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Flight Centre cruises into online headwinds

Emma Rapaport  |  19 Jun 2018Text size  Decrease  Increase  |  
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Shares in travel retail outlet Flight Centre (ASX: FLT) have surged almost 40 per cent since the start of 2018, but Morningstar analysts say investors should fasten their seatbelts as the threat of online turbulence looms.

In his latest note, Morningstar analyst Brian Han has told investors that while he applauds management's efforts to diversify and ramp up online capabilities, pressures on the group's bricks and mortar store-based model are likely to intensify as consumers move online.

"Flight Centre will remain highly profitable for some time, particularly in Australia where its vast network of retail shops, scale, and brand awareness will continue to drive the group's returns. However, we are wary of longer-term structural headwinds," Han says.

"We do not believe the group's strong network of stores is sufficient to protect the company against online competitors over the next 10 years. With the threat from online competitors increasing, we believe physical stores are likely to retain less relevance."

Since its founding in the 1980s, Flight Centre has amassed a physical network of almost 3000 shops in more than 90 countries.

In the leisure portion of the business, a segment that services customers who spend money arranging their travel, such as airfares, accommodation and in-destination activities, Han foresees pressure on commissions as consumers become more comfortable dealing directly with pure-online agencies. Technology, he says, has also worked to erode the information imbalance that exists between Flight Centre and the leisure traveller.

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"While Flight Centre's services will remain relevant for leisure travellers organising complex, multi-stop international trips (especially given Australia's geographical location), we are not confident that relevance will persist for the next decade," Han says.

"We believe improving sophistication and functionalities offered by suppliers and online-only competitors will arm consumers with increasing confidence to bypass intermediaries."
Similarly, in the corporate segment, which services companies and businesses that spend money arranging travel activities for their employees, Han predicts headwinds as the group fights to keep powerful customers with access to quality information in their camp, and a highly competitive industry at bay.

By customer base, Flight Centre generates 67 per cent of its total transaction value from the retail segment, and 33 per cent from the lower-margin, transaction-fee-based corporate segment.

Han has applied a high uncertainty rating to the stock due, in part, to the travel and tourism industry's reliance on the strong consumer discretionary spending and sentiment; a figure that is highly volatile and reliant on positive economic conditions.

By way of example, he points to the group's performance during financial crisis: "net profit after tax fell from $143 million in fiscal 2008 to $38 million in fiscal 2009. This inherent volatility means fair value uncertainty is high."

Shares in Flight Centre are trading around 66 per cent premium to Morningstar's $37 fair value estimate.

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Emma Rapaport is a reporter for Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is editorial manager for Morningstar Australia. You can follow her on Twitter @rap_reports

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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