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An airline stock for value investors?

Generally, here at the Motley Fool we tend to avoid airlines for a number of reasons. Planes cost plenty of money and have to be replaced over time; fuel costs are enormous – Qantas Airways (ASX:QAN) has a $4 billion plus fuel bill alone – and there are a host of other issues that could go wrong, from bad weather, accidents, government regulation (carbon tax as an example) and weak consumer sentiment.

Add in cut-throat competition from state-sponsored airlines who have no real imperative to run a profitable business, cheap airfares that cut profits and the capital intensity required, and airlines start off trying to run up hill.

But this airline business has exclusive contracts to fly to hard-to-get-to places around Australia flying mining workers into and out of mining camps. Not that the workers have any other real option. The average Australian mining camp is around 1,000 kms from the nearest town. During the wet season many roads are impassable and you can forget about catching the train – there isn’t one.

Alliance Aviation (ASX:AQZ) is a dedicated fly-in fly-out (FIFO) airline, and has just reported a 21% jump in revenues. Underlying net profit rose 13% to $21.7m, putting the company on a trailing P/E ratio of 8.5. Alliance declared a final dividend of 5.6 cents, bringing the total for the year to 10.4 cents, for a fully franked dividend yield of 5.9%. While the company has ~$86 million in debt, there’s no off-balance sheet debt (as in the case of Qantas), and it’s comfortably covered by planes, property and equipment worth $210m odd.

An additional five planes added in 2013 with another two to come in 2014, should see the company pick up new work opportunities such as ad-hoc charters or leasing its planes, while still being able to service its existing customers. Alliance has in the past leased its planes to both Qantas and Virgin Australia (ASX:VAH) on shorter flight routes, or to regional areas.

Alliance expects 2014 to be stable, despite the mining boom tapering off, and sees additional growth in the FIFO sector, with a high proportion of projects already in production or the construction phase. The search for oil and gas in Australia’s remote regions could also provide an unforeseen boost.

Foolish takeaway

If Alliance is not for you, you may want to take a closer look at Regional Express (ASX:REX). REX has exclusive government contracts to fly into regional areas, taking domestic passengers, rather than fly-in, fly-out workers so it differs from Alliance in that respect.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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