Where to now? ::

Date: 25/10/2006
Publication: The Courier Mail
Author: Anthony Marx

INVESTORS enjoyed a terrific ride with Flight Centre before its fortunes started heading south three years ago.

The company, launched modestly in Brisbane in 1982, floated on the stock exchange in 1995 at an issue price of just 95¢. It grew to become a market darling, with shares trading above $28 at their height in 2002.

As a result, investors came to expect explosive growth in franchise outlets and double-digit net profits annually. Anything less was considered a disappointment.

That trend peaked four years ago, with profit spiking 45 per cent to $62 million and shop numbers hitting nearly 1000.

But Australia's biggest listed retail travel agency has slowly declined since then, falling victim to rising overhead costs, declining margins, poor sales growth and a surge in internet bookings.

With airlines paying reduced or no commission and a shifting retail landscape, critics wondered whether the company's business model was fundamentally broken.

Flight Centre has made a valiant effort to swim against the current, launching cost-cutting programs, expanding its corporate travel network overseas and beefing up its online facilities.

But none of these initiatives could stem the tide of bad news which swamped the company last year and sent its share price tumbling to below $10.

The company sustained a 17 per cent dive in full-year profit to $67.9 million in 2005, the first since its public listing a decade earlier. That disaster triggered the resignation of chief executive Shane Flynn two weeks later.

The problems continued in the first quarter of 2006, with a 21 per cent fall in pre-tax profit to $23 million. Qantas added to the pain, announcing plans in December to eliminate domestic travel agent base commissions and cutting payments for overseas trips.

Even with Flight Centre's 4 per cent lift in net profit to $79.9 million in the year to June 30, and a modest recovery in the share price, many stockbrokers remained very guarded about the medium to long-term prospects for the company.

The big question now for company founder and chief executive Graham "Skroo" Turner is whether the internal and external problems which have buffeted the company can now be cured away from the prying eye of public scrutiny.

"Our strategy is not going to change dramatically," Turner said yesterday.

"Perhaps some of the tactics we use may well change because we can focus more on the long term.

"We're not so focused on what the next quarter's or six month results are going to be. It's where we end up after five years that's going to be the key thing and we've got some tough areas to move through."

Turner said he remained committed to double-digit TTV (total transaction value) growth again this year and held high hopes for the overseas expansion of Flight Centre's corporate arm, FCM Travel Solutions, which has spread to more than 50 countries in the past two years.

Indeed, corporate travel is expected to account for about half of all profit within five years.

Turner estimated that only about $300 million of the company's forecast $8.5 billion in global sales this year would come via the internet but he expected that number to swell to between 10 per cent and 15 per cent of TTV within five years. The problem with growing that part of the business was that it delivered lower margins than sales from traditional stores, he said.

Certain to be watching with extreme interest from the sidelines is Gold Coast financial group MFS, which recently acquired S8 and its stable of travel agencies, including Harvey World Travel. These companies are wrestling with the same shift towards greater use of internet booking.

Analysts differed yesterday on whether the $17.20 offer for minority Flight Centre shareholders amounted to good value.

But Clime Asset Management managing director Roger Montgomery said Flight Centre's return on equity had been declining for the past seven years and the stock was now only worth about $13.

That means the privatisation offer is "very generous" for small shareholders and had put a floor under the share price, he said.

At the same time, he criticized the deal structure as inequitable. "Minority shareholders are not getting the same treatment as founding shareholders even though the offer is at a premium to the value of the business and to the most recently traded price," Mr Montgomery said.

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