Flight Centre (ASX: FLT) is one of Australia’s largest operators of travel agencies and has sizeable operations across both business and leisure travel. The firm is particularly useful for corporates that have set travel policies since it can act as a one-stop-shop for arranging travel plans. That way, booking airfares and hotels is not a hassle for employees, or people employed in the company’s administration function.
The beauty of the business model is that customers do not necessarily have to pay more for the service. This is because Flight Centre can buy airline tickets, hotel rooms and other products in bulk, before selling it to consumers at a mark-up that they would have paid anyway. Since airlines know that Flight Centre has paid for a certain number of tickets in advance, they can do business with increased certainty around their revenue. This is something companies are willing to pay for, and the pay by offering Flight Centre a discount on travel bookings. One weakness in their business model, however, is weak penetration of the online market relative to competitors. This could be a drag on future earnings, given the growth of online travel relative to the broader travel market.
Like a number of other ASX listed travel companies, Flight Centre had a week start to the year. Revenue rose by 4.5%, but NPAT was little moved on the previous year, rising 0.1% as the impact of margin compression fed through to the business. This was because of a weak leisure market, owing to lower levels of consumer confidence that were underpinned by weak wage and house price growth throughout FY19. While the market responded to upbeat commentary around the result, the stock sold off heavily on the back of a more recent profit downgrade and a weak trading update for the first few months of this year. While the tide of news may need to turn for the company to do well, earnings are already depressed, and the company’s reasonable multiples imply that most of the bad news is already in the price.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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