Flight Centre climbs past turbulence
Five years ago Graham Turner's Flight Centre group would have been on quite a few investor IIRK lists - earmarked, that is, as Imminent Internet RoadKill.
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.