Flight Centre loses altitude

Travel retailer Flight Centre reported its second profit downgrade this financial year recently. The company announced that its 2015 underlying profit before tax would come in around $360m, a little lower than last year (but above 2013). The downgrade implies the stock is trading on a 2015 price-to-earnings ratio of less than 14.

Management blamed discounting and wages pressure, although it remains reluctant to admit what we believe is the main reason – the weakening Australian dollar. Between 2011 and 2014 international holidays were very affordable for Australians but with the Aussie consistently under US$0.80 now, they're much more expensive.

What seems to have really set shareholders running for the emergency exits was this sentence in the announcement: 'To date, the company's share of the leisure travel recovery has not kept pace with the market' [during the second half of 2015]. It implies Flight Centre has lost market share, most likely to the online travel providers. Market share erosion walks hand-in-hand with the lower Aussie; simpler trips closer to home are more likely to be booked online.

So that's why the stock has fallen 20% in recent days.

None of this negative news will be particularly surprising to shareholders. The weakening Aussie dollar was cause for concern in Flight Centre's split ticket from  28 Jan 15 (Hold – $37.43) and we've been banging on about the online threat for years. If you're a shareholder, remember that the internet is likely to continue nibbling away at Flight Centre's retail business (so keep your portfolio weighting under control).

Whether online providers like booking.com and Expedia take a bigger bite remains to be seen. But as we said in January, Flight Centre's share price can swing wildly when the tide turns. Apparently our concerns from the last review are now hitting home.

Having lowered the Buy price to around $30 five months ago, we see no reason to become more positive just yet. An opportunity may still present itself but, for now, HOLD.