By MoneyMorning.com.au
In August 2010 Kris asked if an Aussie Icon was on the ropes…
Back then, Kris laughed at broking firm, Morgan Stanley’s price target for Qantas [ASX: QAN] of $3.05. Turns out he was right to laugh. The stock didn’t get there.
And now, it’s now trading at $1.52 – just above its three-year low.
The other big airline stock, Virgin Blue [ASX: VAH], hasn’t done much better. Since Kris told his Australian Small-Cap Investigator readers to sell the stock, locking in a 100% gain in early 2010, the price has halved:
You can see the long-term share price performance of both companies in the chart below (Qantas – blue line; Virgin – pink line):
The bad news continued into 2011, with both stocks taking a beating. That’s despite revenue for both companies being higher this financial year, passenger numbers for the two airlines were up 3% in November over the previous year.
That said it’s been a tough year for airline shareholders.
Or has it?
In less than six weeks since listing on the Australian Securities Exchange, Alliance Airways [ASX: AQZ] has gained more than 7.5%.
And recently Credit Suisse set an ambitious price target of $2.38 per share by the end of this year…
Is it possible?
It might be. But the rising stock price relies heavily on the mining boom. That is, the company has a small fleet of planes that specialise in dropping ‘Fly-In, Fly-Out’ (FIFO) workers, most commonly mining employees, at their work sites.
By August last year, of the 90,000 resource industry employees in Western Australia, over 52% were FIFO. And the West Australian government reckons in less than three years, FIFO workers will make up more than 57% of the resources work force.
And that growth estimate is just for workers on the west coast of Oz.
But it’s not just WA that Alliance Airways covers.
If you can name a dense mineral deposit, they’ll fly there. As this chart of the Alliance route map shows:
And there’s another benefit of running an aviation business that benefits from the mining boom.
Unlike retail airlines, an empty aircraft isn’t a risk for them. That is, they charge a mining company the same flat rate per flight. Passing on the responsibility of filling an aircraft to the mining company. Empty plane or not, Alliance gets the same fee.
But what if the mining boom in Australia comes to a quick end? Well, the company has aircraft that can reach as far as the South China Sea and to our cousins across the ditch in New Zealand.
They’ve ensured the business is viable outside Australia by building up a small fleet of planes capable of flying internationally.
But for now, if the mining boom slows… and the need for FIFO workers dries up… the Alliance share price could see a fall similar to Qantas and Virgin.
There’s one more thing that could hold Alliance back should the ‘digging up rocks’ boom in Australia end. Alliance doesn’t have a retail market like the big two airlines. Alliance pretty much flies to big holes in the ground… and it’s hard to imagine these becoming tourist hot spots!
Right now, the S&P/ASX 300 Metal & Mining index is down 21% since this time last year. But in the last few weeks, it has gone back up. Given Alliance’s dependence on the mining boom, any change in the demand for resources – and, therefore, workers – will drive the share price.
And perhaps not surprisingly, for the few short weeks it’s been trading, the airline has tracked this index…
…A pattern that seems set to continue given the company’s relationship to the mining sector.
In short, a bet on Alliance Airways is simply a bet on the resources boom kicking on. If the mining companies keep turning a profit it seems likely Alliance will too.
Shae Smith
Editor, Money Weekend
