Price war hits Flight Centre shares
AN AIRFARE price war has caused Flight Centre shares to tank, and nobody has taken more of a hit than managing director Graham “Skroo” Turner.
QLD Business
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AN AIRFARE price war has caused Flight Centre shares to nosedive after the travel agent warned its annual underlying profit would be hurt by heavy discounting.
Demand for cheaper airfares – particularly in the key markets of Australia, the US and India – has ignited a price war among airlines, forcing the average international fare Brisbane-based Flight Centre sells to fall seven per cent on last year.
Flight Centre said even though it was selling more tickets than ever, the cheaper prices were hurting profits, forcing it to issue a warning that its underlying profit before tax for the first half of this financial year was set to fall by up to 28 per cent from a year ago to between $105 million and $120 million.
Annual underlying profit before tax is expected to be $320 million to $355 million in the year to June, compared to the previous year’s $352 million. Flight Centre’s shares took a hammering, plunging $2.65 or 8.04 per cent to $30.30 after hitting an intra-day low of $28.52.
The value of managing director Graham Turner’s 15 per cent stake in the business tumbled $40 million to $462 million.
Burrell Stockbroking senior analyst Bruce McLeary said the downgrade did not come as a surprise after Qantas and Virgin both flagged similar concerns this week.
Qantas foreshadowed a fall of up to 13 per cent in first-half underlying pre-tax earnings of $800 million to $850 million. Virgin reported a net loss of $34.6 million for the first quarter, hurt by weak domestic demand and restructuring charges.
“Subdued trading is certainly a big factor but Flight Centre have had a few other issues,” Mr McLeary said.
“There have been some adverse currency movements in the United Kingdom following Brexit and the United States race for the White House, and terror attacks in Europe will have certainly had an impact.”
Mr McLeary said investors would have reacted negatively to the news, as many were already questioning how Flight Centre would continue to compete with online sellers in the discounting war. He said many could see this downgrade as a “confirmation of those fears”.
Flight Centre said trading in the UK had been subdued so far this financial year due to the Brexit vote. Uncertainty about the US presidential election and concerns about the Zika virus had also hit trading in the US, it said.
The lacklustre earnings expectations come despite the company retaining predictions for a record number of ticket sales for the year, with total transaction value still forecast to exceed $20 billion for the first time. However, it will be forced to rely on a strong second half to meet its target.
“Although the internal and external factors that are currently impacting top and bottom-line results mean that we will not be tracking at those levels by the end of the first half, despite a relatively strong sales performance,” Mr Turner said.
“Travellers have, of course, been the big winners in this low-fare environment and have been snapping up some of the cheapest fares we have ever advertised.”