Not too long ago, I wrote about Commsec's chief economist's airfares data, which suggested that earnings at Flight Centre Travel Group Ltd (ASX: FLT) could be about to turn the corner.
Yesterday, shareholders got their second indication that earnings could be about to pick up, after Qantas Airways Limited (ASX: QAN) and Air New Zealand (ASX: AIZ) announced earnings upgrades.
Flight Centre is typically paid commissions on the airfares it sells, so when airfares drop sharply, so do earnings. Recent news from Commsec and the upgrades from Qantas and co suggest that airfares could be rebounding, which could see Flight Centre's earnings blossom after a couple of tough years.
There are many factors including low oil prices and cost cutting that could be influencing airfares, and Qantas and Air New Zealand aren't representative of the total airline industry, but nevertheless the news is encouraging. It could also bode well for Corporate Travel Management Ltd (ASX: CTD) and Helloworld Ltd (ASX: HLO) as these companies have also been feeling the pinch.
In addition to airfares, Flight Centre also has a number of other sources of growth including international expansion, expanding into travel 'experiences' (such as tours, or destination-specific attractions), as well as vertically integrating with its own travel money card and other products. Management is also contemplating hotel management, which could be a useful tool for further vertically integrating and helping funnel travelers into company-owned/affiliated tours and attractions.
Personally speaking, I wouldn't buy Flight Centre specifically because airfares are turning around. Investors also need to consider its balance sheet (which is solid), its growth opportunities, and the prospect of competition from the likes of Expedia and so on. However, taking the overall package into account, I think Flight Centre shares are good value and I have previously purchased shares at today's prices.
