How Flight Centre does if differently – and wins

SYDNEY – The big rise in projected Flight Centre profits (it expects to post a pre-tax profit of between $160 million and $180 million for the 2010 financial year) appears to be good news not just for Graham Turner and his team, but high street travel agents everywhere.

Writing in Business Spectator, Robert Gottliebsen says the rise is about “old fashioned business strategies that still work in the digital age and about the power of a unique marketing network at a time when there is oversupply among the product producers (airlines)”.

Gottliebsen said Flight Centre has the best travel marketing network in Australia and one of the best in the world.

“For a while though, it seemed that the internet was going to eclipse Flight Centre. But, chief executive Graham Turner stuck to his guns and his store network, plus the retailing system that goes with it,” Gottliebsen wrote.

“The stores – plus the diversification into business travel – turned out to be of enormous value in the slump which has now translated into higher profits as the economy turns up.

“In the global financial crisis demand for airline tickets, particularly international journeys, slumped and international airlines in a desperate effort to clear their stock slashed prices – a malaise highlighted by Japan Airlines filing for bankruptcy.

“But it was no good simply slashing prices unless you had a distribution network to sell the tickets,” Gottliebsen said.

“Airlines had invested in the internet, but no airline had a physical distribution system to clear tickets, so Flight Centre’s importance to the airlines was suddenly underlined in Australia and the other countries where it operates.

“Flight Centre used the lower prices to substantially lift its enquiry rate and although profits on tickets were reduced, Flight Centre expanded its customer base, turning an event that could have been a disaster into a winner.

“One of the big supporters of Flight Centre, Singapore Airlines, pulled out. Singapore did not have its own physical distribution system so the move backfired and other airlines snapped up big lumps of Singapore market share.”

Turner told Business Spectator, “I think Singapore had some sort of a view that their customers were owned by them and that whether we supported them or not, they would still want to fly with Singapore and we have shown that’s clearly wrong.

“Their market share’s gone down considerably…we switched our business over to other carriers and the reality is that these days, whether you’re Qantas, Etihad or Emirates or Singapore, there are very good alternative products.

“Since we took that action against Singapore by not signing a preferred arrangement with them, it’s made it a lot easier to conclude our arrangements with other carriers.”

Gottliebsen said that the underlying strength of Flight Centre caused it to take other decisions which have also enhanced the latest profit.

“Flight Centre did not cut back on its advertising in the downturn at a time when many travel agents panicked.

“The combination of cheap airline tickets, the Flight Centre distribution and the maintained advertising spend has greatly enhanced the strength of the Flight Centre business and contributed to the profit rise.

“The Flight Centre operation challenges all the conventional wisdom – very little internet distribution (Turner says the margins are too low); a branch distribution system with emphasis on people, plus low prices.

“The latest Flight Centre profit shows it works,” said Gottliebsen.