Inside story – May 2013

How the global chain is ‘blending’ a new multi-channel retail formula

By Ian McMahon

inside storyTHEY still have red and white facades but today’s Flight Centre outlets and their approach to travel retailing are unrecognisably different from the company’s first shops.

When Flight Centre’s founders set up those original outlets at the start of the 1980s, the Australian travel industry was blissfully ignorant of the internet and the concept of airfare discounting was a relatively novel one in a quasi-regulated market.

The men behind Flight Centre – Graham (Skroo) Turner, Bill James and Geoff Harris – had returned to Australia after stints in the UK where they had witnessed the success of so-called “bucket shop” airfare discounters.

Australia’s restrictive International Civil Aviation Policy (ICAP) had just been consigned to the dustbin of history and, while domestic airfares were to remain tightly regulated for another decade, the Australian market was ripe for an international airfare discounter.

The first Flight Centre outlets reflected those times. Radically different from traditional travel agencies where staff consulted with clients from behind individual desks, the Flight Centre outlets had the look and feel of an airline office with one additional feature – pavement chalk boards emblazoned with the latest international airfare discount deals.

Customers lured by those offers sat on stools and dealt over a counter with staff selected as much for their sales ability as their travel industry background.

Focusing on volume rather than margin, the aim was to process airfare (and insurance) transactions with despatch.

Today, the company is in the throes of re-inventing its retail approach, implementing what managing director Graham Turner calls “a world first blended travel model”.

The new model will, it is claimed, eventually provide a 24/7 service to clients who will be able to switch seamlessly between online shopping and bricks and mortar outlets with the guidance of a consultant available throughout.

“Ultimately, a customer will be able to start a transaction in store and complete the booking at home later that evening, perhaps after discussing the options with family and friends,” Turner has told the Australian Stock Exchange (travelBulletin, March).

“At all times, help will be at hand in the form of an expert travel agent.

“This offering will give travellers a next generation booking option that builds on the services bricks and mortar and online travel agents have traditionally provided.”

In an interview with travelBulletin, Turner said the Flight Centre model had evolved from the narrow international airfares focus of the 1980s to a “more general travel” approach in the 1990s.

This included the sale of domestic airfares following the negotiation of an Ansett deal with a “very supportive” Geoff Dixon during his brief stint with that airline.

Turner denied the widening of Flight Centre’s offerings in the 1990s was linked to a reduction in international air commissions.

He said commission levels remained more or less constant, albeit “they moved from the front end to the back end”, and he pointed to the company’s ability to maintain gross margins around 14 per cent (although some will believe that the company’s diversification into land products contributed to this).

Now, said Turner, “the internet is changing things up a bit and there will be a lot of opportunity to do things the way customers want them done”.

Flight Centre is developing its new approach under what it calls its “Travel Shopping of the Future Program”.

A key element is the company’s upgraded website which now offers a full range of the company’s published domestic and international fares, underpinning the model that aims to allow customers to interact with consultants in any sales channel at any time with the full product range available worldwide.

Implementation is taking place in three phases, with the second phase now virtually complete in Australia.

Phase one saw Flight Centre blend its offerings in the pre and post booking stages by allowing customers to enquire, pay and view travel itineraries online, rather than having to interact in-store or via telephone.

In phase two, the company has made more product and services available online and given customers broader access to its global shop network.

“Consultant Select” has been launched in Australia, enabling web customers to select a human contact for advice.

In the offing is a “Perfect Match” system that will refer online customers to consultants with recent first-hand experience of the customer’s chosen destination.

Phase three, the fully blended offer-ing that allows customers to switch seamlessly between sales channels, is around 8-12 months away, Turner told travelBulletin.

One of the latest developments has been a meeting this month between the company’s executives and Google in the USA.

The transformation of Flight Centre’s retail model is taking place as the global travel chain is enjoying unprecedented growth.

And Turner is bullish about immed-iate prospects as carriers from China, the Middle East and Asia continue to add capacity. “They all need our business,” he said.

He spoke with travelBulletin shortly after his company had upgraded its profit guidance for this financial year, foreshadowing underlying pre-tax profits of $325-340 million – up from its earlier forecast of $305-315 million.

A notable feature of the revised advice to the Australian Stock Exchange is that Flight Centre operations are profitable in all 10 countries in which it operates.

That includes its once problematic US venture which, after losing more than $60 million three years ago, went into the black last financial year, achieving an above-target profit.

On the basis of the latest guidance, representing a 12-17 per cent increase on Flight Centre’s record 2011/12 pre-tax profit of $290.4 million, its shares shot through the $40 mark and continue to hover thereabouts.

This is in stark contrast with Australia’s other publicly listed bricks and mortar travel retailer, JTG, whose share price is in the doldrums following lacklustre 2011/12 results.

But Turner displays no hubris over the comparative fortunes of the two companies. He sees supplier websites, not JTG, as Flight Centre’s major competitor and he wants to see JTG maintaining a strong High Street presence.

This is important to maintaining a vibrant bricks and mortar agency sector in Australia, he told travelBulletin.

While Flight Centre’s US and Canadian operations are trading in the black, Turner said they still have a long way to go before they achieve results that are comparable to its Australian and UK operations.

And he attributed this, in part, to an absence of visible agency outlets in the shopping strips and malls of North America.
“You can see there what happens if they (bricks and mortar outlets) disappear from the street,” he said.

He said that much of Flight Centre’s improved results in the US stem from corporate market successes – but experience in other countries showed a strong leisure market presence is important to leveraging corporate market penetration.

Responding to a question from travelBulletin, Turner said he would not be interested in acquiring one or more of the JTG franchised chains if they were up for sale – although he described them as “strong franchised models”.

Nor is he opposed to the franchise concept – albeit he said franchising requires “very tight, very careful” management and travel is “a tough thing to franchise”.

As he sees it, the advantage of franchising is that it is low risk and the disadvantage is that it is somewhat inflexible.

He insists that his own company’s Escape Travel franchising operation is “going well although it took a while” with about a dozen franchised outlets among its 130 shops.

“We are quite interested to talk (to potential franchisees),” he said.


FLT plans vertical integration into travel operations

FLIGHT Centre is looking for opportunities to diversify into areas of the travel industry beyond distribution, the company’s managing director Graham (Skroo) Turner has revealed.

Turner told travelBulletin the global chain is currently considering possible ventures in Bali, Fiji and Phuket.

However, while saying that Flight Centre is very much open to vertical integration into travel operations, he ruled out hotels.

He added that equity participation in established operations was one option open to the company, instancing its existing involvement in niche Europe touring specialist, UK-based Back-Roads Touring.
Flight Centre has a majority 66 per cent stake in Back-Roads. “We don’t run it but we do support it – as do other agents,” said Turner.

Meanwhile Turner has played down the prospect of Flight Centre expanding its global retail footprint into new international markets beyond the 10 countries in which it currently operates. “I wouldn’t rule it out but there is so much opportunity to grow our existing businesses,” he said.

Growing these operations is unlikely to involve developing new niche brands to join the likes of Escape Travel, Cruiseabout, Travel Associates and Student Flights that currently come under the Flight Centre umbrella. “We feel we have enough brands,” said Turner.

He identified Cruiseabout as “very successful” while its adventure travel outlets, operated in conjunction with Intrepid, “are going OK”.