Flight Centre profits under strain despite e-commerce take-off

Flight Centre profits under strain despite e-commerce take-off

Travel agency Flight Centre (ASX: FLT) expects a reduced underlying profit in the first half of FY19 even though its online businesses have been flying high.

Speaking at the Morgans Queensland conference, Flight Centre managing director and founder Graham Turner noted online leisure sales in Australia had doubled year-on-year in the three months to 30 September despite a challenging trading climate.

Turner said the sites BYOjet, Aunt Betty and flightcentre.com.au generated more than $250 million in total transaction value (TTV) for the period.

"The Aunt Betty and BYOjet businesses are trading strongly and together recorded 140 per cent TTV growth in Australia during the quarter," Turner said.

"flightcentre.com.au has also continued its trajectory since online booking fees were removed late in FY19 and delivered 65 per cent Q1 TTV growth.

"This growth is predominantly coming from domestic travellers who are new to the Flight Centre brand, rather than from existing customers who are moving between sales channels, pointing to increased market-share over the period."

He noted online sales represent a relatively small percentage of leisure travel TTV, but they were a positive sign as Australian trading conditions started to recover.

FY20 outlook

Flight Centre will be releasing more detailed FY20 profit guidance at its annual general meeting on 7 November, but for now Turner has indicated underlying profit will be lower year-on-year for the first half.

The founder expects results will be heavily weighted towards the second half of FY20, and stabilisation is expected in the current quarter after a challenging first quarter.

Turner cited a range of contributing factors, including a new wage model that led to additional wages for leisure sales people, increased consultancy costs, operational and strategic reviews, and lower than expected profits from the emerging in-destination businesses.

FLT was also impacted by the general unrest and uncertainty in international travel markets, slowing profit growth in regions that have become material earnings contributors. The executive noted Brexit was impacting the UK business, while the US leisure travel business was affected by safety concerns in the Dominican Republic, a popular destination for Americans.

He noted the high-profile collapse of Thomas Cook in the UK had led to a minimal impact on FLT and its customers, but the company expected to incur in the order of $7 million in costs associated with its decision to ensure its customers were re-accommodated and not adversely affected by the collapse of Bentours and Tempo Holidays in Australia.

This compares to a $7 million hit to profit for tourism services aggregator Webjet (ASX: WEB) as a result of the Tomas Cook downfall.

FLT currently expects to separate these costs from its underlying FY20 results.

Turner explained while TTV was increasing in Australia the company had not yet seen tangible benefits flowing from recent interest rate cuts and tax refunds and that any benefits were more likely to be seen later in FY20, assuming consumer confidence improved ahead of the year's peak booking periods for longer haul holidays.

Further opportunities

The company founder also highlighted the home-based agent/independent contractor sector, the ready-made holiday package market and specialist Flight Centre brand businesses as other emerging leisure travel opportunities.

These opportunities are bolstered by FLT's recent full takeover of Gold Coast-based Ignite Travel Group, with plans to export Ignite's model to other geographies where Flight Centre operates.

FLT has consolidated its position in the corporate travel sector in recent years, and Turner said this area of the business had continued to perform well in early FY20 trading.

He said Europe was emerging as a key future growth driver for the corporate business, given the company's expanding footprint on the continent.

"Europe is home to some of the world's largest corporate travel markets and we now have company-owned businesses in key countries like France, Germany, Switzerland, the Netherlands, Sweden, Finland, Norway and Denmark," he said.

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