Flight Centre’s latest evolution

This month, Steve Jones sat down for an exclusive interview with Flight Centre’s Graham (Skroo) Turner, covering the company’s latest big decisions including the shut down of two brands.

It can get quite noisy in here, warned Graham Turner, as we took our seats in the aircraft fuselage. Yet it wasn’t the whirring of engines or chattering of passengers which created any din. It was laughter, drifting in from the corridor and adjacent reception, that occasionally punctuated our conversation.

Where we chatted was not quite at 39,000ft. We were in a mocked-up office space, in the shape of an aircraft fuselage, on the fifth floor of Flight Centre’s new Sydney headquarters.

And the cackles seemed to substantiate what Turner, or Skroo as he is universally known, later explained.

“Believe it or not, we do have a lot of fun one way or another,” he said.

The comment came in response to questions about his longevity, and his plans to remain at the helm for at least another 10 years.

In fact, far from calling it a day in 2028, Turner has previously suggested he can’t imagine retiring before he hits 90, two decades from now.

Only when it is no longer fun, or becomes “too easy”, will Turner consider passing on the baton. And both scenarios, it would seem, are not about to happen any time soon.

“The main thing is the business is still challenging and fun,” he told travelBulletin. “If it was too easy — and I can’t see that happening — that might get boring. And if it wasn’t fun, if it was just hard work … in the past, now, and for the foreseeable future, our business will be challenging but it’s also fun and really exciting.”

Glancing at Flight Centre’s results over the past few years you’d be forgiven for thinking it’s already relatively easy for the Flight Centre founder.

Certainly the current financial year is shaping up well. Three months from its end, 2018 is within reach of the record $376.5m underlying pre-tax profit that so delighted shareholders in 2014.

Yet Turner’s assessment is typically understated. “Not too bad,” was his analysis of the first half results, which it reported in late February.

Occupying much of Turner’s time, and that of his management team, is a geographical region that has for so long underpinned Flight Centre’s success: Australia.

While continuing to generate the lion’s share of profit — it pulled in $104m of the company’s $139m first half pre-tax profit — Australia “is still our flat spot”, observed Turner.

The problem, if such a word is appropriate for what is still a highly profitable region, is leisure where TTV struggled for growth, creeping up only 1%. That Australia’s overall TTV climbed 4% was largely down to corporate travel where transactions rose sharply.

“Our overseas results are going pretty well and what’s really pleasing is that it’s becoming a bigger proportion of our profits. But we’ve been reasonably flat for the last few years in Australia so that is one of the things we need to work on,” Turner said. “Our margins are under a bit of pressure for a whole range of reasons and we are not seeing a lot of growth.”

“Our margins are under a bit of pressure for a whole range of reasons and we are not seeing a lot of growth”

Among the reasons for the plateauing are the competitive nature of the marketplace in Australia and the growth of online players. But he also referred to the thinking of revered US economist Michael E Porter, an expert on competitive strategy.

“I’ve been reading his work lately and generally industries become more commoditised as time goes on,” he explained. “Competitive forces have probably been more significant and over time that’s what happens. One of the things we need to do is reinvent ourselves a bit and our strategic positioning.”

And how do you do that? “That’s the million dollar question,” Turner said.

It’s a question Flight Centre has set about answering through the reconfiguration of its shop portfolio and creation of three “super networks” targeting the mass, premium and youth markets.

Such a rejig falls under the auspices of Flight Centre’s global transformation plan, so designed to bring “scalable and profitable growth throughout the economic cycle”.

So is he worried about Australia? “No, not really but worried enough to make the changes we are making.”

Whether such a retail restructure is the right answer remains to be seen. But the rebranding by the end of April of Cruiseabout and Escape Travel will deliver an even stronger footprint for its core Flight Centre network and build a greater presence for Travel Associates, its premium retail brand.

Turner said Escape and Cruiseabout, despite the latter’s specialist nature, were essentially operating in the same mass generalist space as Flight Centre and draining resources which could be better deployed elsewhere. While not unsuccessful — Escape produced sales around the $750m mark and delivered a $10m profit — a more streamlined brand portfolio was considered prudent in driving growth and market share.

“Flight Centre is by far the best-known brand in Australia so we believe we need to focus on that and get our market share up,” he said.

“Flight Centre is by far the best-known brand in Australia so we believe we need to focus on that and get our market share up”

Turner was predictably confident of retaining the vast majority of the $1b worth of business generated by Cruiseabout and Escape, emphasising the importance of staff continuity to that goal.

“It’s about the consultants, keeping them and making sure they are happy,” he said. “We have looked at it shop by shop, person by person, to ensure consultants move into the right brand and generally the people who will go to Travel Associates will be those who have a significant customer database and they will take that database with them.”

The changes, once bedded down, will create around 120 Travel Associates sales teams, up from 50, while Flight Centre will grow from 780 to more than 900.

Describing Travel Associates as “very successful”, Turner outlined plans to grow the brand “a lot more than we have” and suggested the retail trade had yet to capture the high end traveller in any meaningful, coherent way.

“The reality is there is not a lot of unified competition in that premium travel space,” he said. “There are pockets — some Helloworld and Magellan agents would put themselves in that category — and Phil Hoffmann Travel probably operates in that area to a certain extent, but there isn’t much.

“The Flight Centre brand does have premium travellers but is probably not as good at keeping those customers year after year.”

Operating in tandem with its bricks and mortar business are online brands BYOJet and Aunt Betty which will sit under the “mass market” banner, along with Flight Centre.

Both are performing “pretty well”, said Turner, with TTV of $180m in the first half, up 87%, and a pre-tax profit of around $2.5m.

