Flight Centre Travel Group Ltd (ASX: FLT) has provided services for leisure and corporate travel for over 30 years, with businesses operating in 23 countries. The measures introduced to contain the coronavirus pandemic has created an unprecedented challenge for the company.
After successfully completing a capital raise to combat the impact of the coronavirus pandemic, the Flight Centre share price could be in the buy zone.
How will Flight Centre fight back?
Flight Centre released an announcement today informing the market that the company raised $106 million from its retail entitlement offer. In total, Flight Centre has managed to raise $700 million from institutional and retail shareholders. The capital raising will allow the company to strengthen its balance sheet, enhance its liquidity and capitalise on market opportunities as conditions improve.
In addition to its capital raising, Flight Centre has previously announced various cost reduction and cash preservation initiatives in order to overcome the unprecedented trading conditions. The company announced plans to close more than 50% of its leisure shops around the world and reduce occupancy costs of its retail network.
The cost reduction initiatives are expected to result in $1.9 billion in annualised cost reductions, whilst also allowing Flight Centre to deliver services to customers.
Is Flight Centre in the buy zone?
The Flight Centre share price was down nearly 80% for the year at one point and is currently trading in single digits. The company's main revenue driver is total transaction volume (TTV), with Flight Centre historically running a 12.5% margin on TTV.
A return to normal profitability will be highly dependant on the resumption or easing of domestic and international travel. Although it is an evolving situation, domestic travel is expected to go back to normal in around 8 months while international travel will take a lot longer.
With the company initiating a range of cost-cutting measures, TTV will likely not return to normal margins for a while with reduced foot traffic and less physical stores. However, Flight Centre's capital raising will possibly allow the company to take advantage of opportunities that emerge from the pandemic as smaller operators struggle to survive.
Flight Centre already has a recognisable brand, global reach and existing relationships with other service providers in the aviation, accommodation and transport sectors. As a result, the company could emerge stronger from the pandemic if it capitalises on its opportunities.
Should you buy Flight Centre shares?
In deciding whether to invest in Flight Centre, investors should think about the future of leisure and business travel post-coronavirus. Leisure travel is expected to bounce back in the medium term, however, there could be long-term ramifications for business travel. Online platforms have been a cost-effective replacement for business travel and could be a permanent fixture.
I think investors should keep an eye on the Flight Centre share price and wait for a clear idea of how the company will emerge after the pandemic before investing.
