Flight Centre Limited Records $120 Millions Pre Tax Profit

A stronger second half performance has helped Flight Centre Limited record a $120.0million pre tax profit for 2005/06, a 4% improvement on 2004/05.

After being 4% down (at $49.8million) at December 31, the company’s pre tax profit for the six months to June 30 was $70.2million, 10% higher than the second half of 2004/05.

After tax, profit for the full year was $79.9million, a 4% increase.

Sales continued to grow, with total transaction value increasing 13% to $7.8billion and revenue increasing 11.6% to $1billion. This slower revenue growth reflects airlines’ increased application of zero margin surcharges.

Earnings per share increased 4% to 84.6cents.

The company’s directors have declared a fully franked final dividend of 32cents per share, payable on October 13 to shareholders registered on September 22. This follows an interim dividend of 20cents per share.

In announcing the results, Flight Centre Limited managing director Graham Turner said the company was pleased to have improved on 2004/05, particularly after its poor first and second quarters.

“Within this environment, our cost reduction and business improvement strategies have started to deliver some benefits, as reflected by our stronger second half,” he said.

“Our gains have, however, been offset by the impact of increasing airline fuel surcharges on revenue and profit.

“Some airlines, including Jetstar and Emirates, are now ‘fuel inclusive’, but others treat fuel as somehow separate to the cost of the airfare. By doing this, these airlines create a confusing situation for customers and expect travel retailers to collect hundreds of millions of dollars of their legitimate operating costs without earning margin.

“While Qantas is by no means the only airline that persists with this confusing practice, we welcome recent reports that its leadership will review its surcharge policy.”

Mr Turner said key contributors to the company’s results included:

  • The global FCm Travel Solutions corporate travel business, which recorded good profit growth and significant expansion in just its second full year
  • South Africa, where leisure and corporate profits increased significantly from a relatively small base
  • North America, with increased corporate travel profit, Canada’s leisure business returning to profit in the second half after three years of losses and slightly reduced USA leisure losses
  • India, where returns from the company’s 2005 acquisition exceeded expectations
  • The reduction of some global costs that were significant in the previous two years

“While Australian leisure remains our largest profit generator, its results were disappointing and its performance overshadowed by other businesses in 2005/06,” he said.

“Our retail shop distribution network will remain an important contributor to both our brand and our profit, but our growing diversity – of both brand and geography – is clearly one of our future strengths.

“We are now more than just an Australian-based leisure travel specialist, as evidenced by our corporate travel growth overseas.

“In just two years, we have expanded FCm’s network to more than 50 countries (nine owned, 41 licensees) and secured both equity and strong local partnerships in the world’s emerging new business economy known as BRIC – Brazil, Russia, India and China.

“Given its strong growth, we anticipate FCm Travel Solutions will account for at least half of the company’s overall profit within five years.

“Pleasingly, we also recorded strong profit growth in South Africa and significant improvement, culminating in a second half profit, in Canada’s leisure operation, which had struggled since September 11.”

Strategic Update – 2005/06

At the start of 2005/06, the company outlined a number of performance goals for the year. Its progress in achieving these goals is outlined below.

Continued leisure,  corporate and wholesale expansion, outside Australia and NZ
  • 11% increase in selling staff globally led to 13% TTV growth
  • Expansion of FCm corporate network, after Bannockburn Travel (USA) acquisition and addition of new licensees
Better retail and online product Improved informational and transactional  capabilities on the web
  • Flight Centre Hotels added to flightcentre.com.au Last minute range on quickbeds.com expanded to 28 days
  • Lonely Planet content added to Australia, NZ, USA and Canada websites
  • Booking engine introduced in North America
Margin maintenance – air and land contracting and preferred supplier strategies
  • Smaller pool of preferred suppliers globally Greater certainty negotiated in most air contracts, although lower margins in some cases
Cost improvements by reducing overheads, some aspects of marketing spend, structure and more effective procurement
  • Leaner support structure – selling staff 78% of workforce at June 30 (75% in 2004/05)
  • Reduced head office overheads
  • RewardPass program disbanded

2006/07 Strategies and Outlook

Flight Centre Limited has identified six key issues for the year ahead. Strategies that are in place to address these issues and drive future growth are outlined below.

Growth Continued expansion in leisure, wholesale (Infinity Holidays) and corporate, mainly outside Australia Any acquisitions in both leisure and corporate likely to be small, profitable businesses with niche product or services
Gross Margins Ongoing push for surcharges to be included in margin slowly gaining momentum - some already fuel inclusive other carriers expected to follow suit Promotion of airline and land-based products that offer reasonable margin
Online Further enhancements required to improve informational and transactional capabilities to leisure and corporate websites and technology platform
People Focus on attracting and retaining the right people Career development programs in place, in-house university program and flexible workplace arrangements introduced – job-share, part-time and work-from-home opportunities
Costs Ongoing cost reduction - cost increases inevitable in frontline businesses, so further head office overhead reductions necessary
Customer Experience Specific and targeted customer initiatives underway, focusing on service, improving response times and in-store experience

“There are some significant current and future challenges, mainly related to airfare margins and supplier  disintermediation facilitated by the internet, but the company’s fundamentals remain sound,” Mr Turner said.

“Sales continue to grow, we maintain a healthy balance sheet and the company continues to develop and enhance a comprehensive sales network that already includes:

  • Flight Centre, one of Australia’s most valuable and successful brands
  • One of the world’s fastest-growing corporate networks in FCm Travel Solutions
  • A stable of increasingly popular global travel websites such as flightcentre.com, quickbeds.com and  fcmtravel.com, plus Australian sites escapetravel.com.au and studentflights.com.au

“Building from these sound foundations, Flight Centre Limited will again target doubledigit TTV growth globally in 2006/07.

“With its focus on cost reduction and overall business improvement, the company’s goal is to bring profit growth closer into line with this TTV growth.”

As announced earlier this month, gains from the $35.5million sale of the company’s global headquarters in Brisbane’s CBD will be treated as an abnormal in the company’s accounts for the 2006/07 fiscal year.