"They just won’t be able to get the yield without having a multi-channel distribution system."
By Martin Kelly
It’s taken forever, but Flight Centre, the biggest travel retailer in the Asia-Pacific, is finally getting enthusiastic about the Internet.
Graham Turner, Executive Chairman and Managing Director of Flight Centre, now even sounds positive about the online world.
The famously blunt Turner, known for outrageous statements, has been talking up the group’s Search Compare Book’ advertising campaign, on which it has spent a fortune in the Australian market.
“We expect further strong growth,” Turner said, after earlier forecasting that www.flightcentre.com.au will sell between A$150 million to A$200 million worth of travel product over the next year.
Let’s hope he is right, because Turner – the driving force behind Flight Centre’s astonishing growth – it has more than 1000 outlets in several countries – has been wrong on just about everything else over the past 18 months.
For a start, he thought that Low Cost Carriers such as Jetstar in Australia could not survive without paying commissions to travel agents.
"I think that you’ll find that its losses will be large, and not just on numbers and loadings," Turner told the ABC’s Inside Business program.
Yet in a reflection of changing travel industry dynamics, Jetstar made $44 million before tax for the 04/05 financial year.
Turner added: "We aren’t selling much of it, and if I was (Jetstar CEO) Alan Joyce I’d be quite worried.”
Instead it’s Turner who should be worried because the Flight Centre business is floundering with steadily declining profits at a time when many other (albeit smaller) travel agent businesses are doing well.
Jetset Travelworld, for example, declared a record profit of $5.7 million for 2004/05 – 42.5 per cent up on the previous financial year.
Chairman Brian Wild said cost containment was major factor and he also cited the new National Ticket Centre as a tactically valuable initiative that clearly demonstrates the group’s value as a sales channel to airlines.
By contrast, Flight Centre’s profit over the same period fell 17% to $67.9 million – despite surging sales and earlier assertions by Turner that it would increase by around 15 per cent.
The major reasons appear to be an inability to contain costs combined with falling margins and the challenges of running a large company across different markets, something Jetset does not have to worry about.
Things have only got worse since the full year result.
During the September quarter, Flight Centres sales increased 14.2 per cent to $1.9 billion but pre-tax profit slumped 21 per cent to $23 million. Margins fell to a new low of 12.7 per cent (13.6 per cent a year ago).
So much for Turner’s earlier assertion that Flight Centre did not expect to be affected in any way by the Qantas travel agency commission cuts.
What else is there – apart from poor leadership on service fees, badly-negotiated airline agreements and the ‘Full Throttle’ restructure, which so far has had no impact on the bottom line?
Well, there is the issue of Turner’s increasing control over the company, despite losing his golden touch.
Numerous key executives have left over the past six months, including former Chairman Norm Fussell, who stepped aside in July, handing that mantle to Turner.
Chief Executive Officer Shane Flynn left a few weeks later.
Neither has been replaced on the board, now reduced to just three people – Turner, and the two non-executive directors – Peter Barrow and Howard Stack, who have both been there since 1995.
Time for an injection of new blood, you’d think, but the company has yet to make good on its July 29 pledge to appoint two non-executive directors “in due course”, although a company spokesman said the hunt is on.
Meanwhile, Flight Centre’s share price has slumped to around $10 – half its 12 month high of around $20.
So, scratching around for good news, Turner has emerged with the internet. At least it’s looking up. As for the rest of the formerly bullet-proof Flight Centre business, only time will tell. Clearly, many challenges remain.
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