Stocks In Focus: Flight Centre, November 19 2025

0:10G'day and welcome to Motley Fool Stocks in Focus. I'm Scott Phillips, the Motley Fool's Chief Investment Officer. And Stocks in Focus is where we get one of the crack team of Motley Fool analysts to go under the bonnet, to peel back the layers, choose your favourite metaphor, to look at a company that is widely owned in the news, in the zeitgeist, maybe you're familiar with, you maybe use their products, basically for a few reasons. One, to help you understand how we think about companies. Two, maybe give you some investment ideas of your own. Now, importantly, this is not a buy recommendation.

0:40It's a view. We're going to give you a pros and cons. We're not going to necessarily make a recommendation either way. I do always ask the team to tell me whether they think it'll be market beating, but that's different. Once a month in our YouTube channel, I'll get back to that in a second, we do stock of the month where we actually do give you a buy recommendation. So this is not that. And I say that because I don't want you to see the stocks that come up and think, oh, they must be the ones I need to buy. Sometimes our analysts like them. Sometimes they don't. But again, this is not the high conviction stuff that we've put inside our paid services.

1:10So why do we do it? Well, as I said, partly to help you understand some of the businesses on the ASX, some of them that maybe you've owned, you've used, they're in the news. Partly, yeah, okay, that's a bit of marketing for us, I suppose. But also just give you a sense of what The Motley Fool does, how we operate and what's going on behind The Motley Fool paywall. So that's what we're doing. That's why we're here. And when I say here, as I said, I'd come back to, we're both on our YouTube channel at youtube.com forward slash foolau and Simulcast, you haven't heard that word, Benny, because you're too young.

1:39Simulcast when you used to have something on the TV, something on the radio at the same time because the radio signal was better quality audio. That's a blast from the past. We are simulcasting on the podcast, Motley Fool Money podcast. So you can get us there, you can get us here, wherever you are, go to the other place. Check out Motley Fool Money. Check out their Motley Fool YouTube channel. I've already mentioned Benny, so let's introduce Benny O. How are you, mate? Yeah, good, thanks, Scott. Thanks for having me on. Mate, pleasure. Thanks for joining us. For those who don't know, Benny runs our service called Motley Fool Extreme Opportunities.

2:07That's one where we kind of take a little bit more risk, try and find some big winners of tomorrow. But he's doing a wonderful job running that particular service. But he's not here to talk about that. I'm not going to advertise that, at least not today. We are going to talk about a company that everybody's heard of. I reckon most of our viewers and listeners have probably used it one time or another. And that company is Flight Centre. Now, I normally then say, what does it do? I reckon most people do know. But I also reckon, Betty, you're going to give us a pretty good amount of detail on Flight Centre, the business.

2:35So take it away. Yeah, I think you hit it now on the golfing internet. Most people know it or recognize the red-branded stores you see in the shopping centers. So Flycenter is literally Australia's largest list of travel agents. But that red-branded stores I just mentioned, that's the leisure side of the business, and they're focused on booking holidays for your consumers, everyday consumers. But most people may or may not have heard, but Flycenter also runs a large corporate travel division, and that's where they serve small to medium businesses and global enterprises. And the corporate side of the business has actually become the main profit driver post-COVID.

3:12It's overtaken leisure. But altogether, it operates in around 20-plus countries. It's across Australia, New Zealand, the Americas, Asia, Europe, Middle East, Africa. So it's got a really global footprint. But at a very high level, the business, as the name suggests, it facilitates travel bookings, flights, hotels, tours, packages, but it earns commission and service fees based on total transaction value, which they call TTV. But it's a company that's really gone through the full cycle. During COVID, it came close to collapse. It had to raise capital twice, I believe. Share count doubled. It had to really restructure heavily.

3:56But since then, it's really rebuilt itself, and it's kind of transformed from being a traditional bricks-and-mortar kind of travel agency to more of an omni-channel business model that's got to be like a bit of online, a bit of physical, but it's becoming more diversified as well. But it's a company that's been around for over 40 years and next month, I think it'll be its 30th anniversary on the ASX. Yes, look, they say never waste a crisis, right? And that's certainly been the last five years for Flight Centre. Got us off into some trouble, probably in hindsight, maybe should have managed the balance sheet a little more conservatively, had to raise some capital to stay in business.

4:31But as you say, they've really meaningfully revolutionised, not revolutionised, maybe too much. They've recast anyway, the business model, as you say, what they're putting in physical stores, what's online, business, leisure, lots of moving parts. So yes, it is the business that you probably know and love if you've used it before, but also a meaningfully different business, at least corporately. And as you say, mate, they've done a pretty good job of building themselves back out of those ashes into the flight centre we know today, at least as a corporate entity. Let's talk about the investment case because there's the business and there's the investment.

