The Australian travel market has experienced substantial growth in recent times. This is due to the increase in low-cost airlines, the high Australian dollar prompting more Australians to travel overseas, and an ever increasing urge for Australians to travel, particularly overseas.
On the back of the growth in travel, several ASX-listed travel companies have posted strong results in recent times, for example Flight Centre Limited (ASX: FLT) is up an astounding 711% over the last five years and Corporate Travel Management (ASX: CTD) is up 220% over the past five years.
However, not all companies in the sector have had the same success experienced by Flight Centre and Corporate Travel Management. Wotif.Com Holdings Limited (ASX: WTF) has seen its share price fall by 15% over the past five years, and Webjet Limited (ASX: WEB) is down 35% over the past 12 months. Wotif.Com and Webjet have come under strong competitive pressure from U.S. online accommodation booking giants Expedia and Priceline.com and are facing pressure to retain market share. I believe continued competition in the space will result in margins being squeezed for both Wotif.Com and Webjet and therefore future profit growth will be difficult to achieve.
Investors need to focus on buying quality companies within the sector as opposed to simply investing in the travel sector as a whole. The company I believe will continue to benefit from the booming demand for travel and has the most upside potential is Flight Centre.
Flight Centre recently announced net profit for the six months ended 31 December 2013, increased by 20.7% to $155 million, with revenue up 15.1%.
This result was a record for the company. The key result drivers included strong network expansion with shop numbers increasing 8.2% to 2643 stores. Flight Centre also experienced record sales growth, both in-store and online and in both leisure and corporate travel. The company targeted full-year profit growth of between 8-12%.
The company has experienced growth in its three largest businesses: Australia, the U.S. and the U.K.
Fluctuations in the Australian dollar have not affected Australian outbound travel. Australian Bureau of Statistics data showed that outbound travel growth accelerated in the first half of the year despite a fall in the Australian dollar. The growth in Australian and international low-cost flights also spurred demand for travel.
The growth and success of the Flight Centre business has been phenomenal when considering the huge threat from online travel. The company has huge store scale in Australia which is backed by a comprehensive online offering. The growth in Flight Centre has shown that Australian travellers, for the most part, prefer to consult with a travel agent rather than booking travel themselves to ensure they receive the most optimal travel experience.
The company plans to continue its growth path by evolving from a leisure and corporate travel agent into a best-in-world travel retailer.
Foolish takeaway
Recent results from companies in the travel sector emphasise the importance of picking quality companies rather than simply investing in a particular sector.
Flight Centre has experienced huge growth in recent times and I believe the growth story will continue on the back of sustained demand for domestic travel and the company's overseas expansion. I believe the company is a buy at the current price.
