is a little bit higher than we had forecast. Can you just talk to the net debt profile over the balance of this financial year and then into FY '26?

Yes. Look, on the back of increased aviation services activity, as alluded to by Scott, we see net debt reducing to around the $410 million mark. That's fairly aggressive, but we think that's achievable. And we see that net debt number remaining at that point for FY '26 as operating cash flow is taken up with the remainder of the aircraft purchases for the FY '26.

Okay. Last question, just on Aviation Services. So maybe one for Scott. You have spoken to this increased level of aviation services revenue over the next sort of 18 months. The next 6 months, as I understand it, it's a bit of a combination of Fokker sales to your Irish customer and some of the E190s. But just pivoting to FY '26, is that going to be partly from sales of, say, 2 of the F100s or a little bit more of the E190? Can you just talk to sort of that balance and what we should think about FY '26 revenues from that division?

Phil, there won't be much from the Fokker side of things because whatever we part out, we're pretty much keeping for the future use -- our own future use. Much of the activity in aviation services will be from the 7 E190 parted out forward. That's done during the course of this [ month ] so we've spent all the money [Technical difficulty] and we'll realize that over the next sort of 18 months. That's the aircraft that we've parted out and retained. Then there's the 6 additional aircraft that we sold to EirTrade where we retain [Technical difficulty] in Europe and available for sale. So what you're effectively going to see over that 18-month period is us turning the capital acquisition cost of 13 aircraft into cash. So Andrew has funded that out of debt and cash flow, and it's now my responsibility to turn into cash, bring back the business to keep the net debt down and to provide additional cash for the business and something we're very bullish about. It's a great -- as I said earlier, it's a great time to be a seller. And the fortunate position we are in is that we are buying from AerCap at a fixed cost, whilst everything around us is going up significantly. The world supply of engines has never been worse, and that's, therefore, a great time to be a seller of engines and there's significant margins in that. So it's a pretty happy position for us to be in.

And our next question comes from James Ferrier with Wilsons Advisory.

Can I, first of all, ask you about Slide 9 -- down the bottom of Slide 9 there, where you're doing some cash flow reconciliation. Could you add some color there to the point around timing differences on cash receipts and payments, please?

The color is just difference between actual cash timing and accruals. Obviously, as we reconcile EBITDA to cash, we had timing around payroll. For example, we had a payroll that we accrued at the end of June '24 that we paid on the 3rd of July. So that's circa $8 million to $10 million in cash. And then we had a payroll that actually was technically payable on the 1st of January, but because it's public, we actually paid it on the 31st of December of the same amount of about $8 million to $10 million. So within 2 to 4 days timing, you've got an impact of somewhere between $15 million and $20 million on your cash flow.

That's helpful. Second question on to the next slide, Slide 10. So for the full year FY '25 guidance for maintenance CapEx on the existing fleet there, $102 million. So you've sort of circa $1.3 million per aircraft in the operating fleet, if you think of it like that. Where do you see that spend per aircraft going over the next couple of years? And I'm particularly thinking around the cessation of the rolls engine program, you've made in hangers, et cetera. Where do you see that sort of equivalent of a maintenance CapEx per aircraft heading?

Look, I think our steady-state CapEx, once the expansion program is finished, is probably around the circa $80 million in today's dollars. That's total CapEx once the expansion program is finished, and that's mainly around base maintenance, engine maintenance and any entry into service costs.

And is that total and therefore, inclusive of any noncash transfers from inventory to PPE? Or is that just the cash component of CapEx?

That's cash component.

Yes. Okay. What would be the total if you included a guesstimate of what you draw down from the balance sheet? What do you think the total will be including the noncash?

The issue with transferring out of inventory into PP&E, it's lumpy and it's not easily forecastable because of just -- you just don't know when you're going to transfer certain engines out and in. So our inventory forecast is pretty well stay the same balance as it is if you take out the aircraft purchase and it will sit around $130 million mark.

Okay. That's helpful, Andrew. Last question for me. On the EBITDA margin side of things, so we just -- if we take EBITDA divided by the number of -- average number of aircraft in the operating fleet, it was sort of annualizing at $2.5 million in the second half of '24. It stepped up to $2.6 million in this result we're talking about today. What's driving that? And how much more upside is there in your EBITDA margins as the fleet expansion approaches completion?

I think that come down a little bit with the impact of the EAs. That's going to be the challenge that we face with trying to recover or refresh some of the impact of the EAs with our customers. So I think the $2.5 million to $2.6 million per aircraft is probably fairly reasonable to continue on as a basis. Also gets impacted by timing of fleet coming into the operating service and whether you get a full impact for the half or the full year.

And our next question today comes from Billy Boulton with Morgans.

Just wanted to confirm -- sorry, clarify something with the EBA impact. Just wanted to confirm it's a $10 million impact in the second half and then annualized impact is $20 million total in FY '26?

That's correct, above CPI.

Yes. Okay. Cool. And just on -- the next question was just in regards to Slide 13 with the E190s going into service in FY '26. Could you just talk about where you think those planes are going to go? So you've got 9 aircraft coming into service E190s from -- in FY '26 versus FY '25?

We're in a program at the moment of -- for example, in North Queensland, we are replacing our Fokker aircraft with E190s, which will drive some real efficiencies in our business in the way of engineering and crew and also certainly some savings in there around areas of fuel and whatnot. We will redeploy those Fokker aircraft into Brisbane and other areas of the business. As other E190s come on, we have opportunities in there to also drive some efficiencies on some of our existing customers in Queensland and other opportunities they come on.

Cool. And I guess you wouldn't want to put yourself to anything, but you're obviously going to try and impact -- sorry, offset the EBA impact. If you had a rough guess, how much of the reckon you'll be able to offset?

