Flight Centre Travel: On the journey back to recovery

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
25 February 2022, 10:30 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Flight Centre Travel's (ASX:FLT) 1H loss was materially worse than consensus estimates and increased on last year despite a stronger top line performance. FLT has plenty of liquidity. 
  • The Omicron variant impacted trading over December and January. However importantly, February has seen a material improvement and it should get stronger from here. Management is confident about returning to pre-COVID levels of TTV by FY24, on a materially lower cost base. 
  • We have increased our FY22 loss however the changes to FY23&24 are immaterial and we expect FLT to be profitable in FY23. With the stock trading broadly in line with our new price target of (login to view), we maintain a Hold rating.

Event: 1H22 loss was materially worse than consensus estimates

In 1H22, due to COVID travel restrictions, FLT reported a large underlying NPBT loss of A$270.2m vs -A$242.7m in the pcp. 

Analysis: less subsidies and higher costs; Corporate is leading the recovery

Despite strong TTV growth, FLT reported a slightly larger loss in the 1H22 compared to the pcp. This was due to COVID travel restrictions; materially less government subsidies (down A$66.7m on pcp); and a higher cost base.

Group TTV was up 113% (was ~29% of FY19 levels). Corporate was 57% of FY19, while Leisure was only 30% given its greater exposure to international travel. Corporate’s loss reduced to A$47.7m (vs A$68.0m in 1H21), while the Leisure loss increased to A$197.0m (vs A$171.8m in 1H21).

FLT has plenty of liquidity (was ~A$1,059m at 31-December). Its cash-burn in December was A$39m. However, when trading was strongest in November, it burned only A$20m (EMEA and Americas at or near positive cashflow). The outflow in February has fallen materially, in line with improved trading. 

January was tough due to Omicron however February is recovering strongly 

FLT noted positive signs re-emerging in key regions of the Americas, UK, Europe and Australia after the Omicron downturn in December and January. Group TTV in February is up more than 50% above January levels for both Corporate and Leisure. February TTV could top its November high. FLT is expecting a further acceleration in the months ahead. Management noted the significant pent-up demand from travellers looking to make up for two years of lost time. 

FLT continues to target a return to profitability towards the end of FY22 on a monthly basis. Specifically, Corporate is now expected to be profitable in March/April and Leisure in late in 4Q. 

FLT expects Corporate to return to pre-COVID levels of TTV on a monthly basis during FY23, assuming client activity increases to ~60-75%, demonstrating the significant new accounts it has won during COVID (A$3.4bn of net wins). 12 of the company’s 20 largest clients globally have been secured during COVID. Leisure TTV is expected to fully recover during FY24.

FLT is targeting to have significantly lower operating costs at a full recovery. It continues to target a +2.0% NPBT/TTV margin in the future (FY19 was 1.45%).

FLT went to great lengths to explain why it believes that the lower international front-end commissions from the airlines in ANZ won’t have a major impact on the business over the longer term. FLT noted that most markets around the world dropped international commissions many years ago. FLT said that these commissions are just one source of its revenue and overall margin.

Discussions are underway with the airlines with a view to adjusting back-end margins or pursuing a number of other strategies, to offset the impacts of any commission loss. FLT rightly highlighted that over many years, it has successfully offset commission cuts through mix shifts (ancillary products), alternative air margin structures (greater overrides) and new initiatives such as the Captain’s Packages. 

We revise our FY22 forecasts; FY23&24 are largely unchanged

Due to the larger than expected 1H loss and given the Omicron variant has pushed out the travel recovery, we now assume a FY22 NBPT loss of A$382.4m (was a loss of A$235.0m). Our new forecast assumes a 2H22 loss of A$112.3m, well down from the 1H22 loss. In FY24 we assume that FLT’s earnings recover back to pre-COVID levels.

We maintain a Hold rating with a new price target of (login to view).

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