The Flight Centre Travel Group Ltd (ASX: FLT) share price is under pressure on Monday.
At the time of writing, the travel agent's shares are down 4% to $16.30.
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Why is the Flight Centre share price dropping into the red?
Investors have been selling down the Flight Centre share price on Monday following the release of a trading update at the company's annual general meeting.
According to the release, during the first four months of FY 2023, Flight Centre's total transaction value (TTV) increased 246% over the prior corresponding period to reached $6.8 billion.
And with its revenue margin remaining steady year-over-year at 9.8%, Flight Centre's revenue grew at a similar rate of 248% to $667 million. This appears to have been slower than some in the market were expecting due to softer margins.
Revenue margin impacts
Management advised that Flight Centre's revenue margin is being adversely impacted by reduced front-end commission payments from some airlines in Australia and New Zealand.
And while it is partially offsetting the impact through a combination of revenue margin improvement strategies and by securing better arrangements with some carriers, it estimates that these changes are adversely affecting overall leisure revenue margins by approximately 1% in Australia.
Management advised that while it believes the company's "revenue margin will increase from its current level as the trading cycle normalises, it is expected to remain below pre-COVID levels in the near-term."
One positive, though, is that Flight Centre revealed that its cost margin for the four months to October 31 was 10%, which is in line with the long-term target that it set pre-COVID. Pleasingly, it expects further improvements over the medium-term, which it believes will help to offset the impacts of its lower revenue margin on its profit.
Speaking of which, Flight Centre recorded an underlying $61 million EBITDA profit for the period. This is up from a $137 million underlying EBITDA loss during the same period last year.
And on the bottom line, the company broke-even on an underlying profit before tax basis.
Outlook
Management advised that it continues to work towards an aspirational 2% net margin target (profit before tax to TTV) and believes it is "achievable by 2025."
In the immediate term, the company currently expects underlying EBITDA to be between $70 million and $90 million for the first half. That means an additional $9 million to $29 million of EBITDA is expected to be generated in the remaining two months of the half.
