Alliance Airlines sees share price spike as revenue becomes increasingly diversified

The share price of Alliance Airlines jumped from AUD1.91 to AUD2.38 in the space of just seven days, from 03-Aug-2018 to 10-Aug-2018. Although at reporting time the price has slightly levelled off, it still sits at around AUD2.25, representing growth of more than 20% in the last month.


Summary:

  • Alliance’s share has spiked from AUD1.91 to AUD2.38 following publication of its FY2018 results.
  • Increased activity being seen in the resources sector.
  • Alliance previously felt pressure on long term contract revenue, which initiated a scheme to diversify revenue. This scheme is now yielding benefits.

The spike directly follows publication of Alliance’s FY2018 results. The carrier reported revenue growth across all activities in FY2018, while pure revenue increased 23% year-on-year to AUD248 million. Net profit stood at AUD18.1 million.

The growth in revenue is attributed to increased flying activity, including on a contract basis, wet leases, charter and regular passenger transport (RPT). Growth in the tourism sector – for both new and existing clients – along with the increase in wet lease flying was noted as “particularly significant”.

Alliance CEO Lee Schofield commented: “It is an outstanding financial result driven by increased activity across all sectors. Our strategy to diversify revenue is working. We continue to see increased activity in the resources sector with additional services for existing clients”.

The company also declared a fully franked final dividend of AUD 6.3 cents per ordinary share, bringing the total declared dividend for FY2018 to AUD 8.8 cents (USD 6.41 cents) per ordinary share. This is the highest payout in the carrier’s history.

Coupled with a retainment of the carrier’s positive FY2019 outlook, Alliance’s share price was quick to react, as investors took note of a strong and diversified operation. Alliance’s outlook suggests Australia’s resource sector “continues to show signs of growth”, with commodity prices of Alliance’s customers “performing strongly” while specifically, the airline believes there is an opportunity to continue to develop charter revenue. This would focus on inbound and domestic tourism operators.

How has Alliance diversified its revenue?

In 2015, Alliance felt pressure on long term contract revenue in the resources sector, predicting limited growth in the near term. The carrier was forced to target more tourism-based agreements, and secured a five-year tourism charter agreement.

Following this, Alliance signed a strategic partnership in 2016 with Virgin Australia, with the partnership still in effect to this day.

Alliance and Virgin Australia Regional Airlines formed a charter partnership to grow their respective businesses jointly. Existing charter contracts remained with their current operator, but new contracts were operated under the partnership. The companies also entered agreements to provide and procure services for each other on a preferential basis. This includes aircraft procurement, spare parts pooling, maintenance, ground handling and customer benefits – all resulting in a decrease in costs.

Speaking in early 2018, Mr Schofield stated that besides long term fly-in, fly-out (FIFO) contracts and charter operations, the airline had increased its presence in the scheduled passenger services market, operating wet lease operations for Virgin Australia.

Mr Schofield stated: “The partnership works really well. We have real complementary skill sets… I don’t think anyone operates regional jets as well as we do, but… our strengths do not lie in marketing, branding and distribution”. Alliance was able to circumvent its marketing and branding weakness and focus on its strength, which is operating aircraft on an ACMI basis.

Further to the company’s revenue diversification strategy was a global partnership signed with Avenger Flight Group in mid 2018, which included a minority stake investment. The parties joined forces to provide pilot training programmes in the US and Latin America, offering comprehensive commercial aviation simulation and training programmes to prospective pilots and airlines.