Undervalued Flight Centre Awaits Travel Recovery

Australia | 11:30 AM

Flight Centre has downgraded FY25, again, but FY26 should see some improvement, and analysts see the stock as materially undervalued.

-Travel agent Flight Centre issued second FY25 profit warning
-Numerous negative factors at play
-FY26 could be a 'better', i.e. 'normal' year
-Buy ratings abound amidst undervaluation

By Greg Peel

Flight Centre Travel's ((FLT)) pre-released unaudited FY25 trading results indicated an underlying profit of $285-295m. At the midpoint this is -9.5% below its previous guidance of $300-330m updated in April.

That April market update represented a -15% downgrade from prior guidance.

So what went wrong? Let me count the ways.

Flight Centre's earnings coming out of covid were on a sharp recovery, as was the travel industry, but that rate has slowed as we approach “normal” levels of activity.

Airlines themselves needed to recover from covid, and one way was to reduce overrides paid to travel agencies -- volume bonuses paid by airlines to agents exceeding certain sales targets. Qantas Airways ((QAN)) wasted no time doing so in 2021, while a reanimated Virgin Australia ((VGN)) followed in 2024. The material reduction in overrides now paid by Qantas and others was the key factor that hurt Flight Centre earnings in FY25.

Cost of living pressures over FY25 drove Australians to opt for medium-haul flights (eg to Asia) over more costly long-haul flights (US, Europe). Leisure travel to the US has also been hit by falling demand, thanks to Trump’s America and mistreatment of Australian travellers entering the US.

Conflict in the Middle East has also reduced demand for travel to the UK and Europe, given flights pass overhead.

Flight Centre has taken up higher debt provisions due to non-collections of debts in the Asia Corporate business, The full-year loss for this business will now be materially above previous guidance of -$8-10m.

Yet, despite all of the above, Flight Centre’s total transaction volume (TTV) grew 3.2% in FY25, 1% ahead of consensus.

The question for analysts is to what extent these factors will continue to impact in FY26.

Skies Clearing

Asian Corporate issues are considered a one-off problem that will not continue into FY26.

Expected RBA interest rate cuts ahead will ease cost of living pressures and potentially lead to more normal international travel demand, although likely not to the US.

The Middle East conflict will end, probably.

Looking into FY26, Jarden finds the corporate TTV pipeline is strong, while the leisure base is softer. Return on invested capital should improve, supported by a cost-out strategy now initiated and a -15-20% reduction in capex.

Improving global sentiment, improving corporate industry structure (via merger progress between America’s number one and number four business travel agencies) and strong intentions in luxury/high-end travel (suggested by a Visa report), support a positive view on travel, Jarden believes.

The recent backdrop for travel has been poor, the result of regional conflicts, macro uncertainty and cost of living pressures, with Singapore, American and Southwest Airlines all talking about softer demand and a recent business travel spending survey pointing to weaker global demand. That said, there is a case for optimism in FY26, Jarden suggests, with Airline Reporting Corp data improving, expectations low and improving spending capacity globally as interest rates fall.

Jarden believes Flight Centre is well positioned to capitalise on this and re-rate.

UBS recognises the potential for a better macro backdrop in FY26, which could deliver upside through a combination of lower rates/higher property prices stimulating leisure demand, Middle East disruptions reducing, and better corporate macro conditions. However, in the absence of improving conditions, the risk is the operating leverage within the business gets pushed out twelve months.

UBS is cognisant overrides have been impacted in FY25, which one could argue creates an easier comparable heading into FY26, but the broker has not incorporated a recovery in FY26. UBS highlights Flight Centre has multiple levers to help drive above-market growth, including new business wins in Corporate remaining strong and ongoing momentum in Corporate Traveller, increasing share within Leisure from independents, and productivity benefits in both Corporate and Leisure.

While UBS recognises achieving the full benefits from productivity initiatives will not occur in subdued conditions, the broker still sees potential short-term upside, together with material upside to medium-term assumptions.

Overall, while the outlook remains uncertain, barring no further shocks to consumer and/or business confidence, Citi thinks with a “normal” year expectations for FY26 should prove achievable.

Looking forward, Citi expects short-haul international and low-cost carrier demand to remain elevated and notes bad debts relate specifically to the second half of FY25.

With regard overrides, Citi estimates this issue will drag through FY26, but circa two-thirds will be reset by the first half. The US reporting season showed all major airlines reporting a steady to flat start to FY26, including the reintroduction of quarterly guidance.

It was a disappointing FY25 update, Macquarie admits, but recent US/Middle East volatility created some downside risk heading into the result. Broader travel activity, while volatile, is improving post these events creating a better outlook into FY26, Macquarie suggests, and the market will expect to see some benefits from productivity initiatives in FY26.

As is usual practice, FY26 guidance is likely at Flight Centre’s AGM. Despite a weak first quarter FY25 comparable, given the declining second half FY25 trends and political and macro-economic uncertainty, Morgans believes the first half FY26 will still remain challenging.

It will also take time for internal business improvement initiatives (Global Business Services, Productive Operations, AI, Loyalty program) to gain momentum. For Flight Centre to see acceptable profit growth, it needs solid top-line growth, Morgans notes. Specifically, management has said that Leisure requires TTV growth of mid-single digits and Corporate mid-to-high single digits.

While a short-term rebound in conditions may be elusive, Wilsons remains constructive on a twelve-month view, noting the momentum in Corporate client wins, prospect for an improvement in conditions over this timeframe.

The FY25 result was adversely impacted by poor execution in the Asian Corporate business, which Ord Minnett estimates impacted earnings by some -$30m. Ord Minnett considers it unlikely this will be repeated in FY26.

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