Flight Centre’s machinations are making for compelling viewing at the moment. After a certain inertia, it’s picked up the pace and is moving quickly to catch up with the fast-moving digital world through acquisitions, new ventures and the injection of youth into the company’s ageing hierarchy.
But Flight Centre is also struggling somewhat with its traditional retail businesses under pressure due to a range of factors – an uncertain economy, global turmoil, terrorism and changing consumer preferences – leading to an earnings downgrade which has sent its share from around $45 to the early $30s.
So it’s fascinating to watch Flight Centre’s reaction, which has been a while coming.
MD Graham Turner was a tech sceptic but has seen the writing on the wall and made a decisive decision to invest in technology and talent to help chart a new course for the company he started in the 1980s, years before the internet and mobile phones, a time when consultants ruled.
The key move was the acquisition of StudentUniverse last December, right before Christmas.
At first glance Flight Centre’s purchase of this Boston-based youth travel business looks straightforward, another travel company added to Flighties vast portfolio.
But it’s now clear this is far more strategic than first appeared and had probably been a while in the making. Talent, technology and geography were key factors.
That’s become evident with the appointment of 32-year-old Atle Skalleberg, the former MD of StudentUniverse, to the newly-created position of Chief Digital Officer at Flight Centre.
Skalleberg, a Norwegian, will remain in North America and lead tech teams based in Boston and Brisbane providing e-commerce, mobile development, online marketing and business intelligence services across Flight Centre’s leisure brands.
“Having a global digital leader is important to ensure we are able to develop and execute on a clear digital commerce strategy, build a world class team and drive the digital transformation that will propel online and mobile services as part of our blended travel strategy,” said Turner.
“The StudentUniverse acquisition became a catalyst for digital change management and we feel confident that Atle’s competencies make him the right leader for the teams that will continue our digital transformation.
“We are perfectly positioned to be the global leader in providing seamlessly blended offline and online shopping experiences that allow customers to transact or interact with us by the channel of their choice.”
StudentUniverse will also give Flight Centre a very senior presence in one of world’s major tech hubs and a very different perspective on the world and the way it is.
Crucially, Skalleberg will do his thing a long way from Flight Centre’s Brisbane headquarters.
Now in a hurry, Flight Centre is making up for lost time, investing heavily in staff at StudentUniverse, which is advertising for around 15 engineering and online marketing positions.
Flight Centre has also bought online airline booking engine BYOjet, is funding the website startup Aunt Betty and has totally revamped its approach to wholesale, relaunching Infinity Holidays on the latest iteration of Calypso tech platform, which it’s rebadged ‘iBuild’.
“With a lot of disruption going on Infinity Holidays has re-engineered its wholesale business to ensure relevance and so that it is future-proofed,” said John Feenaghty, GM – Product and Marketing at the Infinity Group.
While technology and dramatically improved packaging and transaction automation is a big part of it, Mr Feenaghty said Infinity is also looking at a new payment model based on turnover and markups rather than just straight commission.
So the changes keep on coming, and no doubt there are more on the way, but the big question is how long will it take to turn around the Flight Centre overall business, which still gets an overwhelming proportion of its profits from traditional leisure and business travel?
Most analysts believe there’s a long road ahead and likely more pain before sustainable growth returns.
Investment bank JP Morgan reckons Flight Centre will meet its reduced profit forecasts but thinks there may be further downside in store for Australia’s leading travel company.
Analyst Quinn Pierson expects Flight Centre to report of pre-tax profit of A$355.9m for the 2015/16 financial year – a 2.8% decrease (underlying) over the previous 12 months.
“Whilst Total Turnover Value should remain robust, both income and EBITDA margins are expected to contract, driving the earnings decline,” he wrote in a client briefing note.
“We retain our Neutral recommendation, but suggest risk to our forecasts and the timing of recovery is arguably skewed to the downside.”
Other investors, however, believe that Flight Centre is worth the risk and represents a good buying opportunity.
Sean O’Neill from Motley Fool is one of those and cites three main reasons: it’s relatively cheap, has loads of cash, $431m, and minimal debt.
He also likes the new investment strategy, the results of which have yet to be seen.
“With just $21 million in debt and $430 million in cash, Flight Centre has one of the best balance sheets on the ASX.
“With the acquisition and launch of a number of new businesses including BYOjet, StudentUniverse, and Aunt Betty, Flight Centre is broadening its product base and further penetrating new markets.
“Additionally, the company recently launched transactional company websites in a number of locales including the UK, Hong Kong and United Arab Emirates, which should help drive sales of lower margin products.
“Flight Centre also has apps and travel money projects on the way, and importantly management has maintained its expenditure program despite weaker business performance this year.
“This is an example of bearing short-term pain for long-term gain.”
Meanwhile, Flight Centre has maintained its aggressive marketing habits – just as it did during the GFC, a move that paid long-term dividends for the business, increasing market share at the expense of other retailers.
As always, Flight Centre is pushing ahead, creating its own future.
Compelling viewing indeed – don’t touch that dial.