The “most profitable” ASX airline stock you probably never heard of

Profits from ASX airlines like Qantas Airways Limited (ASX: QAN) have nosedived due to COVID-19. But there’s one airline that’s upgrading its profit forecast.

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Profits are nosediving for our ASX listed airlines as the COVID-19 pandemic grounded nearly all air travel.

But there’s one in the sector that’s made a big profit upgrade, and chances are you haven’t heard of the stock before.

The airline is Alliance Aviation Services Ltd (ASX: AQZ), which issued a trading update yesterday and forecasted a FY20 profit before tax (PBT) that is excess of $40 million.

This is a big step-up from its March guidance of less than $33 million.

Best performing ASX airline

Most would have missed the good news as Qantas Airways Limited (ASX: QAN), Regional Express Holdings Ltd (ASX: REX) and the defunct Virgin Australia Holdings Limited (ASX: VAH) dominated headlines.

While much is written about the Qantas share price surging 50% since the bear market trough in March, it’s the Alliance Aviation share price that takes the crown for the sector as it flew 155%.

Credit Suisse calls Alliance “Australia’s most profitable airline” and management’s profit upgrade is well above the broker’s $24 million PBT estimate for the current financial year.

Earnings taking off

“Some of the significant tailwinds in the 4Q are one-off (namely more FIFO [fly-in, fly-out] flights post social distancing rules),” said the broker.

“However, of more relevance are medium-term contracts with new customers won as AQZ steps into the breach vacated by other RPT operators.”

Alliance operates Regular Public Transport (RPT), leases aircraft and provides other aviation services.

One of its customers was Virgin Australia, which went into voluntary administration but may be brought back to life by new owners.

Virgin to provide second tailwind

Regardless of what happens to Virgin, Credit Suisse believes Alliance is well placed to benefit in the new post COVID-19 world order.

If Virgin is revived, the new operators will likely continue to or expand aircraft leasing from Alliance to contain costs. On the other hand, should Virgin be permanently shuttered, Alliance is best placed to fill the RPT and FIFO hole left by Virgin, explained Credit Suisse.

“The second scenario would obviously require additional fleet (particularly given AQZ’s upgraded FIFO presence post recent events) and the market for aircraft presently favours the buyer,” said the broker.

More upside in the wings

Credit Suisse reiterated its “outperform” recommendation on the stock and upgraded its 12-momth price target to $3.20 from $1.90 a share.

But the valuation may prove to be too conservative. The price target assumes that wet lease (short-term aircraft leases) hours returns to pre-coronavirus levels in FY23. There’s a real possibility that this will rebound sooner.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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