Internet catching up with Flight Centre

By Daisy Melwani

After more than a decade of defying the threat from online competitors, is the internet finally catching up with Flight Centre?

Australia’s largest travel agency spooked shareholders on Tuesday by downgrading its profit guidance for the second time in six months and admitted it’s core leisure travel business had lost market share.

Flight Centre now expects its 2014/15 profit to be between $355 million and $365 million, down from its previous guidance of between $360 million and $390 million.

The company’s shares lost 13% on Tuesday and were down another $2.38, or 6.3 per cent, to $35.13 as of 1303 AEST on Wednesday.

Profit downgrades never go down well with investors but it was the decline in market share that sent Flight Centre stock through the floor and sparked another round of speculation about the company’s future.

While online travel booking websites are hardly a new invention, Flight Centre under the direction of founder Graeme “Skroo” Turner has chalked up an enviable growth record over the past decade even as more consumers ventured on to the internet to book flights and accommodation.

That’s partly because many Australians still prefer the security and convenience of outsourcing their travel arrangements to an agent, and with more than 2,500 stores across the country Flight Centre dominates that area of the market.

But Morningstar analyst Farina Parsons warns that store network could become a significant burden for Flight Centre as online booking becomes simpler and Australians more savvy.

She says the cost of running those stores puts Flight Centre at a disadvantage.

“We don’t think the business has enough competitive advantages to compete with online competitors,” she said.

“As online operators improve their offering, Flight Centre will lose market share.”

However, Deutsche Bank analyst Michael Simotas said the market had overreacted to the profit downgrade.

He said the slide in earnings was mostly linked to the weak consumer leisure market, which was hit by the slide in confidence following the 2014 federal budget.

“The market share loss seems isolated to relatively small and low margin segments of the business which makes us believe that cyclical weakness in the leisure market was the primary driver,” he said in a research note.

Mr Simotas expects Flight Centre to lift its earnings next year, thanks in part to its growing overseas operations.

Flight Centre operates in 10 regions globally and has been increasingly focused on the lucrative corporate travel market, while expanding into new areas like its foreign exchange subsidiary Travel Money Oz.

It’s also overhauling its leisure operations and is sitting on a $500 million cash pile, which gives it some room to respond to changes in the sector.

“At current levels we believe the market is pricing a more dire scenario than reality, particularly given the large cash balance which continues to build,” Mr Simotas said.

Deutsche Bank has a target price of $46 for Flight Centre shares, while Morningstar puts the fair value of the stock at $45.

* The reporter owns shares in Flight Centre

Image: brw.com.au

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