“They’re getting reasonable growth. It’s a really competitive field,” said Turner. “It’s mainly an adjunct to bricks and mortar where we don’t want to destroy our margins.”

While BYOJet caters exclusively for the price-sensitive flight-only consumer, Aunt Betty will increasingly expand into land packages. But how do you stitch together two online brands, the core bricks and mortar network and flightcentre.com? The risk of cannibalising sales appears obvious.

“Flightcentre.com is important to us and we want to make it a very transactional site. But essentially we want to direct consumers into our bricks and mortar shops and our customers are generally people who, whenever there is a degree of complexity, would prefer to book offline,” Turner said.

BYOJet and Aunt Betty, on the other hand, will target those who predominantly want to book online, who, to follow Turner’s logic, are generally not core Flight Centre customers.

“It’s a different marketplace so they don’t really conflict,” he said.

If operating the right mix of brands is one challenge, another dilemma is equally as fundamental: where to put the shops. After all, when you’re shelling out between $80m and $100m in rent each year, you don’t want shops tucked away in a pedestrian-free side street.

And here Flight Centre “dropped the ball”, admitted Turner.

Late last year executives met with several major landlords. What emerged was a realisation that Flight Centre had many shops in the wrong location, the result of an overly decentralised system of network planning where decisions were handed to managers, some of whom it transpired, did not possess the necessary expertise.

“The message I got very clearly was our network planning wasn’t very good. We had opened stores in poor locations,” Turner said. “There is no doubt, having had a good look at this and working with our network planning guys, that we dropped the ball.

“There is a reasonable amount of science behind the location of stores and there’s probably 200 we would like to relocate. That will make a big difference.”

Unsurprisingly, future shop planning will be centralised and meticulously scrutinised.

Since those conversations with landlords, Flight Centre shut around three dozen stores in January alone, with a handful of new shops opening the following month. Turner stressed his plan was not to shrink the number of shops but to “re-plan” the network.

“But as the landlords pointed out, getting shops into the right locations could take a couple of years because they have to move tenants around,” he said.

“One of the things shopping centre owners are meant to deliver is customers on a walk pass basis. Most of the larger ones are delivering pretty well on that but some of the smaller ones are struggling.”

Other changes on the horizon impact in-house wholesaler Infinity Holidays, a business which exceeds $1b in TTV for Flight Centre and generates a “significant” net profit.

As part of the “super network” strategy, and as reported in Travel Daily in March, Infinity will be progressively rebranded with brochures to bear the name of shops in which they sit. However, it will be retained for external use and through FCTG’s unbranded affiliates, contractors and franchises.

Elsewhere, “we’ll be tending to brand our product more by Flight Centre, Travel Associates and Student Flights rather than Infinity”, Turner said.

The move, he added, will make those brands “more powerful”.

Power, of course, is already something Flight Centre possess in spades. Its TTV in the first six months of the financial year hit a record $10b, almost $6b of that in Australia. By comparison, Helloworld, its nearest bricks and mortar competitor, reported TTV of a shade under $3b, itself an encouraging performance.

Yet Turner, as you might expect, played down Flight Centre’s commercial and distribution muscle and the negotiating power it holds over suppliers.

“You can ask them, but we try to make it a win win,” he said, adding, somewhat unconvincingly, that Flight Centre “doesn’t necessarily get that much better a deal than a lot of smaller players”.

“I like to think we’re not overly tough with this sort of thing, but some suppliers might disagree of course. Some of the airlines that have a lot of market power can be quite difficult and that is the same in every country.

“Generally the aim of the game is to work with your suppliers because we are really in the same game and everyone needs to make a margin out of it.”

Meanwhile, Flight Centre’s own product range is continuing to expand, partly a response to an understanding — still seemingly underestimated in the industry — of the need to add value.

Asked, following the collapse of Si Holidays, what the future was for independent wholesalers, Turner said: “You’ve got to ask what sort of value you add, and it’s the same for re-sellers which is one of the reasons we do have some of own product.

“You’ll certainly see us using more and more of our own package content. I just think the industry needs a bit more imagination rather than just being a re-seller of someone else’s product.”

Not that Flight Centre is pursuing an aggressive UK-style vertically integrated model where operators control beds, aircraft and everything in between. At least not according to Turner.

But, through its Travel Experience Network, it’s hard not to draw the conclusion that Flight Centre is preparing itself to control the chain as much as possible.

Its acquisition of Thailand-based Bespoke Hospitality Management Asia will, by Turner’s admission, not be its last foray into the accommodation sector, while the addition of its second Destination Management Company, Mexico-based Olympus Tours, is another sign of things to come.

It also operates Top Deck and Back-Roads Touring, which carry in the region of 55,000 and 11,500 passengers respectively.

“Thomas Cook and TUI are large vertically integrated companies. We’ll do some vertical integration but our goal is not to fully go there,” Turner said. “When it comes to cruising and most touring we’ll still be supporting third party suppliers.”

“Thomas Cook and TUI are large vertically integrated companies. We’ll do some vertical integration but our goal is not to fully go there”

What is abundantly clear when exploring the various inter-connecting parts of Flight Centre is the ever-evolving nature of the businesses and the pressures associated with continuing to drive profits. Such is the nature of a publicly listed company — and a high profile one at that — where the critical gaze of shareholders, analysts and competitors is a constant.

So 45 years after creating Top Deck, and 36 years after the first Flight Centre shop opened in Sydney, what remains the motivation for the Flight Centre founder?

Surely he wakes up on a Monday morning in Brisbane and, just occasionally, thinks: “It’s time”.

“No, I don’t actually,” Turner laughed. “We have got so many things we want to do. And in the end, people enjoy working here. I certainly do.”

Any why stop if it’s still fun?

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