It's too early to tell at the moment, Billy. We're still in discussions with our major clients. And as we said, we've had some discussions, they continue. We'll try to recoup some of that, if we can. But it's too early to put a number on that at the moment.

I think the other thing, too, Billy, and for everyone else on the call, we've invested, as Stewart said, very heavily in new systems during the course of this year, all of which has been written off that's gone through the P&L. We've gone -- if you think about a scale of sort of 1 to 10 on systems efficiency, we've gone by the end of April. We'll have the new Lufthansa system turned on in full. We've got nearly 1,500 staff. That is a rostering system for 1,000 of them. And the efficiency that flows from that is very, very significant, and we're already running a whole bunch of different sample rosters and the efficiency that comes out of that is very significant. So what that means for us is in terms of recouping what we've done with the EBA and what we've been particularly adept at doing is -- the impact is direct dollar impact. It's not changing of conditions. And what happens with pilot -- fly attendants, particularly is that they'll always try and find ways to do less work for more money. Now we've given them more money, but we're not giving them the less work. So the conditions have been largely unchanged in our EAs. That's a really important part of us maintaining our competitiveness. If you think about the $20 million, we'll recoup a fair of that from our customers. And as Stewart and Andrew have said, bear in mind, that's the $20 million over and above CPI. It's not -- if we did nothing, that would come straight off our profit. The fact is it's neatly timed for our new Lufthansa system. We won't see the full effect of the improvement in efficiency in the business until around 6 months from now, but that's when it starts to hit us more heavily in terms of the cost. We've already got one of our very large customers to agree to pick up pretty much the difference between what we've had to pay in CPI. So that's already pleasing for us. We will get some of it back by being a more efficient operator and get more productivity out of the same staff we've got and ultimately, as contract renewals come up, then we've got to repeat that from our customer base. And if you look around our industry here in Australia, particularly, there is a huge amount of industrial activity going on, that makes the news quite regularly, particularly with Qantas to a lesser degree with Virgin. But -- and there are a whole bunch of court cases coming up. But it's also affecting our customers. So when we go to talk to our customers about our increased cost base, it doesn't fall on debt because they understand that it's impacting them as well. So yes, there's an impact, but we're well aware of it, and we're -- I think we're going to make a very good case that most of it will be [indiscernible].

Okay. Scott, that's great to hear and appreciate that. Andrew, just last one, if you could maybe share some thinking around how you think D&A will -- and net interest will land for the full year, it's fair bit above where we -- what the market was expecting.

Yes. Look, the impact for depreciation and amortization is as your flight hours of your Embraers increase as a percentage of the total flight hours, they are more expensive aircraft and more expensive engines. I see that depreciation will probably be about circa $90 million for the full year and probably increase to about $100 million to $105 million in FY '26. On interest, we'll probably -- it will sit in the circa $30 million to $33 million mark, as we have the full impact of our debt of around $450 million.

[Operator Instructions] our next question comes from Wayne Arthur at Wayne Arthur at [ Monroe Superannuation Fund ].

I wanted to ask you about the payments for the sales of the Embraers and the engines. Now when you announced these in September and November last year, you indicated that those transactions would be finalized in January and February. We're now midway through February. And what payments have been received for the 6 Embraers and the 13 engine calls?

Wayne, thanks for the question. It's Scott. In terms of the engine calls, it's on time payment. We're receiving USD 100,000 a month from the person that -- the company that bought those, and we're being paid for one airframe because we've only delivered one. But we deliver another one next week and another one the week after. We'll have all those payments received into the business by the end of March.

Okay. All right. Now a question on borrowings. I see that the company has loan facilities with 3 entities. One is the Northern Australia Infrastructure Fund, one is ANZ Bank and one is Pricoa Private Capital. Is there anything in those borrowing agreements which prevents the company from paying dividends?

No.

Okay. Now assuming you get all the money from the engine sales and the Embraers by the end of March, if the company were to declare a special dividend, surely it could declare a dividend of $0.10 a share, which would be more than covered by the revenue from the Embraers and the engine sales. And I see the company has now got a franking balance. Now is there any good reason why the revenue from those Embraers and the engine sales couldn't be used to pay a special dividend at least partly franked?

Look, Wayne, the answer is -- as what we've said before is that those sales are taken into consideration when we look at our total funding, including debt. And we reiterate that the -- any operating cash flow, which those sales are part of will be utilized to complete or be part of the financing or funding of the remaining aircraft.

Well, the problem that I see is that the shareholders are getting the rough end of the stick. In the AGM 15 months ago, the Chairman sort of made reference to the importance that dividends were a key component of shareholders' ongoing investment in the company. Now the share price has just been completely in the doldrums for the last 18 months. Shareholders have been getting no capital growth. They've been getting no dividends. The company has got some franking credits, but the shareholders are not seeing anything for it. So to me, you have to ask the question, why would you own shares in a company that doesn't actually reward the shareholders when it's in a position to do so.

Okay. Thanks, Wayne. Thanks for your time.

So, what's the answer...

There are no further questions at this time. So I'll hand it back to Mr. McMillan.

All right. Well, thank you all for dialing in. Wayne, if you want to take that discussion offline, just drop me an e-mail, and I'll give you a call on Monday, mate. I can walk you through it. But just to finish off that -- the answer to that question, it's the view of the Board, which includes now all the new Board members, that the use of the cash and the capital is still best served by keeping that internal to the company rather than paying a dividend. It's a matter of fact that I have 4 million shares, and I'd love to get some dividends. So you and I are in the same boat, mate, but it's -- right now, we're in this growth phase. The best use of the capital is to keep it within the business. So feel free to contact me offline. But thanks to all, and thanks to the moderator.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect your lines.