In the last year, Flight Centre Travel Group Ltd (ASX: FLT) has treated investors to more ups and downs than a holiday to Bali. The stock price has pushed up against the $50 mark, while at other times it has also threatened to descend below $30.
But if we follow the advice of the most successful value investors and "turn off" the market, the advantages and disadvantages of owning the business, rather than trading the stock, become clearer.
The bull case
Flight Centre has a hard to replicate asset in the Australian market – its dominant store network. The eye-catching, bright red Flight Centre outlets are present in every major shopping hub across the country, as well as hundreds of smaller suburban shopping centre locations. The company also operates the niche Student Flights brand, which targets a younger demographic and is present on numerous university campuses.
This store network gives it a market-leading physical presence that is unmatched by any of its competitors.
The next major advantage of the Flight Centre business model is the significant alignment of the goals of management and smaller retail shareholders. Graham Turner founded the company decades ago, and to this day he is a major holder of company stock, with no stated intention to sell down his holdings.
Importantly, he also maintains an active role in the management of the company, meaning that his strategic decisions are made for the benefit of his major shareholding as well as the company as a whole.
Those management decisions include an ambitious long-term plan for the company to transform itself from a travel agent that largely sells the products of suppliers, to becoming a global travel retailer that packages, markets, and sells its own products. The advantages of the new model include higher margins and more control over the product offering, without the need to own capital-intensive infrastructure and assets.
It would also insulate the company against competition from websites and aggregators that do not have strong packaged deal products.
The other advantage, which I have written about previously, is the generational tailwind of retiring baby boomers who will leave the workforce in the coming years. More than ever, travel is a high priority for this generation, and several decades of wealth creation and the compulsory superannuation system mean that international travel is more accessible to more retiring Australians than ever before. Flight Centre is ideally placed to serve the need of this huge demographic for trusted advice and peace of mind in their travel bookings.
The bear case
The threat to the business model of physical travel agents from the Internet has been flagged for some time now. Global competition from booking websites saw an early ASX-listed pioneer in the space, Wotif.com, taken over after a string of profit warnings. While the overall travel market is growing, concerns about losing market share to online competitors is one of the major concerns hanging over Flight Centre at present.
In addition, the weakening Australian dollar erodes the purchasing power of Australian tourists abroad, especially in higher cost destinations like the United States and Europe. This can lead to holidays being deferred or cancelled entirely.
And while management makes much of the fact that Flight Centre is a global travel agent, Australia is by far the largest revenue generator and profit contributor to the business. That means that a weakening Australian economy, which in turn affects the amount that people are willing to spend on holidays, is a headwind.
A weakening domestic travel business is also of concern to Flight Centre, as more people become more comfortable with booking domestic holidays and flights within Australia directly from the airline or hotel online, even though they may still leave more complex overseas holidays to the expertise of a travel agent.
Should you buy?
On balance, I believe that Flight Centre will still be around in 10 years, and will still be profitable. However, it is clear that the company faces some headwinds, and management has to figure out how to best navigate these in order to capitalise on the strengths of the business model.
Short term, the share price may continue to fall in the absence of any immediate turnaround catalysts, but it is getting close to the point at which I would add it to my portfolio, based on the long-term advantages that it possesses as a business.
