KGB: Graham Turner

Flight Centre founder Graham Turner tells Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

• Why Flight Centre is transitioning from middleman to travel-product retailer
• Flight Centre’s blended distribution model has been a success
• What the challenges are in Flight Centre’s foreign markets
• Having a national carrier like Qantas isn't important
• Travellers are seeing the benefits from increased competition, including from Chinese airlines
• Australian travellers are showing resilience despite the weakening dollar

Alan Kohler: Graham, another fantastic result this period. But can you tell us in the context of that result why it is that Flight Centre needs to transition, as you put it in your presentation, from travel agent to a world-class retailer of travel products? What’s the driving force behind that transition?

Graham Turner:  It’s a good point. This has been something that has been going on for some years, so it’s not just something we thought up last week. But essentially we don’t want to see us in the future – and we don’t see ourselves now – as just a middleman: an intermediary between a manufacturer or a supplier of products and the customer. We want to take various forms of products and put them together in different ways, so we’ve become more of a retailer.

There are seven aspects to that. I don’t want to go into all of them, but it’s basically being an expert at the sort of specialist brands we do, making up our own products as well as using some of the more conventional products around, and becoming very good at looking after what the customer wants. Obviously, not just doing what everyone else does either, because as things become commoditised, you do struggle for margin and success. That’s the basic picture.

AK: The two observations that come out of that are that, firstly, the current business that you have is going pretty well. Your margin actually increased in the latest period. But also, secondly, are you in danger of falling into the trap of a lot of retailers that move into manufacturing, which is that you end up competing with your suppliers and you get caught with your suppliers offside as well?

GT: Yeah. Our aim is generally not to compete with suppliers. With some of our vertical integration there might be a little bit of competition, but it’ll be healthy competition. We certainly don’t believe in just having monopoly products.

Most of what we’re looking at doing when we talk about manufacturing  is more about getting suppliers’ existing products and putting a different face on it. We’ll still be using the same airlines. We might just do different things with the airfares we get and the way we combine it with different land products. So, if you look at manufacturing, it’s not necessarily about owning tour operations or hotels or airlines; it’s about how they put it together to give us a unique offering.

Stephen Bartholomeusz: Graham, this shift towards being a retailer of travel products, is this unique? Is there another model out there? And does it leverage off the fact that you’ve got this blended distribution model?

GT:  I don’t necessarily know that there’s another model exactly like this out there. There are a lot of different specialist suppliers in the travel industry and these are the specialists that have probably grown the most over the last 10 or 15 years. As things become commoditised, it does mean that they can go online. Every man and his dog can do the same sort of thing, so it does come back down to price.

A blended model is just giving customers what they need but today, that it’s 24/7, is pretty obvious on the internet. We want to make sure we’ve got a good 24/7 offering, whether it’s on the internet or person-to- person because the vast majority of international travellers still want to deal with people. We want to make sure that we can compete with the online channel with expertise and people who know what they’re doing. It is a combination of a few of those things.

SB: I think you’ve said in the past, Graham, that your model, the blended model or the omnichannel model, would be more resilient in the long term than the pure online providers. Is that playing out? We’ve seen some fairly patchy results from pure online businesses in the last little while.

GT: I think it is a little bit. But as I said, things that are easily commoditised do fit the online model pretty well. If you’re purely in online, it’s a very competitive business. I mean in the end, particularly with aggregated sites, it often will come down to identical offerings that are just bought on price. That’s one of the problems with the online play. 

If you look at online too and I know some of the results have come out, but there are some big global players and they have some unfair advantages in terms of GST, although not so much in travel. When you have Expedia and Priceline when they really come into Australia, you know, being a purely online play with no flexibility to do it, could be a tough game to be in. 

The way we do it – where we have that blend of online/offline with the focus on person-to-person transactions – I see it as the way forward in travel. And even the successful department stores in the US and UK, it’s the online-offline offerings to customers, where customers choose how they want to do it, that have been quite successful. That’s certainly where we want to go as well.

AK: Do you run your online business as a global site or do you tie them to each of the local geographic businesses?

