Australia | 10:38 AM
Following Flight Centre Travel's lower profit guidance, analyst explain causes and actions management is taking to address current uncertainty.
-Flight Centre Travel downgrades FY25 guidance
-As partly anticipated, US trade and entry policies weigh
-Management is taking action to address uncertainty
-Upcoming buyback a positive, yet risks remain
By Mark Woodruff
While global provider of travel products and service Flight Centre Travel ((FLT)) remains on track to deliver record total transaction value (TTV) this financial year, ongoing uncertain trading conditions are set to weigh on the company's busiest trading months of May and June, prompting management to lower FY25 profit guidance.
Among factors creating uncertainty and potentially causing short-term results volatility are recent changes to US trade and entry policies, company management explained.
Lower guidance came as no surprise to Morgan Stanley, given the 30/70 implied skew at the bottom end of prior guidance and recent elevated uncertainty.
On the day of -18% lower guidance this week, the Flight Centre share price finished up 1%, suggesting to the analysts at Morgan Stanley this was a widely anticipated re-basing event.
US-based travel companies had already underperformed since February, notes Jarden, when US policy changes started to take effect.
Only this morning, global online marketplace Airbnb has cited softness in US Travel demand to explain its weaker outlook. Airbnb's profit warning has been followed by a similar warning from ASX-listed Corporate Travel Management ((CTD)) whose market update suggests consensus needs to lower its FY25 forecast by some -15%.
Flight Centre's corporate brands --such as FCM Travel Solutions, Corporate Traveller, Campus Travel, and Stage and Screen-- have partnered with Airbnb to integrate Airbnb listings into their corporate booking tools.
At first glance, 20% growth in volumes in recent months for Australian outbound holidays should be positive for Flight Centre.
While this would usually signal a strong earnings boost, Ord Minnett explains the shift in destination mix toward short-haul markets such as Japan, Indonesia, Vietnam, and Thailand, rather than higher-margin long-haul destinations like the US and UK, means sales are generating lower profitability than pre-covid levels.
Management is still targeting some profit growth in Leisure in FY25, though Corporate profits are likely to contract.
Headquartered in Queensland, Flight Centre has operations in over ten countries with retail and corporate travel management businesses across four major regions: A&NZ; the Americas; EMEA; and Asia.
The majority of revenue is generated from selling travel products and services, i.e. airfares and holiday packages. Divisions include Leisure Travel, Corporate Travel, Wholesale & Supply, and Ancillary Services.
In a negative development for outer-year consensus forecasts, Canaccord Genuity observes a transition in the broader travel market from a post-covid recovery phase to one of more typical activity.
This broker notes the market is now exposed to the usual fluctuations in travel demand, but without the additional tailwind of pent-up recovery driving growth.
The positives
Despite the downgrade, management announced a buyback, an expansion in Canada, and further investments in technology.
A $200m on-market buyback will be launched on May 12, and given the company's balance sheet strength and depressed share price, Morgans feels this is a clever use of excess capital, plus the buyback is nicely EPS accretive.
Management also expects stronger results in FY26 and beyond as trading conditions stabilise and as its strategies for business improvement gain momentum.
Amid short-term uncertainty and share price weakness, Morgans sees an attractive entry point in Flight Centre, arguing once operating conditions improve, the company offers significant leverage to both earnings and share price recovery.
It's thought patient investors will be well rewarded when a travel industry rebound eventuates.
A key question for UBS revolves around momentum in new business wins in Corporate, i.e. are they continuing to grow their base, which means a solid recovery when spend per customer increases?
The guidance downgrade and causes
Specifically, Flight Centre downgraded FY25 underlying profit before tax guidance to between $300-$335m, from prior guidance of $365-$405m.
While no guidance was issued for FY26, management noted there was no silver bullet to offset macroeconomic challenges but that a focus on cost-out, plus the cycling of Asian issues and Cruise start-up costs, should provide some offset.
Ord Minnett attributes this weaker outlook to a combination of cyclical, structural, and execution-related factors.
Management acknowledged execution missteps in its Asian Corporate, Canada Leisure, and Student Universe segments, with improvements expected.
Jarden determines around one third of the downgrade was company specific, which should likely ease into FY26. The residual are macroeconomic factors, which the analysts expect to persist into the first half of FY26.
Structurally, pressure from reduced airline commission rates persists, though a potential Virgin/Qatar alliance may shift industry dynamics in Flight Centre's favour, suggests Ord Minnett.
Morgans explains lower-than-expected TTV growth across Corporate (trading down and travel bans), and its larger and more profitable Leisure brands, is negatively impacting super over-rides and group margins.
Overrides in the context of Flight Centre refer to incentive payments or bonuses airlines and other travel suppliers pay when the company achieves certain sales targets. These are in addition to the standard base commissions travel agents earn on ticket sales.
Actions to address uncertainty
To offset cyclical challenges, Citi explains management is focusing on cost out in non-customer-facing areas.
Additionally, the StudentUniverse business is being placed under review, with Wilsons noting up to -$10m in potential losses for FY25.
StudentUniverse is part of Flight Centre's Jetmax online travel agency division. It was acquired for circa -US$28m in late 2015.
The company is also fast-tracking various initiatives within the newly created Global Business Services (GBS) division to reduce its circa -$20m per month cost base, aiming to lower capex in FY26 by -15-20% in FY26, as well as ongoing productivity improvements.
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