2003

Address to UBS Warburg Conference by Norman Fussell

Wednesday, 9 April 2003

History

Flight Centre can trace its roots back 30 years to an investment of £400 pounds made by two young Queensland vets, Graham "Skroo" Turner and Geoff "Spy" Lomas. In 1973, "Skroo", who is of course Flight Centre Limited's managing director, and "Spy", who also remains with the company today, spent £400 pounds on an ageing bus and started operating budget double-decker bus trips around Europe, North Africa and Asia. After an eventful start, that company, Top Deck Travel, grew quickly and it had a fleet of about 80 buses by the early 1980s, when Skroo returned to Australia and established a new area of business, a retail travel agency specialising in cut-price international airfares. The first of these agencies opened in Sydney in 1981. Five years later, Skroo's personal involvement with Top Deck ended, when he and his colleagues sold the business and devoted their full attention to a growing network of retail stores that came together under the Flight Centre umbrella that same year. Flight Centre's services quickly proved popular with the Australian travelling public and the company as a whole proved similarly popular with investors nine years later when it floated on the Australian Stock Exchange at an issue price of just 95 cents a share. Today the company's share price is $18.20 and its market capitalisation has increased from $74 million to $1.7 billion.

Company now

Although we operate under a proven business model, our rapid rate of growth here and overseas means our operation is constantly changing in terms of both size and structure. After starting out with just one store in Sydney 22 years ago, Flight Centre Limited is today Australasia's largest and most successful retail travel agency group. We have more than 1000 retail outlets in seven countries and, in terms of store numbers, have more than doubled in size since October 1999, when we opened our 500th retail store in the Brisbane suburb of New Farm. By the start of 2003-2004, we will have about 1200 stores and other businesses in our countries of operation. More than half of these will be in Australia, but that percentage will obviously decrease as our expansion offshore continues. Through our stable of specialist leisure, events and corporate brands, we provide a complete travel service for holidaymakers and business travellers in Australia, New Zealand, the United States, Canada, the United Kingdom, South Africa and Hong Kong. These brands include Flight Centre, Great Holiday Escape, Student Flights, Overseas Working Holidays, Shopper Travel, Corporate Traveller, SBT, ITG, CIM, CIS, Campus Travel, Cruiseabout, American International Travel Limited, Britannic Travel Limited and the Travel Associates stores. Flight Centre is, of course, our best known and most successful brand. Flight Centre consultants provide their customers with a one-stop service, highlighted by Australia's "lowest airfares guaranteed". This guarantee is a genuine promise to customers and means Flight Centre consultants will BEAT any genuine quoted airfare price. This includes fares offered on the internet, a fact that we have aggressively promoted in recent marketing campaigns. In the corporate arena, Corporate Traveller is our largest brand and is now represented in all of our international operations. ITG, American International Travel and Britannic Travel are relatively recent corporate acquisitions, while Campus Travel is a new business tailored specifically for the travel needs of Australian universities. In addition, our ownership of CIM, CIS and The Events Centre, a business that we welcomed as part of the ITG acquisition last year, makes Flight Centre one of Australia's leading conference organisers. On top of this broad range of specialist leisure and corporate travel brands, Flight Centre Limited operates a number of other businesses. These include Ticket Centre, our in-house ticketer, wholesaler Infinity Holidays, VFR, a brand that provides consultants with non-mainstream or specialist airfare product, and Fanatics Sports Tours, a business that offers affordable worldwide sports and party tours for 18 to 35 year olds. Ticket Centre is one of our great success stories and continues to perform strongly in all countries. This business performs the important function of formatting, issuing and managing all of Flight Centre Limited's airline contracts, in addition to managing the distribution of information about price and ticket rule changes.

Our Business Model and Philosophies

Diversity of brands is clearly one of Flight Centre Limited's great strengths. Undoubtedly, another key to Flight Centre Limited's ongoing success is its unique business model and philosophies. We strongly believe that for our company to survive, grow and prosper for the next 100 years and beyond, we must clearly define and live by our purpose. We must protect and further develop our company culture and philosophies. Our culture must be robust and independent, able to outlive our current and future leaders. Our purpose, as a company, is... "to open up the world for those who want to see" For people in our company, this means our purpose is to open up their world by helping them develop professionally and personally and, for customers, to open up their world through the exciting medium of well organised and targeted travel experiences. There are ten clear areas that underpin our philosophies and culture. These relate to; * Our people * Our customers * Profit * Ownership * Incentives * Brightness of Future * Standard Systems - One Best Way * Our "lean" operational structure * Taking responsibility * And Egalitarianism and unity in the workplace Egalitarianism is one of the key philosophies that distinguishes us from other companies. In our company, we believe that every individual should have equal privileges. We will never have separate offices, receptionists or secretaries. Promotion from within will always be our first choice. We believe that work should be challenging and fun for everyone. Within our company there is no "them and us". We are all going forward together. Our structure is based on Families (or teams), Villages - 4-5 geographical teams that work supporting each other - and Tribes (or areas). All disciplines are set up as corporatised businesses or profit centres and, essentially, operate under this structure. This creates a small business culture and a real feeling of ownership.

