How Flight Centre’s news on falling airfares became Qantas’ problem

It’s time to book that overdue holiday. Updated profit guidance from Flight Centre should be music to the ears of the travelling public – global international airfares in the first six months of this calendar year fell by 6 per cent.

But here’s the kicker. In Australia, international prices fell by more than double that – 13 per cent compared with the same period last year. And they are still falling.

Flight Centre shares tumbled after it reported weaker-than-expected sales turnover.Credit: Dan Peled

The customer excitement should be infectious, but the now-quantifiable fall in fares appears to have hurt Qantas’ share price, which dropped 2.5 per cent immediately after Flight Centre released its statement to the stock exchange.

The falling fares led to Flight Centre recording a weaker-than-expected total transaction value (what most would understand as sales turnover), which also sent its share price tumbling.

For Qantas and Flight Centre, there is a delicate balance between demand and fare pricing.

The falling fares are boosting the volume of tickets sold, which in Flight Centre’s case was up 10 per cent for the six months to June.

Flight Centre maintains that in the long run falling airfares are good for its business because they boost volumes and entice customers previously priced out of air travel.

“We welcome this deflation and believe it is a potential tailwind in the months ahead,” Flight Centre’s managing director, Graham “Skroo” Turner said.

For Qantas, additional ticket sales are a positive, but falling airfares will also feed negatively into sales.

Qantas had a mega-profit heyday in the immediate post-COVID period when supply was restricted, demand was robust and fares were exorbitant.

With the aviation market almost back at pre-COVID levels and fares continuing to drop from nose-bleed levels, we should see aviation profits settle back to more normal sustainable levels.

Qantas’ half-year net profit in the six months to December 2023 fell to $869 million, which was down from $1 billion in the prior-year period as margins tightened and airfares fell.

The curious part of Flight Centre’s announcement is the fact that volumes of tickets sold continue to rise during a cost-of-living crisis.

Flight Centre managing director Graham “Skroo” Turner believes lower fares could provide a tailwind for the business.

Customers prioritised travel over other discretionary spending, according to Turner.

The same message is coming from Qantas chief executive Vanessa Hudson, who seems to have no concern about consumers closing their wallets to air travel.

The falling fares open up the market to families who had previously been priced out, whereas Baby Boomers, who are less affected by higher interest rates (and in many cases have cash earning higher interest), are in a strong position to travel internationally.

It is further evidence that there is a relatively large group of Australians who are feeling the effects of inflation but not to a great extent.

Meanwhile, investors may have been a little deflated by Flight Centre’s guidance on Wednesday, which was slightly lower than previous guidance, but the company is pointing to profit for the 2024 financial year being a major improvement on 2023.

Total transaction value will be about $23.7 billion, which is in line with the 2019 pre-COVID result and $1.7 billion ahead of last year. The year-on-year underlying profit rise should be about 130 per cent.

Sure, there were some in the market hoping Flight Centre would punch the lights out even harder, but the result is solid, no matter how it’s judged. For the travelling consumer, it is fabulous news.

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