Montgomery Investment Management founder Roger Montgomery has predicted a little-known ASX-listed airline could enjoy a 40% lift in earnings.
The veteran investor told his online subscribers that Alliance Aviation Services Ltd (ASX: AQZ)'s advantage is that it "wet leases" planes to its big rivals in addition to its own operations.
"Under a wet leasing arrangement, Alliance supplies the aircraft as well as crew, maintenance, and insurance – while the customer pays by hours operated, pays for fuel, and covers airport fees, duties and taxes," said Montgomery.
Alliance does good business out of wet leasing, having agreements with Qantas Airways Limited (ASX: QAN) and Virgin Australia.
"As Virgin recommences operations, it will need planes. Alliance [has] these and the cost structure to make money, along with a solid balance sheet," Montgomery said.
"Most recently, Qantas announced it will aim for a greater share of the Australian domestic market with the help of Alliance under a 3-year deal. Qantas will wet lease at least three of Alliance's recently acquired Embraer 190 jets, and possibly as many as 14."
Alliance to cash in on domestic travel ramp-up
Montgomery reckons Alliance has "one of the best management teams" among ASX-listed small-cap companies.
"Alliance is a beneficiary of the reopening of domestic travel," he said.
"Low unit capital cost assets, a low cost base and plenty of spare capacity mean an estimated 40 per cent EBITDA uplift is not implausible."
The fund manager classifies Alliance stocks as a "tactical opportunity".
"These firms might offer opportunities through industry catalysts, a company taking market share, or as we saw during and after COVID's impact on a number of Australian industries, companies moving from being perceived as survivors to thriving."
The value to the big airlines of its wet leasing arrangements was emphasised by Qantas earlier this year.
"The ability to switch on extra capacity with Alliance will help us make the most of opportunities in a highly competitive environment," the airline stated.
"And having the right aircraft on the right route helps us deliver the schedule and network that customers want."
The Alliance share price is down 0.94% at the time of writing, trading at $4.22. It started the year at $3.72.
