Alliance Faces Margin Squeeze as ACMI Contract Renegotiation Looms

Strong FY25 Performance Sets Stage

Alliance Aviation Services Limited (ASX, AQZ) closed FY25 with a notable performance, achieving record flying hours of 113,000 and a 19% increase in revenue to $769.7 million. Despite this growth, statutory profit before tax slipped 4.9% to $82.1 million, weighed down by rising operating costs and higher depreciation charges. The company’s substantial fleet, independently valued at over $900 million, remains a core strength underpinning its operations.

FY26 Guidance Reflects Cost Pressures and Strategic Actions

Looking ahead, Alliance has provided FY26 earnings guidance forecasting EBITDA between $190 million and $210 million, and profit before tax in the range of $46 million to $50 million. This outlook factors in a $15 million increase in depreciation driven by capital expenditure and a $12 million annualised rise in maintenance and compliance costs due to inflation and supply chain pressures. The accelerated deployment of the AVIAN inventory management system also contributed an unbudgeted $3.5 million cost in the first quarter, aimed at long-term operational efficiencies.

Contract Renegotiation Highlights Margin Challenges

A significant focus for the new Board is the renegotiation of a major Aircraft, Crew, Maintenance and Insurance (ACMI) contract originally signed in 2021 and expanded to 30 Embraer E190 aircraft. The contract’s pricing mechanisms have not kept pace with industry-wide cost inflation, resulting in margin erosion as Alliance absorbed increased wages, maintenance, and capital costs. The company is actively engaging with the customer to seek a commercial resolution and update contract terms to include appropriate repricing clauses going forward.

Leadership Renewal and Governance Strengthening

Alliance has undergone significant leadership changes in 2025, with Stewart Tully appointed Managing Director and new independent directors Bernard Campbell and Simon Lange joining the Board. These appointments bring deep expertise in aviation, finance, and capital markets, signaling a strategic pivot towards stronger governance and operational rigor. The Board is also progressing the appointment of a permanent CFO to further bolster financial oversight.

Focus on Debt Reduction and Asset Optimization

Despite a net debt position of $436 million, the Board forecasts a reduction to $392 million by the end of FY26, supported by targeted sales of non-core assets and disciplined capital management. The company is reviewing its maintenance capital expenditure and depreciation policies to better align with asset utilization and extend aircraft useful lives, potentially easing future depreciation charges. These measures, alongside contract repricing and cost control initiatives, aim to restore margin resilience and enhance shareholder value.

Outlook and Market Position

Alliance remains a critical partner to Australia’s mining and resources sectors, with a fully owned fleet and a strong operational track record in FIFO and charter services. While near-term challenges persist, the company’s strategic actions and refreshed leadership team position it to navigate cost pressures and capitalize on long-term demand for outsourced aviation services. Transparency and shareholder engagement remain priorities as Alliance executes its turnaround plan.