Small Caps | 2:48 PM
The Middle East conflict has significantly impacted the travel industry, and Flight Centre Travel is no exception. Peace, if that’s what it is, should drive a return to solid growth.
- Flight Centre Travel downgrades guidance more than feared
- Growth was accelerating before the war
- Peace should now lead to a swift rebound
- Rollout of AI platforms from this week
By Greg Peel
It was never going to be a matter of if, but by how much. Joining travel industry peers, Flight Centre Travel ((FLT)) has downgraded FY26 profit guidance.
Analysts had already cut their forecasts in anticipation of the impact of the Middle East conflict in corporate and leisure travel demand, and investors had quickly seen the writing on the wall, selling the stock down some -40% from February to May, before talk of a “deal” drove a 30% bounce-back.
That still leaves the stock down -24% from its peak.
It has now been agreed Trump’s approved memorandum of understanding represents an ignominious defeat and a surrender to Iran.
At least the Strait will be reopened.
But this is not yet “peace”, just a 60-day extension of the ceasefire in order to talk further. And Israel can yet derail the process.
Travel sector analysts are nevertheless for the most part optimistic, expecting a company that was performing well before the war can quickly revive now the war is over.
If that’s what it is.
More than Feared
Flight Centre’s underlying FY26 profit downgrade to $275-295m represents a -13-16% revision to prior guidance of $315-350m, and despite anticipation, is -7.4% below consensus at the midpoint.
Before the war, Flight Centre’s profit for the nine-months of FY26 to that point was up 10% year on year, and up 20% year on year for the March quarter.
Unsurprisingly, leisure demand has been the hardest hit. A spike in air fares, government travel restrictions to the Middle East, required re-routing leading to longer haul flights, and a general fear have made potential travellers think twice.
The conflict has interrupted travel plans and forward bookings. Additionally, Flight Centre will lose overrides from higher-yielding Middle Eastern carriers compared to lower-yielding Asian and US carriers, Morgans notes.
Some customers that have rebooked have done so to lower-margin short-haul destinations. Customers are choosing to switch long-haul overseas holiday plans to domestic destinations or more nearby foreign destinations (such as Bali and Thailand).
Corporate demand, on the other hand, has remained resilient, more so than would be expected in the age of Zoom and equivalents.
Flight Centre’s new forecast FY26 underlying profit growth for Corporate of 26% year on year compares to 23% for FY26 to date. Outperformance is driven by market share gains and productivity initiatives.
Medium-term growth remains attractive, Macquarie notes, supported by new business wins and rollout of AI platforms from this week.
Macquarie sees Corporate as a key AI beneficiary over the next three or so years.
Rebound should be swift
Along with downgraded guidance, Flight Centre has announced a share buyback of up to $200m. Analysts agree this represents management’s faith in the business quickly returning to prior solid growth now the war is over.
Management said the peace agreement reached this week provides a clearer runway into FY27 and a significant earnings tailwind. Management also highlighted past rapid and steep rebounds which have followed short-term leisure travel downturns.
Significantly, in the wake of the agreement, the Department of Foreign Affairs and Trade has this week lowered its travel advice for Bahrain, Israel, Kuwait, Qatar and the UAE from Level 4 (Do Not Travel) to Level 3 (Reconsider your need to travel).
The change is significant for Flight Centre given at Level 4, standard travel insurance policies are typically void, Morgans notes, which acts as a meaningful deterrent for both leisure and corporate travellers.
Looking ahead, Jarden notes domestic travel spending looks to have bottomed in April/May, while DFAT's decision to ease travel restrictions to the Middle East provides an additional near-term catalyst for demand.
This, coupled with the company winning more than $1.2bn of corporate contracts year to date, leads Jarden to become more positive. Jarden expects FY27 earnings to be materially higher than FY26, driven by the buyback, the normalisation of leisure earnings and corporate travel wins.
Historically, Flight Centre has emerged from crises in a stronger position through improved cost-control, a stronger balance sheet, and gains in scale and or mix. Jarden sees the current situation as no different.
Flight Centre has strengthened customer trust, gained market share and benefitted from market consolidation. At the same time, the travel agent has launched a loyalty program and is leveraging data and AI initiatives to drive productivity and share of wallet.
The net result is Jarden believes Fight Centre should come out of the crisis stronger, with scope for earnings and return on invested capital to accelerate, albeit this is likely a second half FY27 story.
Is it all tailwinds from here?
Importantly, two of the biggest headwinds look to have eased for the moment, UBS suggests, being the peace deal and the government’s easing of travel restrictions on five countries within the Middle East.
It’s a big positive for travel into FY27, yet in UBS’ view investors should not discount potential longer-standing headwind risks.
These include higher-for-longer aviation fuel and plane ticket pricing and further deterioration of Australian consumer sentiment (noting three RBA interest rate hikes, a fourth being forecast, and changes to negative gearing/capital gains tax impacting on the wealth effect).
This combination could see reduced travel, UBS warns, or further trading down to domestic or shorter-haul travel.
Furthermore, while the Corporate travel business has to date been materially less impacted compared to Leisure, elevated ticket prices could see northern hemisphere Corporate clients implementing travel restrictions around November-December, as 2026 budgets max out, or result in fewer transactions for the same travel budget (and less service fees).
It’s a more challenging backdrop, but on current valuation UBS would argue very low expectations for FY27 are already priced in. Should Flight Centre demonstrate ongoing momentum in Corporate business wins and/or see a resumption of more normalised Leisure bookings versus currently, we could see further re-rates in UBS’ view.
That is not to discount the fragility of the US-Iran agreement, and the fact an actual agreement has yet to be negotiated over the next 60 days. If those negotiations do not go well, Iran could quickly close the Strait again and an enraged Trump could easily start bombing again.
Another sticking point is Israel. Iran will insist any deal must include an end to Israel’s bombing of Lebanon, and to date a stubborn Netanyahu is refusing to withdraw troops.
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