Riding out the darkest storm
HAVING seen his life’s work start to crumble and his personal wealth decimated in the early days of the COVID-19 pandemic this year, you’d have to forgive Flight Centre Managing Director Graham Turner for being a little glum. But quite to the contrary, Skroo appears to be accepting, pragmatic and even optimistic for the future of the travel giant that he co-founded 38 years ago, despite the ravages of coronavirus. Bruce Piper reports.
The story so far…
Like just about every travel and tourism business in the world, Flight Centre just isn’t going to look the same on the other side of the pandemic. The company was riding high right up until March this year, reporting record levels of sales and targeting earnings of as much as $350 million. As the pandemic closed in, that was revised downwards by $50 million at the end of February, and then another two weeks later it became clear that the travel world was never going to be the same again.
Turner was actually in London in those first two weeks of March, arriving back home fortuitously after visiting UK-based family on Thursday 12 March — about 24 hours before Prime Minister Scott Morrison raised the global travel warning for Australians to the second-highest “reconsider your need to travel” level. “We quickly realised this was getting serious,” he said, with Flight Centre’s then Chief Operating Officer, Melanie Waters-Ryan, moving into action to set up a war room, where the executive team worked around the clock, conducting sessions twice a day to discuss what needed to be done with the leaders of Flight Centre’s businesses in 23 countries around the world. “We had to work out what we had to do and what the consequences would be,” Turner told travelBulletin.
After first suspending profit guidance on that Black Friday 13 March, it only took until the following Wednesday, as travel restrictions were increased again to a mandatory Do Not Travel warning, for Flight Centre to announce an urgent business review, saying it would “hold discussions with landlords, suppliers, vendors, insurers and banks on ways to manage the financial impact of a precipitous drop in travel activity in the near term”. The rapidly devolving situation meant it very soon became apparent that in order to survive, the business would need to go to the markets to raise capital. But even then “we really didn’t think it would last that long,” he said.
“We’ve been in business for a long time, faced many trials and tribulations over the years, and you kind of get used to it. You’ve got to be pragmatic and accept the situation.”
Looking back Turner is surprisingly sanguine about the collapse of the world as we knew it, but it’s unlikely that the rest of his executive team were so relaxed, as the company suspended trading in its shares on Thursday 19 March, cancelled the payment of an interim dividend, halved executive salaries and pleaded with the Government for assistance. Clearly the scramble was on to get some cash into the business, but it took more than a week for the full plan to be laid out, including thousands of job cuts and bringing forward the closure of some underperforming stores. And clearly that didn’t end up being enough to satisfy investors, with the shares remaining suspended for a total of two weeks before details of a $700 million equity capital raising were announced alongside a raft of additional cost saving initiatives — including the closure of more than half of its global leisure retail outlets. The company’s shares, which had been trading at more than $55 over the preceding 12 months, returned to trading on 7 April at just $8.92. Turner drily noted that the capital raising was “with quite a bit of dilution” — particularly since he and his fellow co-founders and major shareholders didn’t put any of their own cash in.
Clearly Flight Centre is not a cheap business to run. Prior to the pandemic’s onset, monthly costs amounted to an eye-watering $230 million. The radical surgery undertaken this year has seen this roughly quartered to between $60 million and $70 million a month — still not an inconsiderable amount. But Turner told travelBulletin “there’s no use coming out of the other side of this if you don’t have assets intact to make the most of the situation. Our core assets are our people, and we want to keep as many as possible. There’s also real estate, and technology development that’s going to be needed after this ends — particularly in corporate but also for the leisure operations,” he said. Things have stabilised, and with every announcement of a vaccine or border breakthrough the company’s share price climbs and has now recovered to more than double that low point back in April.
And what comes next?
With Government support in the form of JobKeeper set to run out at the end of March 2021, Turner is confident all of the major staff cuts within Flight Centre are over. The company is heavily focusing on its corporate businesses across the world while international borders are closed, with the CEO making pains to stress that even pre-COVID about 55% of Flight Centre’s profits were generated from its business travel operations. He said at current rates, as domestic borders open and economic activity picks up the company was looking at perhaps breaking even within its corporate division as soon as May 2021, while the timeline for a return to profitability in leisure is looking more like the second half of 2021. “But it is in the lap of the gods. We are so dependent on the actions of governments around the world, as well as the trajectory of any outbreaks and the availability of vaccines,” Turner said.
What will Flight Centre’s brave new world look like? Well for a start, across Australia there will be many less of those treasured red and white stores. Before the pandemic hit Flight Centre had about 950 locations across the country, and under current plans that will end up being around 420 — something like 40% of the previous overall footprint. And in fact slightly less than 300 of them are likely to carry the Flight Centre branding, with the rest being Travel Associates, Corporate Traveller or other Flight Centre brands. On the brand front, there won’t be as many as before, with cievents, Universal Traveller/Student Flights, cievents and Infinity Holidays all COVID-19 casualties.
