It's not hard to make the bull case for Flight Centre Travel Group Ltd (ASX: FLT) shares, but then again it's not hard to make the bear case either.
This is one company that tends to divide the investment community as to whether its business model is outdated and in structural decline, or whether it's cheap given its valuation and strong global growth prospects.
Much of the commentary around Flight Centre's falling profits has focused on its perceived failure to move sufficiently aggressively into the online space at the expense of its bricks-and-mortar business model.
However, the company and its founder have been quite resolute in blaming falling airfares as a cyclical factor "which has stimulated demand but slowed short-term TTV (total transaction volume) and revenue growth". For the six-month period ending December 31 2016 Flight Centre stated average airfares decreased by 7% internationally and 4% domestically.
Notably, other companies in the travel sector including Corporate Travel Management Ltd (ASX: CTD) have also blamed falling airfares for holding back their profit growth.
It's the falling oil prices that are letting airlines discount airfares to win market share as lower oil prices mean one of the airlines' biggest input costs has cratered to help boost their profit margins.
Oil is also traded for delivery on a future basis to give energy explorers and producers some certainty as to future receivable prices, although airlines won't fully hedge their future fuel requirements over the medium term as they don't know what passenger demand will be in periods greater than one year out for example.
As there is no effective futures market for airline tickets the airlines won't fully hedge their fuel bills, as getting it wrong could allow rivals to offer far cheaper airfares to passengers at a time when short-term demand is surging.
The volatility of the oil price adding to airlines' reluctance to fully lock themselves into potentially higher prices versus rivals that prefer to adjust ticket prices according to short-term fuel costs and passenger demand.
The low oil price then has floored Flight Centre as much as it has supported the profit margins of the likes of Qantas Airways Limited (ASX: QAN) and investors in Flight Centre would probably do well to consider the long-term direction of the oil price and airfares as much as Flight Centre's competitive position in the digital future.
Airfares are probably somewhere near cyclical lows now, although I expect supply growth outpacing demand growth in oil markets means the oil price and airfares may remain in a relative long-term bear market.
For that reason, alongside the rising online competition I'm reluctant to invest in Flight Centre at today's share price, despite its super strong balance sheet, cheap looking valuation, attractive yield, and track record of long-term success.