Flight Centre climbs past turbulence
There are almost 700 Flight Centre shop fronts in Australia, another 550 overseas in markets including New Zealand, Britain, the United States and Asia, and a host of other group members catering to corporate travel and retail niches including student travel, working holidays, adventure travel and high net worth holidays.
By 2008 the group was waiting to be run over by the internet juggernaut according to some. Internet flight aggregators were already well established: why wouldn't the entire industry shift onto the internet, stranding companies like Flight Centre and slashing the value of their bricks and mortar networks?
It hasn't worked out that way, so far. After Tuesday's 8.5 per cent share price leap on news that the group's net profit had risen by 23 per cent to $246 million in the year to June the shares were registering a 204 per cent five-year total shareholder return. Anyone brave enough to buy up in bulk in 2008 should be perusing Flight Centre's brochures for a first-class flight to Rio.
There's a couple of caveats to Flight Centre's stellar performance that I will come to later, but the result, like others in this profit season including a 12 per cent fall in the June year earnings that the Wotif online booking site disclosed on Wednesday, confirm that corporate internet strategies are modifying as the internet evolves.
In the media industry the simultaneous threat and promise of the internet is arguably starkest. Companies like the "new" News Corp and my employer, Fairfax Media, still have their newspaper presses rolling, but it is only a matter of time before digital platforms take over. They will print newspapers and magazines until it is no longer economic for them to do so, but the growth focus for them and their investors is digital media.
Retailing is a more varied landscape. The carnage that has occurred in the book-retailing sector reveals the internet's disruptive potential. But in other retail sectors the early online adopters have transferred and delivered a share of the retail market rather than all of it.
Online retail-market share growth may come more slowly from here on. Wotif's managing director Scott Blume said on Wednesday, for example, that online growth had slowed across the industry in Wotif's core market, accommodation booking. He is looking at expansion into areas including airline bookings to provide additional revenue momentum.
The big traditional retailers meanwhile have been integrating the internet as an additional browsing and purchase platform that is backed up by their existing distribution chains and store networks in what is known as a "click and collect" or "clicks and mortar" strategy.
When he unveiled Woolworths' 6.1 per cent higher $2.35 billion annual profit on Wednesday, chief executive Grant O'Brien said, for example, that Woolies had boosted online turnover by 42 per cent in 2012-2013.
He predicted more than $1 billion of online revenue this financial year. That's a drop in Woolies' $58.5 billion total revenue bucket, but click and collect does appear to be getting traction, and Flight Centre is another example.
Only about $500 million of Flight Centre's total transaction value of $8.5 billion in Australia was generated purely online in 2012-2013. Many of the offline customers visited Flight Centre websites before they visited the stores, but Turner is confident that he can leverage the internet without damaging the physical franchise he has constructed.
The group has ceded market share to internet travel aggregators on simple transactions, flights between Melbourne and Sydney, for example, but when flights are part of a larger, integrated and complicated schedule, say an international trip that involves multiple stopovers, Flight Centre is still a formidable competitor, on price and a "value-add" service that integrates online and the store network.
The first caveat to the Flight Centre story is that Turner is also delivering growth by relentlessly expanding the group's geographic and travel industry footprint. There were 50 Flight Centre outlets in Australia in 1988, and there are 689 now, for example. Growth will continue as Flight Centre expands overseas, but success depends ultimately on the success of the clicks and mortar strategy.
Flight Centre's key constituency is also baby boomers who are less comfortable using internet aggregators. The second caveat is whether Flight Centre will lose altitude as baby boomers get older - but it is probably a medium-term one: the boomers are underwriting Flight Centre's growth as they retire and travel more frequently, and the trend could run for years.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Flight Centre's share price rose about 8.5% after the group reported net profit up 23% to $246 million for the year to June. That result contributed to a five-year total shareholder return of about 204%, signalling strong recent performance — but investors should also weigh the drivers behind the growth before making decisions.
Rather than losing out entirely to online aggregators, Flight Centre has adopted a 'clicks and mortar' approach: it integrates its websites with a large physical store network to serve customers who need complex, multi-stop international itineraries or value in-person service. The group has ceded share on simple transactions (eg, domestic point-to-point flights) but remains competitive on price and value-add for complicated bookings.
Flight Centre operates almost 700 shop fronts in Australia (about 689 reported) and roughly 550 stores overseas across markets including New Zealand, Britain, the United States and Asia. The wider group also serves corporate travel and niche markets such as student travel, working holidays, adventure travel and high‑net‑worth holidays.
In 2012–2013 only about $500 million of Flight Centre's total Australian transaction value of $8.5 billion was generated purely online. Many customers still research online before visiting a store, reflecting the hybrid online/offline behaviour the company is leveraging.
A key part of Flight Centre's growth has come from relentless geographic and product expansion. For example, the group grew from about 50 Australian outlets in 1988 to nearly 689 today. While underlying profitability has improved, investors should recognise that part of the headline growth is from adding outlets and entering new markets.
One important caveat is Flight Centre's customer base: baby boomers are a key constituency and are generally less comfortable using internet aggregators. If demographic trends shift over the medium term as this cohort ages, demand patterns could change. The company's future success also depends on how well its clicks‑and‑mortar strategy holds up against pure online competition.
Flight Centre's hybrid model is similar to broader retail trends where large incumbents combine online platforms with physical distribution — often called 'click and collect' or 'clicks and mortar'. The article notes examples such as Woolworths, which grew online turnover by 42% in 2012–13 and expects more than $1 billion in online revenue, and Wotif, which has seen online growth slow and is exploring expansion into airline bookings.
Investors should weigh the company's strong recent profit growth and five‑year shareholder returns against the sources of that growth: expansion of store networks, reliance on baby‑boomer customers, and the effectiveness of its clicks‑and‑mortar strategy in the face of online aggregators. Also consider broader industry signals in the article — such as slowed online growth in some travel segments and competitive moves by pure-online players — when forming an investment view.
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