Flight Centre warns on profits

The travel retailer's share price has plunged after it reported that a margin squeeze will cause profits to fall this year.

You'd think an airfare price war would be good for Flight Centre, and you'd be right in as much as it stimulates overseas travel – but it seems that too much of a price war can cause it to miss its 'super overide' volume-based bonus commissions from airlines. And unfortunately on this occasion the extra stimulus to travel has been thwarted, says management, by uncertainty due to the election in Australia, the 'Brexit referendum in the UK and the Zika virus in central and south America (important markets for the US business).

These two factors, plus an increase in expenses, have combined to put a squeeze on margins. The result is that profit before tax for the year to June is likely to fall by 2–5% from the $366m achieved in 2015, compared to the 4–8% increase targeted by management at the 2015 final results and reiterated at the interim results in February.

As we noted in Flight Centre: Interim result 2016 on 3 Mar 2016 (Hold – $43.65), 'downturns in Flight Centre’s business ... when they come, can be ugly', and this fact appears not to be lost on the market, which has knocked 13% off the share price since the announcement.

Our price guide already allowed for a margin of safety, so we're happy to leave it where it is for the time being. We won't, however, be in any great hurry to upgrade even if the share price nudges below our $30 Buy price. HOLD.

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