Are Flight Centre Travel Group Ltd shares about to turn the corner?

Over the past 18 months or so, travel agents Australia-wide have bemoaned low airfare prices as a constraint on their earnings. Flight Centre Travel Group Ltd (ASX: FLT), Helloworld Ltd (ASX: HLO), and Corporate Travel Management Ltd (ASX: CTD) have each felt the pinch of lower airfares in recent times.

Lower airfares are a concern because they can prevent agents from earning sizeable rebates based on hitting a certain level of $ sales (thus lower airfares require proportionately more sales to meet targets). Of course low airfares are great for customers, as directors of Corporate Travel Management have pointed out in the past.

However, it looks like the tide may be turning. For two months in a row, popular broker Commonwealth Securities (‘Commsec’) has published reports noting that discount airfares have risen significantly in price over the past 12 months. Discount fares are up 18% compared to a year ago, while economy prices were up 3.5% and business class fares rose 2.1%.

Here’s a chart tracking the relative inflation/deflation in discount airfare prices in recent years:

source: Commsec

Notably the airfare surge comes despite static oil prices, which suggests that the forces of supply and demand have shifted in the sector. In previous coverage on Flight Centre, I’ve argued that, with the company blaming low airfares for a fall in profit, a straightforward way to tell if business is improving would be to watch for improvements in airfare prices.

With those improvements now having occurred, Flight Centre could be on track to hit its big second half forecast this year, while Corporate Travel and Helloworld could also stand to benefit.

An open question in my mind is ‘what happens to travel demand when airfares go up?‘; theoretically you would expect people to travel less as the cost of travel increases. However, some evidence shows that the number of outbound tourists remains fairly steady, with only the destination changing.

Common sense suggests that the Aussie fixture of the annual overseas holiday is unlikely to be derailed much by changes in airfares. So travel agents could be in for a more lucrative period in the foreseeable future, at least until the next time competition gets out of hand in the airline industry.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Flight Centre Travel Group Limited. Motley Fool contributor Sean O'Neill owns shares of Flight Centre Travel Group Limited. The Motley Fool Australia owns shares of Corporate Travel Management Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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