With such massive changes, Turner clearly has a sense of regret about some of the choices that were made. “Did we cut too hard? Well we had to make tough decisions. It’s very hard to know whether we did go too hard, or did we get it about right. Ask me in a couple of years. We have kept the biggest and best shops, and we believe we can get back most of the revenue as the industry recovers,” he said. “But our shops are going to have to be more efficient.” Turner said the closures had been carefully planned, with about 96% of Flight Centre customers still within 5km of a retail outlet, and regional offices still in place. “In a lot of shopping centres, we had two, three or even four Flight Centre shops, we’ve had to rationalise that. But we’ve kept the best and largest ones, and we can run a number of teams from many of the locations,” he noted.
There’s been some speculation about how keen suppliers will be to support a significantly smaller Flight Centre retail network. But Turner does not appear concerned about that at all, “Suppliers will support you if you give them the business. Supply chains need distribution, and we will still be able to offer them that,” he said. And while digital distribution and call centres will comprise an increasing share of Flight Centre’s sales mix, “in the end we will always remain a people-driven enterprise. There will be fewer shops but they will be more productive,” he said.
Also in the mix is Flight Centre’s increasing presence in the home-based or independent consultant sector. But “we won’t have ridiculous numbers of them, it will be a combination,” Turner said. Flight Centre clearly also has no plans at all to move to a service fee model for its consultants. “In some areas we do charge, depending on what it is, and of course corporate is fee-based, but I think overall I can’t see the supplier commission model changing dramatically. Suppliers need distribution, and in the end, whether it’s professional fees or commission, ultimately the customers pay for distribution. It’s also very important to be price competitive with your supply chain,” he noted — and while suppliers generally don’t undercut their resellers, a service fee model would make purchasing through Flight Centre more expensive than going direct, and that’s clearly not something Skroo is ever going to advocate.
Back to the future?
Can Flight Centre return to its glory days of $20 billion-plus TTV and making up to a million dollars in profit in a day? Skroo is confident that will happen, with official forecasts from the business predicting a recovery in 2024/25. “But I believe leisure will actually come back a bit earlier than that,” he said. On the other hand, the way businesses operate has been significantly impacted by COVID-19, with new ways of working and technology meaning Turner is only expecting corporate business to return to about 85% of its former levels. “But overall, in terms of revenue I reckon we will be back to pre-COVID TTV by 2023/24, combining both leisure and corporate,” he said.
The other question surrounding Flight Centre is its brand reputation, with a number of activist Facebook groups strident in their criticism of the company and particularly the way it handled refunds due to cancellations. Turner noted that so far about $1.2 billion had been returned to customers. “I’m the first to admit that in the early stages of the pandemic we were not well organised,” he said.
“Nobody’s perfect, we’re not an organisation that was built to efficiently issue refunds, because there used to be so few of them.”
“But once we got organised we have gotten quite good,” he said, adding that in some cases suppliers had not refunded Flight Centre yet either.
The newly well-oiled refund machine was still getting a workout, Turner added, with the short-lived snap closure of South Australia last month “keeping us in practice,” he said.
While the refund situation has led some to call for a return to increased regulation of the industry, Turner says that is not the answer. “We spent 30 years getting rid of the Travel Compensation Fund, which was very expensive and really didn’t work well at all, particularly with the rise of overseas players coming into the market. Bringing back more regulation isn’t the answer. This is an incredibly unprecedented situation, we won’t see it again in my lifetime,” he said. “And having gone through it once, if it does happen again we will be much better prepared.”
And what of AFTA?
Flight Centre is a significant contributor to the Australian Federation of Travel Agents, holding two positions on the AFTA Board including Turner himself as one of the Vice-Chairs. And despite the massive changes that have occurred there this year, with the abrupt departure of former CEO Jayson Westbury and the recently successful efforts to obtain an industry-specific support package, Skroo clearly believes the Federation has a key role to play going forward.
As well as the current work being undertaken in Canberra by AFTA’s new chief, Darren Rudd, Turner said there were other issues on the horizon too — such as ensuring that all industry players pay GST on domestic products, particularly in the current environment with international borders closed. “It’s really important in terms of helping the local industry compete, but also in terms of government revenue. At the moment it’s mostly overseas metasearch providers who are slipping through the net, but it’s an important loophole to close,” he said.
“It is in the interests of the industry to work together,” he added, noting some of his own recent joint lobbying efforts alongside Helloworld CEO Andrew Burnes and Corporate Travel Management chief Jamie Pherous. “Survival of bricks and mortar travel agents is good for everyone — including consumers. Look at the situation in the USA, where it is really hard to find a travel agent because of the decreased footprint. Everything has gone online and that just doesn’t give as good a customer experience,” he said.
“The more bricks and mortar travel agents who prosper and survive, and continue to offer great service to their customers, the better.”