Flight Centre seeing travel demand gather momentum but margins under pressure

Flight Centre (ASX: FLT) says the reopening and pent-up travel demand narrative is only gathering momentum, with expectations of a 'gradual recovery' in FY23 followed by a 'larger scale recovery during FY24'.

"Travel is, however, at a relatively early stage on the path to recovery," Managing Director Graham Turner said at the company's annual general meeting.

"... there is considerable pent-up demand that is not yet fully translating to bookings, which means there is also ongoing upside potential," he added.

FY23: Trading Update

Group total transaction volumes (TTV) were $6.8bn for the first four months of FY23 and up 246% compared to the prior period.

Over the same period, revenues jumped 248% to $667m, underlying earnings improved to $61m (-$137m loss in prior period) and profit before tax was sitting at around breakeven.

Flight Centre's corporate segment did most of the heavy lifting, contributing $58m in underlying earnings. The company said corporate transaction levels are back to pre-covid levels, with revenue at approximately 95%.

The leisure segment is lagging as outbound travel remains impacted by 'a lack of competition and capacity', leading to a lack of bookings available and abnormal prices.

Still, the leisure segment is cycling rather depressing numbers from a year ago. In the first four months of FY23, TTV was up $608% to $3bn and underlying earnings sat at $23m compared to a -$102m loss a year ago.

FY23 outlook: Prospect of stronger profits

For the first half of FY23, Flight Centre expects underlying earnings to be between $70-90m compared to a -$184m in the prior period.

To add some perspective, underlying earnings were $165m in the first half of FY20 and $167m in the first half of FY19.

Management said they expect to see a 'significant second half profit improvement' underpinned by strong top-line growth and greater stability in supply chains.

A meaningful recovery in international capacity is projected for the near-term, with capacity "likely to be back to circa 70% of pre-COVID levels by December and approaching 90% by mid-2023."

The upbeat outlook was offset by the expectation of subdued revenue margins due to changes in business mix, 'abnormally high airfares' and commission changes from some airlines.

The commission changes is expected to impact overall leisure revenue margins by approximately 1% in Australia.

Management expect revenue margins to remain below pre-covid levels over the forecast period but partially offset by cost margin improvements.

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