GT: They’re done geographically. We have different levels of online transactability, depending on the country you’re in. For example, in the Flight Centre brand, it will be one of 29 or 30 brands we have that will be fairly similar globally. Obviously, different markets have different product requirements, but the look and feel will be fairly similar. It’s very much a geographical thing; it’s the same as any product. There is a reasonable amount of difference when you get into different countries.

AK: Some of your sales in other countries are up quite solidly, up by 25 per cent to 33 per cent in Singapore. It’s early days in particular in China and India, but what sort of margins are you getting in those places?

GT: Look, our margins generally aren’t too dissimilar. I don’t know the exact numbers, but our overall gross margin is around about 14 per cent and most countries won’t be too dissimilar. The UK, which has had a big growth on relatively significant numbers, is a little bit higher than that.

But in places like China, Singapore and Hong Kong, we tend to deal in the higher-end local and expat market. The margins are quite solid. India is a tougher market. The margins there are relatively thin, so it’s certainly different. But generally, most of our margins in most of our countries are around the 13 or 14 per cent mark.

AK: In China, you grew by 11 per cent in local currency terms in the latest half year. What sort of potential do you see there?

GT:  China’s not a really easy market. A lot of people travel an enormous amount, but the vast majority of Chinese who travel are still very tour-orientated. They travel in big groups, they travel domestically a lot by rail, air is coming more into it, but we just don’t see that as part of our market in the foreseeable future. Our market will be high-end Chinese travelling internationally, as well as the expats out of places like Shanghai, Beijing and Guangzhou.

We’re getting some reasonable growth there, but we’ve been there for seven or eight years now, growing year on year but from a pretty small base. We’re not going to ramp it up in a big way in the short term.  It’ll be long-term growth, certainly in the double digits, but we’re not looking at anything really spectacular there.

SB: Graham, we’re shortly going to see the domestic aviation duopoly reduce losses of somewhere around about $400 million over a six-month period. Is that destabilising for the larger industry, including Flight Centre, or is it actually producing benefits because of all the capacity that’s being put into the market?

GT: We’ve been through the duopoly before of course with Ansett and Qantas, and I think effectively Qantas, you could say, has had a bit of a monopoly particularly in the corporate market over the last 12 or so years. So, I think it’s just coming back to what it was like before, perhaps, and I think Virgin has still got a fair way to go in terms of winning that sort of market share that Ansett had in the ‘90s.

But I think it’s generally positive for us and for the travelling public. I can see Qantas are concerned about it and there’s no doubt that Virgin’s not having an easy run with getting the market share they want in that separate business either, so I think it’s pretty interesting and generally it’s fairly positive for us. We’ve worked with both carriers well and we’re looking forward to having two products that are really quite competitive as it goes on.

AK: Graham, what if the Qantas board got an attack of sense and asked you to run the company? What would you do?

GT: Well, I’d head overseas somewhere and hide, I think.

AK: No, seriously – what do you think Qantas, and Virgin for that matter, should do differently, if anything?

GT: I think John McGee – in Virgin – he’s got a relatively new business, a new company that he can do a lot with and a lot of alliances that I think fit in pretty well. His main challenge now is he’s got to make some money and without knowing that business intimately that’s going to be a challenge because Qantas’ Alan Joyce is not going to let him just take market share without putting up a fight.

For Qantas – much, much harder. It’s an old legacy carrier, heavily unionised. The unions have a big say in a lot of the inefficiencies and inflexibilities of the business model but unfortunately they’ve got a lot of nimble and relatively new competitors, particularly in the international area, that just don’t have to worry about unions and the inflexibility they often bring. I think that’s Qantas’ biggest challenge, is how you try to compete with a unionised workforce when none of your competitors, or most of your competitors, just don’t have that.

AK: Do you think it matters whether Australia has a national carrier or not?

GT: I don’t think it does. We’re a global marketplace. You can just see all the carriers that are coming into Australia now and whether Qantas – or Virgin for that matter – is known domestically, locally or overseas, I don’t think it has any impact at all. If there’s another world war or something and the government wants to have access to an airline, I’m sure that in the end there’ll be plenty of hands up to cooperate with them, no problems at all.

