Flight Centre boss sees airfares coming down further this year

Flight Centre boss Graham Turner expects airfares to come down further this year as more international carriers increase their number of services to and from Australia.

Company data shows prices for plane tickets have eased by about 14 per cent over the last quarter, helped by increased capacity from foreign airlines, and the travel veteran predicts they will “fall by another 9 per cent over the next six months, largely due to more flights from carriers including Malaysia Airlines, Singapore Airlines and also a number of Chinese and American airlines”.

The boss and co-founder of the travel booking behemoth spoke with this masthead on Wednesday after Flight Centre reported $86.7 million in net profit for the six months to December 31, a sixfold increase on the year before after deep cost cuts and a resurgence in leisure travel. However, its shares tanked as that was still below analyst expectations.

Chief executive Graham Turner said he was confident in Flight Centre’s long-term strategy.

Flight Centre’s shares slumped as much as 8 per cent in morning trade, their worst intra-day performance in more than a year, but rallied by the afternoon to recoup half of those losses and closed 4 per cent lower at $20.89.

Turner said he was surprised by the market’s reaction, given the company had flagged it would meet its earnings targets for the year.

Underlying profit before tax was up 565 per cent at $106.2 million in the December half, and the travel agent has predicted an underlying profit before tax of between $300 million and $340 million for the 12 months through June, up from a $270 million and $310 million forecast earlier this year. It is targeting a 2 per cent profit margin across its corporate and leisure arms by 2025.

“You have to consider this result came out of two years of COVID-19,” he said. “Last year, we made a modest $110 million profit with a 0.5 per cent margin. We’ve upped that to 0.9 per cent for the first six months of the year and made a decent profit. We expect to be well over 1 per cent for the second half of the year and be well positioned to meet our FY25 profit margin target of 2 per cent from there,” Turner said.

‘At a time when discretionary budgets are typically tightening, travel remains an outlier and a priority spend for many.’

Flight Centre CEO Graham ‘Skroo’ Turner

Turner said the swing back to profit highlights the resilience of the travel industry amid the cost-of-living crisis as it emerged from the pandemic years.

“At a time when discretionary budgets are typically tightening, travel remains an outlier and a priority spend for many,” Turner said, and observed travellers are beginning to settle back into normalised travel patterns, with rising demand for higher-yielding categories such as cruises.

“For the past two years, the bulk of tourism has been people visiting friends and family where they’re likely to just require an airfare. That’s changing now as the recovery phase eases,” he said.

Australia’s level of inbound tourism continues to lag at about 65 per cent of pre-COVID-19 numbers. Turner says this is unlikely to change until the return of Chinese tourists, which he expects could take months.

“Travelling patterns have also changed. Australia’s always been a long-haul destination, but airfares are a major factor and they’ve been at near historic highs. When you combine high airfares and long distances, you will not find many Europeans or Americans willing to make the journey,” he said.

Earnings before interest, tax, depreciation and amortisation in the December half almost doubled to $189 million and were buoyed by $11.3 billion in transactions, 15 per cent more than in the same period last year, Flight Centre said in its result.

The earnings rebound comes after Flight Centre closed hundreds of its stores as part of a cost-cutting drive after COVID-19 threw the travel sector into turmoil.

The group’s cost margins fell below 10 per cent and are expected to further reduce in the second half, with Flight Centre using $365 million to reduce its bank debt and overdraft facilities.

RBC Capital Markets analyst Wei-Wei Chen said the half was “weaker than expected” when accounting for amortisation costs and said the heavy reliance on earnings in the second half means a potential for a downgrade later in the year.

“Flight Centre has confidence in its guidance range, adding trading in January and February has been in line with expectations. However, management cautioned the months comprising [the fourth quarter] remain the most critical for achieving guidance,” he said after the group’s investor call.

Flight Centre will pay a 10¢ fully franked interim dividend per share on April 17.

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