4:59I say this all the time, but they're not the same thing, right? You have a great business, it's a terrible investment. Very hard for a terrible business to be a great investment. But either way, the idea is that there are simply two different parts here. There is how good is the company and is it worth investing in? And they're very different pieces. Before I ask you to go through those pros and cons, mate, I will remind our viewers and listeners of two things. Firstly, we're doing this at a point in time, right? We're recording this in the middle of November, 2025. five. Anything could change from here, right?

5:25So whatever Benny says about the business is what he believes, what he thinks, and the data that is current as of today, tomorrow, next week, next month, next year, things, I was going to say could change, will change because that's the nature of business. So we are recording this at a point in time. Secondly, whatever we do at the Motley Field ever is always an only general advice. Now the boffins at the corporate regulator, ASIC, have a distinction between personal advice and general advice. Personal advice is when an think is best for you personally. That's personal advice, right? Makes sense.

5:56General advice the Motley Fool gives is, hey, here's what we think about a company, an issue, a topic, the market, whatever it is, but that's our view of it, not whether or not it's right for you. Your job, if you get any general advice from anybody, including us, is to say, huh, that's what they think. How does that pertain to my situation? Is it appropriate for me? And if you're not sure, go and see a licensed financial advisor. Ask them to help you make that decision. We can't do that for you. So we can say this is what we think. We can't see this is what we think is right for you personally.

6:24I want to say you, it's everybody listening or watching. We just can't do that. So it's an important distinction. It's a legal one, it's a moral one, it's an ethical one, and now you know, so we can get on with it. Benny, let's do exactly that. Let's start with the pros, mate. What are the reasons why our viewers and listeners might consider an investment in Flight Centre? So I think the first one that really stands out about Flight Centre is that it's still a founder-led company more than 40 years on, right? So CEO Graham Turner, and his nickname name Screw. He's built it from a single shop into a global travel company, I mean, operating across 20 plus countries.

6:56And I think he's at over 70 years old now and he's still running it. And he's got 8 % share ownership. So I think that kind of skin in the game keeps him aligned with shareholders and really helps maintain that kind of entrepreneurial fun culture the business is known for. But he's also proven that he's really resilient. He's steered Flight Center through COVID, as we touched on before, but he's really transformed the business. And right now, he's really expanding to higher margin segments like luxury, cruises, and experiences. And don't forget, he's also built one of the leading corporate travel managers globally.

7:32But secondly, I think corporate travel now, not corporate travel, flight center, the corporate division now is the future profit engine going down the track. It's now the largest and highest margin division. It delivers slightly more profit than the leisure in the last financial year. But the corporate division structurally has better economics. It's got higher growth potential, stronger margins, steadier demand and leisure, and more recurring kind of client relationships that tend to be long-term as well. But not only that, it's getting market share in the SME market, small, medium enterprise market.

8:07And management is clearly prioritizing the division. It's investing in tech. It's investing in AI. It's investing in the sales capacity to really scale this part of the company and become the main property driver there. But lastly, I think the last point I want to touch on is probably Flight Centre now runs a far leaner and more efficient business model than it did before COVID. I talked about it restructuring. It's a lot of costs. It's closed underperforming stores. I think it's gone from 1 ,500 to around 590 stores now. It's really automated workflows, and they're really focused on lifting productivity.

8:45So leisure travel, it's back at, I think, 86 % pre-COVID total transaction value, and they've done that with only 40 % of the workforce. So the company is obviously being more productive, but also investing in AI and automation. They've got a partnership with Anthropic, which runs the cloud large language models, and that's obviously to improve productivity, but reduced manual tasks. But all of this means that a lower cost base means that as the transaction value grows, profits just scale faster. But overall, it's leaner, it's more productive, it's more diversified business than it's been in years.

9:24Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

9:34Whenever we make a recommendation inside the Motley Fool services, by the way, we have a section called risks and when we'd sell. and even the companies we really, really like, we recognize and want to communicate to our members that, yeah, things can go wrong. Things that we expect, things we don't expect, circumstances that would maybe change our minds. That's the reality. When you put together any investment idea, you say, well, here's why I like it, but here's what I'm watching out for. Now, we're not just doing that because I said there's not a recommendation, but we're going to keep that format.

9:57We've done the pros. Let's do the cons. Maybe before someone buys many or maybe the things that might prevent them from buying, what are some of the cons? What are some of the risks? What are some of the concerns that people should be aware of before buying shares in Flight Centre? One of the main ones is probably around travel. It's inherently cyclical. It's tied to discretionary spending. So when we see the economy slow down, both consumers and corporates, they tend to cut travel first. And flight centre is obviously no exception, right? It's highly exposed to these external factors, not only geopolitical tensions, airfare pricing, regulatory changes, stuff of demand, or even shifts in the consumer behaviour.

