Unlike my dairy and baby formula investment which I wrote about last week, the travel industry – or at least, Flight Centre Travel Group Ltd (ASX: FLT) – is the opposite of hot right now. Flight Centre shares are down 30% in the past 12 months and the company's current forecast hinges in an unusually big second half.
So why do I own shares in Flight Centre? Here are the main reasons:
- Experienced and well-aligned management
Flight Centre is founder-led and the management team has a lot of experience in the travel industry, including during the GFC and various other crises like the 1990's recession. I think it is easy to under-rate the importance and value of this type of experience, especially when times get harder as they appear to be now.
- Strong financial position
Minimal debt and a couple of hundred million in cash. Currently the company is on a bit of a spending spree, investing in small travel businesses all over the globe, but for the time being the balance sheet remains rock-solid. This gives the experienced management team (see above) the flexibility and freedom to focus on growing the business and/or making necessary tough decisions without having to worry about how they are going to pay down debt.
- International expansion
Tied in with an increasing focus on niches, below, Flight Centre has been acquiring a variety of international travel businesses in recent years. The growth overseas will in time reduce the company's reliance on its core market, Australia, and should also give the company a much better 'worm's eye view' of the type of travel opportunities and investments that are available in those markets. I.e., further acquisitions appear a distinct possibility.
- Increasing vertical integration and focus on niches
Flight Centre has a number of new products rolling out, including complementary ones like a travel money card, and in-destination 'experiences' like managed tours. The company is also keeping an eye out for other opportunities including potential hotel management arrangements, and I expect that in time this will result in the company's booking agents being able to channel customers into the company's own products, for example through the use of bundled holidays.
While the travel agent business is often maligned for its lack of economic moat and technological obsolescence, in-destination experiences can have a very high moat – anyone who's ever traveled overseas will tell you that there are plenty of absolute must-see (often difficult to replicate) experiences to be had. I expect that the Flight Centre 'story' could take 5 years or more to play out, but with no debt and good management I'm happy to kick back and see how events unfold.
