Flight Center stock price drops following trade update

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The Flight Center Travel Group Ltd (ASX: FLT) the stock price is under pressure on Monday.

As of this writing, shares of the travel agent are down 4% at $16.30.

Why is the Flight Center stock price falling into the red?

Investors sold Flight Center stock price on Monday after the publication of a business update at the company’s annual general meeting.

According to the release, in the first four months of fiscal 2023, Flight Center’s total transaction value (TTV) increased 246% from the prior corresponding period to $6.8 billion.

And with its flat year-over-year revenue margin at 9.8%, Flight Center’s revenue grew at a similar rate of 248% to $667 million. It seems to have been slower than some in the market had expected due to lower margins.

Impacts on revenue margin

Management advised that Flight Center’s revenue margin is being negatively impacted by reduced upfront 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 deals with some carriers, it estimates that these changes negatively affect overall leisure revenue margins by approximately 1% in Australia.

Management said that while it believes the company’s “revenue margin will increase from its current level as the business cycle normalizes, it is expected to remain below pre-COVID levels in the near term.”

One bright spot, however, is that Flight Center revealed that its cost margin for the four months to October 31 was 10%, which is in line with the long-term target it had set. before COVID. Fortunately, he expects further improvements in the medium term, which he says will help offset the impacts of his lower revenue margin on his profit.

Speaking of which, Flight Center posted an underlying EBITDA profit of $61 million for the period. This represents an increase from an underlying EBITDA loss of $137 million in the same period last year.

And ultimately, the company broke even on an underlying pre-tax profit.

Outlook

Management said it continues to work towards an ambitious net margin target of 2% (profit before tax for 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. This means an additional EBITDA of $9 million to $29 million is expected to be generated in the remaining two months of the semester.

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