Alliance Aviation Services (ASX:AQZ) executives told investors its first-half result was “clearly disappointing,” citing a commercially unviable wet lease arrangement, higher-than-expected maintenance and inventory costs, and a reassessment of fleet carrying values that resulted in significant non-cash impairments and write-downs.
Chairman James Jackson said the board and management had aimed to be “direct, transparent, and focused on the actions underway” to address issues that emerged over recent months. Despite the financial outcome, Jackson and Managing Director Stewart Tully emphasized that operational performance remained strong, with safety, reliability, and on-time performance maintained across the network.
Half-year results and operational backdrop
On an underlying basis for the half, Alliance reported:
- Revenue of AUD 368.8 million, supported by record flight hours of just over 59,000
- Underlying EBITDA of AUD 87.4 million
- Profit before tax of AUD 14.6 million
- Underlying NPAT of AUD 11.9 million
- Operating cash flow before aircraft purchases for inventory of AUD 8.2 million
- Net debt of AUD 433.4 million and a fleet of 81 aircraft
Tully said cash conversion was weaker than targeted and net debt reduction was a priority, while noting the balance sheet remained covenant compliant.
Wet lease contract pressure and business simplification
Management identified margin pressure in a major wet lease arrangement as the most significant drag on group performance. Tully said the contract was “commercially unviable and cash flow negative under its current terms,” with pricing that had not kept pace with cost inflation in maintenance, labor, and parts. CFO Simon Vertullo added that wet lease represented about three-quarters of flight hours but “just under half” of group revenue, underscoring the margin pressure within that segment.
Jackson said negotiations with the customer were commercially sensitive but described them as urgent and “well advanced.” When asked whether discussions had been escalated, Jackson said the matter had the attention of senior management on both sides. He declined to provide a timeline for resolution, citing negotiation sensitivity.
Alliance also confirmed it has ceased aircraft trading activities. Tully said the decision reflected a desire to reduce earnings volatility and working capital risk, and to simplify the business with a stronger focus on free cash flow. Vertullo said aviation services revenue would be focused “exclusively on supporting the Alliance fleet,” which management said would improve transparency.
Impairments, write-downs, and fleet renewal plans
Alliance’s revised outlook for earnings and cash flows prompted a reassessment of asset values and a series of non-cash accounting adjustments. Tully detailed the items recognized:
- AUD 144.6 million impairment to Fokker 70 and 100 aircraft and engines
- AUD 7.2 million impairment to right-of-use assets
- AUD 12.9 million write-down of Fokker spare parts and inventory
Tully said the impairments did not affect day-to-day operations, safety outcomes, or current cash, but were intended to reset the asset base to better reflect market conditions and expected returns.
In the Q&A, management said the wet lease contract performance was a contributor to the impairment assessment, but also indicated broader earnings underperformance relative to the capital deployed. Jackson added that historically more maintenance expenditure may have been capitalized into aircraft values, and the board had adopted a more conservative, market-based view. Executives also said Fokker aircraft would be progressively retired and replaced over the next four to five years, with a longer-term fleet renewal planning process underway considering leasing, purchasing, or redeployment options.
Costs, cash flow, and balance sheet details
Vertullo said Alliance’s revenue increase did not translate into stronger earnings because operating costs rose “materially” and well ahead of CPI. He attributed the increase to enterprise agreement outcomes for flight crew and engineers, higher repairs and maintenance costs, and costs associated with inventory and maintenance processes, including an arrangement with Avion where benefits “have yet to be fully realized.” Depreciation and amortization rose due to higher-cost replacement engines, increased heavy maintenance, and changes in maintenance profiles. Finance costs also increased, which Vertullo linked to the elevated debt balance after several years of debt-funded fleet growth.
On the balance sheet, Vertullo said net tangible assets (NTA) at 31 December were AUD 2.22 per share following impairments and inventory write-downs. He also noted the company adjusted its NTA methodology by excluding right-of-use assets and lease liabilities. Vertullo said independent valuation work continued to support the value of the Embraer fleet, with valuation exceeding written-down value by about AUD 67 million.
Net debt at period end was AUD 433.5 million, including AUD 23 million of newly drawn debt, offset in part by mandatory repayments of AUD 5.8 million. Vertullo said liquidity was adequate, with cash of AUD 58.4 million and no near-term covenant pressure. He said the company did not declare an interim dividend in order to preserve capital and prioritize balance sheet repair.
On cash flow, Vertullo said cash conversion was hurt by “outsized maintenance capital expenditure and inventory movements.” Maintenance CapEx was elevated due to scheduled activity and cost inflation, and management said tighter planning, inventory discipline, and capital controls were priorities.
Updated FY2026 guidance and near-term priorities
Jackson said the board updated and simplified FY2026 guidance on an underlying basis, excluding impairment impacts and aircraft trading activity. Underlying profit before tax is now expected to be in the range of AUD 35 million to AUD 40 million, with the board citing uncertainty around the timing and outcome of wet lease negotiations, execution of asset divestments, and delivery of forecast cost efficiencies.
Management also described a tighter approach to capital expenditure for the remainder of the year, prioritizing essential maintenance and limited growth spend. In Q&A, the company said the final six Embraer aircraft related to its AerCap purchase agreement are planned to be purchased and then “immediately onsold,” with aircraft being marketed globally through an agent. The company did not provide an updated full-year CapEx number, indicating it would be incorporated into the turnaround plan being formulated. It also said debt facilities were fully drawn at 31 December, while reiterating confidence in liquidity given the period-end cash balance.
Across prepared remarks, management framed the turnaround around three priorities: improving capital allocation, improving free cash flow, and improving contract quality and customer management. Actions discussed included identifying surplus assets for sale (including surplus aircraft, hangars, engine cores, and excess parts inventory), tightening maintenance CapEx controls, implementing a planned engine procurement strategy, reviewing heavy maintenance programs, and commencing consultation on an organization-wide staffing review.
About Alliance Aviation Services (ASX:AQZ)
Alliance Aviation Services Limited provides contract, charter, and allied aviation services in Australia and internationally. The company offers specialized aviation services, including aircraft wet leasing, dry leasing, airport management, aircraft trading, parts sales, engine leasing, and engineering services for airlines and clients. It operates a fleet of 100 seat aircraft F100; 80 seat aircraft F70; and 1 Embraer aircraft. The company serves mining, energy, tourism, and government sectors, as well as corporates, and educational and sporting customers.
