The market received an interesting update this morning from out-of-favour businesses FlexiGroup Limited (ASX: FXL) and Flight Centre Travel Group Ltd (ASX: FLT). After a competitive process, Flight Centre will now offer interest-free finance to retail customers for their travel purchases through the brands Flight Centre, Travel Associates, Cruiseabout, Student Flights, and Escape Travel.
FlexiGroup will commit an initial $3 million this year in order to get the arrangement started, and there is an expectation that it could double Flexi's card business revenues and profits over the next several years.
So What?
The agreement looks like a real coup for FlexiGroup, with interest free travel highly appealing in this age of increasing consumer debt. The partnership with Flight Centre provides a national distribution platform for the product with plenty of upside for FlexiGroup over the next few years as the fees start rolling in.
There's also upside for Flight Centre because of the uniqueness of the offer (differentiating it from competitors) as well as increased volumes and the potential for eventual replication across its international network – with FlexiGroup responsible for the costs and the risks.
Now What?
Neither FlexiGroup nor Flight Centre look expensive today, although the deal is far more important and relevant to Flexi than it is to Flight Centre. The downside is it will potentially take some time to get volumes going and the nature of the offer requires heavy up-front investment from FlexiGroup (funding people's holidays) which is then paid back plus fees gradually over a number of years.
There's also a question over which customer segment interest-free travel will most appeal to. Students and young people are the ones that jump to mind but they're not necessarily in the best position to take on large debt commitments. However, when you're on a tight budget the appeal of small regular repayments as opposed to a lump sum rises exponentially.
I expect FlexiGroup to rise sharply today as the announcement looks like great news that adds a viable long-term growth avenue to FlexiGroup – and it won't hurt Flight Centre's offering either.
