Qantas buys Alliance Aviation in revenue boosting exercise

Qantas is set to buy smaller operator Alliance in a $614m deal, to boost its share of the lucrative charter market.

Alliance Aviation managing director Scott McMillan says the Qantas takeover offer represents a compelling deal for shareholders. Picture: Lyndon Mechielsen

Qantas has reached an agreement to buy smaller airline Alliance Aviation in a move that will result in the national carrier taking over lucrative mining contracts worth more than $200m a year.

The deal, which was six months in the making, is subject to the approval of shareholders and the competition watchdog, which pledged to scrutinise the acquisition closely.

Qantas first flagged its interest in Alliance in February 2019, after taking a 19.9 per cent stake in the Brisbane-based company.

The move triggered a three-year investigation by the Australian Competition & Consumer Commission, which only decided against enforcement action last month.

Under the terms of the sale, Qantas planned to buy the remaining 80 per cent of Alliance by issuing new shares valued at about $614m.

Alliance shareholders would then be offered one Qantas share worth $4.75 for each Alliance share, representing a 32 per cent premium to Alliance’s volume-weighted average price for the past three months.

Alliance said the deal implied an equity value for the company of $764.5m and an enterprise value of $919.2m.

Set up 20 years ago by Steve Padgett, Scott McMillan, Hugh Jones and Stephen Bond, Alliance now boasts a fleet of 76 aircraft, a sizeable spare parts business and a workforce of more than 900.

As well as contracts with BHP, Santos, Fortescue Metals and Newmont Mining, Alliance charters sports teams including the North Queensland Cowboys and Queensland Reds.

The company’s half-year results showed contract flying ­accounted for 75 per cent of revenue, after growth of 21 per cent on the previous corresponding period.

Alliance also had wet-lease ­arrangements with Qantas and Virgin Australia, operating up to 18 Embraer jets on regional routes for QantasLink.

Qantas CEO Alan Joyce said it made a lot of sense for the airline to “combine with Alliance” and would mean QantasLink could better compete in the highly competitive charter segment.

“Alliance’s fleet of Fokker aircraft are perfect for efficiently serving resources customers in Western Australia and Queensland,” Mr Joyce said. “They also have a big inventory of spare parts that would significantly extend the practical life of a combined fleet (with QantasLink) of around almost 70 Fokkers.

“Keeping these aircraft operating reliably for longer than ­either carrier could achieve by themselves will help keep costs down, which is ultimately good news for charter customers.”

It is understood QantasLink currently operates about 40 per cent of mining sector flights, and Alliance 20 per cent.

Virgin Australia is also a significant player in that market, and was quick to raise concerns about the proposed acquisition.

“Qantas is the dominant carrier in the Australian domestic aviation market. It already has the largest share of charter operations,” a spokeswoman said.

“Its proposal to acquire Alliance Aviation has serious implications for competition in Australian aviation markets and consumers will be impacted if competition is reduced.”

Alliance chairman Steve Padgett said Qantas was a “quality ongoing owner” of the business he began in 2002, and represented a “compelling opportunity” for shareholders.

“The transaction structure enables our shareholders to continue to participate in the Alliance story albeit as part of an expanded Qantas Group or, should they choose, to crystallise a cash payment by selling the Qantas shares issued to them,” Mr Padgett said.

Alliance managing director Mr McMillan said the deal had the unanimous support of the board. “We’ve already spoken to around 70 per cent of our shareholders and the response has been congratulatory and supportive,” Mr McMillan said. “The goal for us now is to get on with business and run Alliance while the regulatory approvals are sought.”

It would be up to the new owners to decide whether Alliance’s workforce of 904 people was maintained, he said.

Alliance reported a $20.7m underlying profit before tax in the 2022 financial year first half, while Qantas made a $245m underlying loss in the same ­period.

Alliance shares soared 21 per cent to $4.25, while Qantas slipped 0.3 per cent to $5.65.