10:35And we kind of saw some of that happen in the last financial year, particularly in the second half, where they saw lower demand and bookings to the US and Europe because of geopolitical tensions. And they obviously mentioned around two profit downgrades last financial year. So really hit them hard. And profits in the first half of this new financial year, it's expected to be flat. So there's obviously going to be external factors that continually impact the business. that's despite having a strong brand, obviously. I think another ongoing challenge is that a flight center is that profit margins remain under pressure.

11:14Airlines are continuously reducing override commissions. They're trying to consolidate incentives, and that's going to lower the bonus income for the flight center. Not only that, more travelers are booking online or directly with airlines and hotels, and I think that's squeezing the traditional travel agency kind of economics, and I'm guilty of this, right? I've been booking directly with hotels and airlines directly because it's got a lower price. I did a quick search from Melbourne to Sydney and booking directly was obviously cheaper than via a flight centre. But also I think this is the elephant in the room.

11:50AI tools are rapidly improving travel booking and planning. So I think that's going to likely reshape the industry. I think it's just getting started. So I think all these pressures, they're why flight centres lean towards the kind of higher margin areas like loyalty programs, luxury travel, and they're really pushing hard on automation and cost control really to protect that margin. And I think finally, the industry as a whole, it's in a technology arms race. Online players like Booking.com, Expedia, even Luxury Escapes and large corporate travel companies, they're well ahead in terms of automation, in terms of user experience, in terms of global marketing.

12:30yes Flight Center still has a strong brand they've got a global footprint but it's really playing catch up on the digital side in my view it continues to transition from that kind of legacy retail store network into more of like a physical online omni-channel model and I think the key risk is that if Flight Center doesn't innovate fast enough particularly in technology particularly in AI it could gradually lose relevance over time. Beautifully put mate that last one I mean And that's kind of, it's the overarching question and risk for a lot of businesses, right? We just don't know what AI is going to do, how quickly competitors are going to pick it up, how much it can automate or streamline or take costs out of or give competitive advantages to individual businesses.

13:11So that's going to be an ongoing watchword, but you're right, particularly with Flight Centre when it comes to the ability of booking online, using AI, other stuff, either directly with one of their competitors is a huge potential risk. Let's wrap it up, mate. I'm not sure which way you're going to fall here, I have to say. Sometimes when you guys do this, I can go, oh, I see where he's going here. You've given a pretty compelling pro case. You've given a pretty compelling con case as well. So again, I'll say for a third time, I think, not a formal recommendation. But if I get you to look out, say, five plus years, and at the Motley Fool, we are long-term investors, so five years is the minimum we look when it comes to our investment theses.

13:43What are you thinking? What are you seeing? Do you reckon Flight Center can beat the ASX over five plus years, or is it likely to lag the market? That was an interesting question when I was doing this exercise, trying to figure out that kind of answer to your question. I first looked at an evaluation. On a trailing basis, Flight Center trades on around, I think, 17 to 18 times underlying earnings, which is around its long-term average. But for a cyclical low-margin travel business, that's not screamingly cheap. Flight Center did have its recent AGM last week, and they provided a trading update.

14:16It really showed a solid start to the first quarter. Corporate is growing. Leisure is still recovering, so there's still a bit of recovery in that space. But management did provide some guidance for FY2026, and that's to forecast around 5 % to 17 % growth in profits before tax, with a lot of the growth that's skewed to the second half. And if they deliver that guidance, which is a big if, because I mentioned they did have two downgrades last financial year, and particularly a weak second half, um flight center trades at around 13 to 14 times forward earnings which looks reasonable value right so it is a tough one but there's a lot of external factors involved and execution really needs to go well um but that being said flight center is definitely a leaner efficient business um but i think with all those externalities and those external risks i think those headwinds make it hard to have the confidence to see Flight Centre sustain kind of outsized earnings growth.

15:21So unless Flight Centre can actually expand margins meaningfully or if both leisure and corporate can accelerate growth together, I think Flight Centre is more likely to track the market rather than beat the market over the next five years. So you split the difference, you reckon roughly market matching. Is that what you're telling us? At best. At best. There you go. You've heard it straight from Benny O, who leads our Motley Fool Extreme Opportunities Investment Service. First, thanks for being part of Motley Fool Stocks in Focus. Again, as I've said before, please, if you're listening to this on the podcast, firstly, thanks, come and check out the YouTube channel.

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