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Flight Centre hits bumpy patch – but longer-term outlook smoother
Flight Centre (ASX:FLT) might have been expecting a softer landing when it delivered a slightly pessimistic earnings update to the market in October. At a Morgan’s presentation, it said first quarter growth (July-September) had been impacted by a flat global corporate sector, airfare deflation and down trading in some large accounts.
That mild warning for a company that typically does its heavy earnings lifting in the second half, and amid a positive longer-term outlook, did not spare the travel group from investor wrath.
Shareholders can be an unforgiving lot – just days earlier another travel stock, Webjet, was treated similarly when it issued two consecutive profit warnings – as Flight Centre quickly discovered when its share price nosedived about 20 per cent on the day. It has recovered slight but for the year is still down 16.2 per cent after closing on Tuesday at $16.65.
Yet Flight Centre delivered an impressive performance to June 30, 2024, with encouraging signs it can build on those numbers in 2025.
The ubiquitous travel group enjoyed a record total transaction value (TTV) of $23.74 billion and a 131 per cent year-on-year increase in underlying profit before tax to $320 million, demonstrating its ability to adapt and thrive in a post-pandemic market.
Productivity gains were pivotal, with record TTV achieved by only 63 per cent of the 2019 workforce, reinforcing the company’s operational efficiency.
Flight Centre’s disciplined cost management and strategic initiatives have strengthened its balance sheet, with a record $421 million operating cash inflow. For shareholders, this translated into increased dividends, share buybacks and significant reinvestment in growth areas, signalling its commitment to delivering sustainable, long-term value.
For shareholders wanting to take a long journey with Flight Centre – it’s worth remembering the share price touched $60 in 2018 and before COVID was part of the lexicon – then there are some promising trends.
On the dividend front, its commitment to returning value to shareholders was on show again in 2024, with $62 million distributed and an additional $66 million declared for early 2025. These fully franked dividends represent a 38 per cent return of underlying 2024 net profit after tax. With continued profitability and cash generation, investors can anticipate steady or increasing dividend payouts this financial year.
Growth in its high-margin leisure division is a key driver of profitability, with a 104 per cent increase in underlying profit before tax to $188 million in 2024. The company’s strategic acquisition of Cruise Club UK will accelerate growth in the lucrative cruise sector (its double the size of the Australian market). By leveraging its successful MyCruises model, it aims to capture significant market share while enhancing profit margins.
Corporate travel, which achieved a record $12.1 billion TTV in 2024, remains a cornerstone for growth, with its expansion into the small to medium-size enterprise market, particularly in the US, highlighting its potential for sustained profitability.
Technology improvements – $100 million investment is earmarked for 2025 – will drive operational efficiencies, reduce costs and improve customer experience, ultimately boosting profitability.
Underpinning this corporate outlook are predictions for an expanding global travel market for the remainder of the 2025 financial year as lower prices drive volume growth, there is robust demand from high-net-worth and older demographics and the continuing recovery of corporate travel volumes.
As the Morgans’ warning highlighted, the travel industry remains extremely volatile – and shareholders are quick to bail out. It could also face a challenge from lower-margin businesses, but Flight Centre’s strategic focus on scaling profitable segments, managing costs and optimising operational efficiencies will mitigate these risks.
Shareholders can take confidence in its disciplined approach to balancing growth investments with sustainable profitability. Remember, too, the stock, which hit $8.50 in early 2020 when the market was digesting the impact of COVID, is trading on a relatively attractive valuation multiple compared with its historical average. So, it might be worth hitching a ride. If you do, expect some turbulent weather along the way.
