Last year is best forgotten for Flight Centre Travel Group Ltd (ASX:FLT) shareholders. Shares in the global travel agency soared to an all-time high of $55.72 early in the year. Weaker consumer confidence throughout 2014 and a profit guidance downgrade in December sent the share price into freefall. The shares are currently trading around $34 . Which flight path will it take in 2015 and beyond?
Flight Centre managing director Graham Turner warned that "trading conditions in Australia remain challenging following the leisure travel spending slowdown late in 2013/14" and "profit before tax (PBT) for 2014/15 will be between $360 million and $390 million" as opposed to initial guidance of $395 million to $405 million.
Despite this current negative sentiment towards the stock, there are many reasons to be confident about the performance of Flight Centre in 2015 and beyond.
U.S. economic recovery
With numerous economic indicators including GDP growth, job market gains and consumer spending increasing, an economic recovery is taking hold in the United States. The U.S. Flight Centre business is the largest outside of Australia as ranked by total transaction value (TTV), earning more than $2 billion TTV for the year ending June 2014. Leveraging from the economic recovery will provide a huge growth opportunity for both the U.S. corporate and U.S. leisure business sectors.
Growth in Asian travel
The World Travel Trends Report 2014/2015 expects total international travel to expand by up to 5% in 2015. Asia is the growth powerhouse, with the total number of outbound trips set to rise a whopping 8% during 2015. With an increasing presence in Asia, including China, Flight Centre is in a great position to convert this growth into earnings.
Falling oil prices
Fuel costs contribute up to 40% of total airline operating costs, making the oil price dive good news for air travel. It may take some time before the full impact is passed on to consumers with Australia's two largest airlines hedging their fuel prices.
The Australian Financial Review noted that "some foreign airlines buy fuel at spot prices, giving them the option to undercut their hedged rivals – which in turn could put pressure on the Australian airlines". If oil prices remain low into the future, lower airfares and increased demand should be expected.
Exchange rate doesn't factor
According to the Australian Financial Review, Mr Turner has consistently denied that the exchange rate has contributed to the stalling profit growth. The Australian dollar has depreciated significantly against the U.S. dollar over the past six months but the market consequences haven't reflected this. "In reality, the U.S. has been among the strongest-performing outbound markets for Flight Centre – even for bookings made after the currency began a steep slide in September".
Most travellers don't choose their destination based on the exchange rate. A major factor in the decision to travel is airfare cost. With international airfares being affordable for the majority of Australians, international travel should continue to expand.
Should you buy?
Flight Centre is a dominant Australian business with exceptional growth opportunities ahead of it. Currently offering a fully franked trailing dividend yield of 4.5% and trading at an attractive price, I think long-term investors buying today will be rewarded in the years to come.
