It's not hard to make the bull case for Flight Centre (ASX: FLT) as an investment, and while I don't want to make you hungry, it looks to me like it has parallels with the legendary US burger baron McDonald's (NYSE: MCD). The chicken nuggets and Big Mac maker has a market value of almost US$90 billion and Flight Centre with a market value around $4.3 billion may be on the same growth menu. Here's why.
It's all about the brand – and the people
Flight Centre's bright red brand and Ronald McDonald-like grinning pilot are recognised and trusted worldwide. The bricks-and-mortar shop front model appears to work as customers enjoy the human interaction of booking travel and accommodation at its more than 2,500 shops worldwide. Human capital is critical to businesses where such a high proportion of staff are client facing. The uniformed staff are well presented and on remuneration packages that align their interests with those of the company. Founder Graham 'Skroo' Turner has crafted a competitive culture amongst staff that rewards high performers through commission systems and rapid promotions.
The business and its staff are able to up and cross-sell products with ease on a constant basis. Customers using its services are offered huge amounts of extras like insurance and accommodation by a well trained sales and marketing machine. You don't need an MBA from Harvard to work at Flight Centre, but you do need a determination to succeed and key to the business is its corporate culture of hitting sales targets.
Drive-thru
Some have criticised the group's shop front business model as outdated, but don't overlook the fact that this is a digital business too. As such it's able to leverage all the benefits of the digital future as well, if not better, than any of its rivals. The appetite of Australians and other citizens for international travel is growing and Flight Centre's business model of low airfares and cheap holiday packages is all bookable online with just a few clicks of a mouse.
Moreover, the overall future of travel is one of cheaper airfares, greater comfort, affordability and choice, which gives Flight Centre a handy tailwind to support its journey into the digital future.
As the business gets bigger, the past years of double-digit earnings growth become harder to replicate, but the group's corporate travel business continues to show promise as a growth engine. Corporate travel also offers generally higher margins than leisure travel and the industry has already produced one of 2014's best performing ASX-listed small-cap stocks.
The corporate U.S. business is now expected to turn over more than $1 billion this financial year in a market valued at more than $200 billion per year. The entire corporate travel business has now grown into 90 countries covering clients in industry sectors as diverse as construction, sports, energy, entertainment and financial services.
Widening moat
The scale of the business gives it cost benefits and stops competitors gaining market share with lower prices. The network effect is a powerful one as clients and travellers appreciate the giant scale means it's the place to save and make money alike.
Flight Centre now has such reach that the airlines and other travel operators are dependent on it for business. When Flight Centre enters new markets its global network and giant scale gives it Darwinian advantages in winning market share from smaller competitors.
While the Australian leisure market has seen weaker conditions on the back of a softer dollar and downturn in consumer sentiment, Flight Centre offers investors plenty of exposure to the big trans-Atlantic markets and the fast-growing Asian markets of India, China and Singapore. Operating under 30 different brands the group also has a giant $476 million cash pile sitting on its balance sheet to fund future acquisitions and global brand strengthening.
