Net Sales came in at SEK5.7m, +27% y/y, and flat q/q. This is slightly below our estimates of SEK6.0m. EBITDA came in at SEK2.4m, corresponding to an EBITDA margin of 42% (EBITDA SEK1.6m, EBITDA margin 36% last year). Thus, slightly above our estimates of SEK2.0m. The main reason for the higher EBITDA is the effects of capitalized R&D and other income.

The quarter was stable regarding FX, with USDSEK declining 3% q/q. This should have had a marginally negative impact.

AVTECH announced an extension to its ClearPath product which will improve in-flight comfort by providing better information to pilots to avoid dangerous and turbulent flight paths. AVTECH believes this could improve the pricing for ClearPath over time. Our current view is that this is a “nice to have” for airlines and adds additional sales arguments.

Globally, there are about 25,000 aircraft AVTECH could service. AVTECH is already servicing c1300 aircraft (implied market share c5%). The number of aircraft is expected to reach c32,000 in 2027 and grow to c38,000 by 2032.

Based on figures communicated by AVTECH related to its contracts with customers, we estimate ClearPath earns cSEK0.022m per aircraft per year. Aventus, we estimate, makes cSEK0.017m per aircraft per year. The figures below are not comparable due to different contract terms such as fixed versus variable, et Cetra.

Using these figures, we estimate AVTECH’s total addressable market (TAM) for Aventus and ClearPath to be cSEK1bn in 2022, growing to cSEK1.3bn by 2027 and cSEK1.5bn by 2032. Thus, we estimate AVTECH has penetrated only about 2% of its addressable market.

Moreover, most of AVTECH’s customers only use part of AVTECH’s offerings. If they all upgraded their offering, AVTECH could double its revenue. Considering AVTECH’s operating leverage, EBITDA should increase significantly more.

Key metrics measuring the airline industry’s profitability are Revenue per Available Seat Mile (RASM) and Cost per Available Seat Mile (CASM), including and excluding fuel. Aggregating the airlines and comparing their profitability, including and excluding fuel costs, its clear that fuel-saving technologies are essential for airline profitability. For example, on average, 23% of the airlines’ CASM cost is fuel. Thus, we find there is a clear need for AVTECH’s software. However, as discussed below, airlines view new aircraft as the main lever to reduce fuel consumption.

The available seat mile is expected to be below the 2019 level. Hence, the industry will likely remain below capacity in the next few years. This could push up airline ticket prices and reduce the airlines’ need for fuel savings technologies to be profitable. However, the environmental aspect remains, which could offset the economic factor.

During the quarter, AVTECH signed one additional airline, the fast-growing Volaris. Volaris is owned by almost 9% by the private equity group Indigo Partners Llc, which also has stakes in American Frontier Airlines (112 aircraft) and Chilean low-cost JetSmart (17 aircraft). Thus, we see upside potential in AVTECH’s services spreading to the other holdings.

Volaris is a rapidly growing aircraft carrier serving the North and South American market. The deal is for ClearPath and Aventus Winds services and is expected to generate between SEK8m-SEK14m (mid-point SEK11m) over three years. This implies an annual revenue of SEK3.7m at the midpoint. Volaris is a midsized carrier with a fleet of about 120 aircraft at the end of February, and as such, the agreement implies revenue per aircraft of cSEK0.03 annually. This is the highest revenue per aircraft figure so far. The target start date is in March 2023 and includes an initial 3-month evaluation period with an option to discontinue.

Volaris significantly emphasizes fuel efficiency to achieve profitability through reduced fuel expenditures. Volaris’ March 2023 investor presentation states that approximately 36% of the company’s costs are fuel-related. Nevertheless, Volaris demonstrates superior efficiency compared to other industry players, with 22%, 26%, and 47% greater efficiency than the US low-cost, Latin American, and US legacy carriers, respectively.

In pursuit of further improvement, Volaris has set a goal to decrease its fuel consumption per thousand available seat miles to 8.8 gallons by 2027, down from 11.8 in 2016. Most of these fuel efficiency gains appear to correlate with fleet upgrades to Airbus NEO aircraft.

Nevertheless, using software is a low-hanging fruit for airlines to adopt for immediate increased fuel efficiency. For example, airlines could already lower in-flight fuel consumption by approximately 2% by adopting AVTECH’s offerings.

Volaris has grown its aircraft fleet by about 20% annually since 2006. According to its March 2023 presentation, it has three purchase orders placed with Airbus totaling 174 aircraft and an order backlog of 144 aircraft. According to the presentation, half the backlog relates to replacing existing airplanes, with the other half to the growth of the fleet. Volaris’s medium-term plan is to have 175-200 planes operating 490-550 routes. The agreement with Volaris is variable; thus, the future fleet expansion would add an upside to the announced deal.

According to the Company, five airlines, totaling approximately 350 aircraft, are currently testing AVTECH’s services. In addition, six more airlines have signed up for tests this year, amounting to c1200 aircraft. We estimate the 350 planes to have a net sales potential between SEK2.6m–SEK10.7m. We estimate the average contract size to be between SEK0.5m–SEK2.1m. The 1200 aircraft could be worth SEK9.0–SEK36.7m, and we expect the average contract size to be SEK1.5m–SEK6.1m. The high-end range assumes similar per-aircraft pricing as Volaris, which uses both Aventus and ClearPath.

The airline industry is characterized by a handful of huge US airlines and a long tail of airlines with 100–300 airplanes. The average fleet size of the airlines scheduled to trial AVTECH’s offering is 140 planes. This would put them among the top 50 airlines by fleet size.

We think most of this pipeline is scheduled to test in H123, and we expect the airlines to decide to move forward within two quarters. Hence, it is likely that a large part of the incremental revenue from the pipeline will spill over into 2024.

In conjunction with AVTECH announcing the Volaris agreement, we increased our 2023 estimate marginally from SEK27m to SEK29m. The financial impact of the Volaris agreement will start in Q2’23.

Our estimates imply about 40% of AVTECH’s pipeline at the mid-point will convert to sales between 2023 and 2024. AVTECH has already added cSEK3.7m from the Volaris deal, or 20% of the mid-point pipeline. We keep our fair value range but expect the share to close on our base case.

We make some minor adjustments to our quarterly estimates, mainly relating to capitalized R&D. This has no impact on our fair value range.

Compared to our peer group, chosen based on product concentration and profitability potential, AVTECH trades at a discount between 30-46% on 2023e-2025 EV/EBITDA. Considering AVTECH’s proven profitability and potential for rapid revenue expansion, we find it fair that it trades at least in line with peers.