Flight Centre is once again charting new territory with the surprise launch last week of a buy-back deal that will see five founding shareholders de-list the group from the ASX.
The founders’ decision to revert to private ownership – while receiving a $435 million bonus - sparked furious speculation as to their motives and the future direction of retail travel’s most innovative and interesting company. It also served as a reminder of just how much the landscape has changed, and how influential Flight Centre has been, over the past 15 years.
When the Brisbane-based group floated in late 1995 the majority of the retail sector was unconvinced of its own value.
At the time, there was no shortage of industry leaders explaining why the market would be unimpressed with a small retail travel group. And at least one leader of a major retail group admits to having advised friends and family not to waste their money.
With a mixture of pride, envy and regret the industry watched as Flight Centre’s stock began a seemingly unstoppable rise – with shares that listed at $1 in 1995 finally topping more than $30 at their peak in 2002.
Along the way the group delivered extraordinary profit growth, used its stock to acquire a portfolio of leisure and corporate brands, and expanded its operation across the globe. And it did all of this despite the spectre of commission cuts and online bookings, which were expected to kill traditional retailing dead.
Not everything Flight Centre did was guaranteed of success. Some international markets have failed to deliver; it struggled with service fees; it has yet to extract a profit online; and its wholesale division has been neglected. But when profits are swelling, a myopic market is more than happy to overlook the odd bump.
Watching from the sidelines, other groups were encouraged to follow Flight Centre’s lead. Harvey World Travel, corporate agent Internet Travel Group (later acquired by Flight Centre), Jetset Travelworld and Transonic all listed on the ASX, while Travelscene and, most recently, Travellers Choice adopted publicly unlisted structures.
In the last couple of years, however, Flight Centre has experienced the downside of being a listed company.
With falling commissions and incentives putting pressure on its business model, profit growth faltered. Investors became less enamoured; the market seemed more willing to question the decisions of once infallible management. And suddenly the darling of the market watched its share price slide, and morale declined with it.
Now Flight Centre’s founders have decided to change tack once again. But this time, the rest of the industry is unable to follow.
The reason is that while the majority of its rivals have followed its course, they have also failed to observe one of the key maxims of Flight Centre’s success – let others on the bus, but never allow them to take the wheel.
Bob Sparks, the architect of Jetset Travelworld’s float, created the group following a rapid series of mergers and acquisitions. He had a vision for the group, but following its listing on the ASX, control of the company quickly fell into the hands of Consolidated Travel's Spiros Alysandratos, and Sparks found himself out in the cold.
Over the past 12 months, Harvey World Travel, Transonic and Travelscene Amex have been swallowed up by S8, which has itself been consumed by MFS, a company with its own strategies and priorities.
By comparison, after a decade on the ASX, Flight Centre’s founders have now executed a deal that will see them partner with private equity firm Pacific Equity Partners, while still retaining control of a more highly leveraged company.
So what will they do now they are free of the market’s scrutiny and constraints?
There is certainly no shortage of speculation. Some think the group will be broken up, with the possible sale of the core retail division and a refocus on the corporate sector (or vice versa). Others foresee a more aggressive expansion of its fledgling franchise model. The market is certainly expecting a return to the ASX within three to five years.
Managing director Graham Turner has mentioned only the need to relieve public market pressure in a “challenging” environment, and to get tough with suppliers.
Flight Centre’s success has in part been based on its ability to grow revenue through the addition of new shops, allowing it to meet lucrative airline incentive targets. Falling commissions have undermined the profitability of those deals.
It is possible Flight Centre's business is simply too reliant on airline contracts and it now needs to get more balance by reducing the number of deals it cuts with the carriers and forging stronger relationships with a more select group of wholesale operators.
Time will tell what course of action the group takes. But one thing is certain - Flight Centre’s founders are still in the driver’s seat.
8 November 2006
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