SB: Graham, one of the challenges Qantas has faced over the last decade or so has been, as you say, the increase in the number of airlines flying into and out of the country – most recently the Middle East airlines. We’re seeing the start of a Chinese airline presence in Australia. I know the product at the moment isn’t all that strong, but can you see them having the same sort of impact as the Middle Eastern airlines have had?

GT: That’s a good point. I suspect they will, and most of the things that the Chinese have done, in a lot of the areas they’re pretty good at and have shown that once they get serious about it they will have an impact. Already at the bottom end of that market they’re now having an impact but they’ve still got a fair way to go and I think overall generally it’s a good thing because it really means that everyone has to keep their standards up. If you look at the last 10 years we’ve got 80 per cent more capacity, but it’s not just the capacity – we’ve got much better product coming into and going out of Australia than 10 years ago by a long shot and eventually I think the Chinese will get to the stage where they’d probably take things to the next level as well. So the travelling public is obviously the winner here.

AK: Doesn’t that mean that Qantas and Virgin will never make any money?

GT: Well if you’re an airline, it’s a challenging business and there’s no doubt whatsoever if they’re going to compete on the international scene, you need to be very good, you need to be very, very efficient, very flexible and essentially excellent at what you do. Not just from an operating or a hardware situation, but from the way you run your service offerings. You’re going to have to be at the top of your game. But I think that’s the same just about anywhere in the world where you see airlines, and there are some terrific competitors now that are just basically reshaping that business.

SB: Graham, in that sort of post-financial crisis period part of the explanation for the surge in overseas capacity coming in has been a) overcapacity in the global market, but b) the strength in the Australian dollar and the chance to get some strong currency earnings from a market which was growing because of the strong Australian dollar. The dollar has now come off quite a bit from where it peaked over the last 12 months. Are you noticing any impact on your outbound traffic?

GT: We don’t expect that to be much at all. Airlines, as you know, when a dollar or a currency gets weaker will tend to try to feed more capacity into the other markets and we may suffer a little bit because the airlines will tend to find they might be better getting US dollars out of the States rather than Australian dollars out of Australia. And that’s really obvious in South Africa where the rand is really weak. The airlines try to sell very little stuff in South Africa, so we have a capacity issue there, though there are plenty of airlines flying into there.

But generally I think the prices will remain competitive out of Australia and I think we’ll have enough seats. If it goes down to fifty cents, that might change things, but all the things we’ve seen is that what really affects outbound travel out of Australia, for example, is more the actual price of airfares and other tour operations, hotels and people will tend to book a lot more of their travel before they leave so that they’re basically hedged against a weak currency. So we don’t see any major problems and our experience is that people might downgrade a little bit by going to four star hotels or not flying business class or staying for shorter periods. But generally Australians are very resilient travellers.

SB: Graham, you’ve got a really conservative balance sheet with a big lump of net cash in it, and I know you’ve talked about looking for capital-light transactions but clearly you’ve got the capacity to do something much larger if you wanted to. Are you looking, or have you ruled that sort of big transforming acquisition out?

GT: As we get older… we’re in 11 countries. There are just no major acquisitions on the horizon that we can say that would be of interest to us. We can grow organically. I think I said that in this last six months, organically we grew by $887 million, I think. That’s in six months, it’ll be probably $1.8 billion, just growing organically. And in the 11 countries we’re in, there are so many opportunities to increase that organic growth, albeit it is hard or as you get larger, so… We’re looking more at areas where we can perhaps expand vertically a little bit, so that in areas where we do have a large market share that we can, you know, look after our customers better by having a greater vertical presence there and obviously take another slice of the dollar. So that’s basically our focus at the moment. You never know, there might be something that comes up, but we’ve got no aspirations to very big lump acquisitions.

AK: Thanks very much for joining us, Graham.

GT: Okay. Thank you very much, guys.

SB: Thank you, Graham.

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