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Can Jetset replicate Flight Centre’s success?

Jetset Travelworld (ASX: JET) has been through a number of twists and turns since its formation.

Formed through the acquisition of National World Travel in May 2001, Jetset soon expanded through the purchase of Traveland, a subsidiary of Ansett, acquired following Ansett’s demise in December 2001. Subsequently, via a backdoor listing in 2002, Jetset listed on the ASX.

A few smaller acquisitions ensued and then in July 2008 Jetset merger with Qantas Airways (ASX: QAN)-owned Qantas Holidays and Qantas Business Travel. This created a full service, integrated leisure and corporate travel group. This merger also secured Qantas as the largest shareholder in Jetset.

Moving forward to September 2010 and another major merger occurred at Jetset, this time with Stella Travel Services, which added the Harvey World Travel and Travelscene American Express brands to the fold. Stella Travel Services’ history is equally complicated due to its previous ownership by S8 Limited. Prior to merging with Jetset, 65% of Stella was acquired by private equity group CVC Asia Pacific. For those who remember the private equity fever which swept through the market just prior to the Global Financial Crisis (GFC), S8 was one of those private equity targets. Today, alongside Qantas, CVC holds a major stake in Jetset.

Operations

Jetset operates in eight countries, namely Australia, New Zealand, Fiji, USA, South Africa, UK, Vietnam and Cambodia. The company directly employs nearly 2500 staff, along with over 2000 franchisees, members and affiliates.

In the retail space, Jetset operates a franchise model which allows it to minimise expenses and working capital that would otherwise be tied up in owning and managing “bricks and mortar’ retail stores. In wholesale, the business has diversified away from its reliance on Qantas and outbound domestic travellers by expanded overseas to provide holiday packages sold internationally for visitors to Australia. The third division, Travel Management focusses on servicing government and corporate clients with their travel needs. This division has been underperforming and management has recently implemented a restructuring program to improve performance.

Competitors and risks

The travel sector continues to grow, with Jetset’s major competitors Flight Centre (ASX: FLT) and Corporate Travel Management (ASX: CTD), going from strength to strength. While Jetset may not be about to realise the same degree of success as its peers, with its recent restructuring and cost-saving initiatives, it has the potential to improve margins and grow revenue and profits.

Like many ‘bricks and mortar’ retail businesses, travel agents are faced with competition from online operators. So far, travel agents have proved that customers still prefer to deal with an agent and avoid the hassle and complexity of booking an overseas holiday or cruise online. Nevertheless investors need to monitor the industry for signs of changing customer habits that could leave ‘bricks and mortar’ agents exposed to structural irrelevance.

The travel industry has enjoyed the tail wind of a strong Australian dollar with the record high exchange rate making it an appealing time for Australian residents to travel overseas. With the exchange rate dropping, investors also need to monitor for the risk of declining sales.

The Foolish bottom line

While Jetset’s performance has been underwhelming over the past few years, at an underlying level the business has remained profitable. Jetset currently trades on an estimated forward PE (of adjusted earnings) of just 6.9 times, which looks very undemanding and potentially cheap.

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Motley Fool contributor Tim McArthur owns shares in Jetset Travelworld.

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