People

Much of the credit for our success, both recently and historically, must go to our people. I have often stated that people are our most important asset and that will continue to be the case. Flight Centre Limited is extremely fortunate to have a remarkable collection of people and teams at all levels of the business. In their daily activities, they display an incredible commitment to the company and to their customers. They are a source of great pride and have performed remarkably in recent times in particular in the most challenging of environments. We also take pride the strength and capabilities of our leadership teams both within Australia and overseas and, through our ongoing training programs, invest significant resources into identifying and nurturing the next generation leaders.

Best Employer

Flight Centre Limited actively strives to create a challenging and stimulating environment for its people. This has undoubtedly contributed to the company's recognition in a number of Employment awards recently both here and overseas. At home, Flight Centre Limited has maintained its position as the nation's premier workplace, being crowned the Best Employer to Work for in Australia for the second year in a row. This award was based on feedback from our people and followed similar results for the company's New Zealand operation which in January claimed the country's Best Employer title for businesses with more than 400 staff. In addition, Flight Centre UK recently finished third in a poll of leading workplaces, picking up the Best Leadership award, and the company performed strongly in Canada with its Toronto-based operation being named the country's third-best company to work for and its Vancouver operation claiming fourth spot in British Columbia. In South Africa, Flight Centre Limited was named best travel company and finished 11th overall in the country's best employer voting. These strong results on a global scale indicate that our innovation and development programs are paying dividends. As a company we place strong emphasis on developing our people's abilities, fostering leadership skills and identifying future leaders. Our philosophy of cultivating personal and career development means we give a strong degree of empowerment and trust to our people, providing them with a productive environment and an opportunity to develop and demonstrate their abilities. We also offer a number of special extras for our people including inhouse financial planning and health and fitness services. These services have proven extremely popular and, no doubt, have assisted our people in achieving their personal and professional goals.

Results

In terms of financial results, Flight Centre Limited has consistently achieved strong growth. If we look back to the ten fiscal years between 1992-1993 and 2001-2002, we see that... * revenue increased from $393 million to $3.6 billion (an average of 29% growth per year), * profit before tax increased from $6.2 million to $90.5 million (avg 36% growth per year) * profit after tax increased from $2.9 million to $62 million (avg 41% growth per year) * and shop numbers increased from 135 to 832 (avg 21% growth per year) Flight Centre Limited has now shifted to quarterly reporting to the Australian Stock Exchange. In our most recent result announcement, our figures for the first half of the 2002-2003 fiscal year, we revealed that we achieved record gross sales receipts in the six months to December 31, 2002. Gross sales for the period reached $2.14 billion, a 37% increase on the corresponding half in 2001-2002 and a record sales result for any half-year. Pre tax profit for the half increased 47% to $44.94 million, while profit after tax jumped 49% to $31.11 million. The company opened 140 new stores in the six months, giving it 972 shops and almost 5000 employees at the end of the 2002 calendar year. Flight Centre Limited also recorded significant growth in the three months to December 31, 2002, in comparison to the previous corresponding quarter. Gross sales in the second quarter increased 40% to $1.05 billion, pre tax profit increased 36% to $22.54 million and profit after tax jumped 38% to $15.61 million. Basic earnings per share for the half year were 35.3 cents. The company declared a fully franked dividend of 18.5 cents a share, a 48% increase on the 12.5 cent dividend from the corresponding half year.

War and SARS

The solid first half results have helped the company establish a sound base for the full year, but recent world events mean it is impossible to predict our ability to maintain our traditional trading patterns in the second six months of the year. Having said that, the company has successfully weathered significant events in the past and can draw on this invaluable experience during tough times. The company has outstanding people, a strong leadership team, a sound balance sheet, an innovative business model and proven strategies that have traditionally helped it achieve its growth goals, even in challenging environments. With its spread of business geographically around the world, coupled with the growth and diversity in its brands, the company has enhanced its capability to perform in the face of adversity. Of course, Flight Centre Limited's results clearly show that it has done just that in the past couple of years, despite airline failures and terrorism.

Airlines

In Australia, we are fortunate to be working closely with two strong airlines in Qantas and Virgin Blue. In New Zealand we are also the biggest provider of sales to Air New Zealand. It is fundamental to our business that we have strong and successful airlines. When airlines are weak, they tend to do irrational things that are often detrimental to the travelling public. As a company, we continue to be surprised by moves by struggling overseas carriers to reduce or eliminate commission payments to retail travel agents. This business model, which is often described as "low cost", has never really succeeded and has often been reversed. Surely, airlines that are experiencing tough times should be using all available avenues to fill their planes, rather than seeking to remove an important element like the retail travel agent from the distribution chain. We support competition in the sky and will continue to work closely with airlines that value the vast distribution network our stores provide. Future for Flight Centre Limited Flight Centre's goal for the future is very clear and simple - a continuation of strong growth and profit in all areas of business. When our future growth is discussed, attention often focuses on our growth plans in the large UK and American markets. But there is also considerable opportunities for growth in our established markets. We have by no means reached market saturation in Australia and New Zealand and there are still significant opportunities for growth in key areas like Sydney.

Business Travel

Business travel is likely to play an increasingly important role in our future. While Flight Centre Limited is best known for its vast leisure travel operations, the company has recently made many major advances in the area of corporate travel. The company has significantly bolstered its organic growth by adding a string of strategic acquisitions, including ITG, AIT and Britannic Travel. Flight Centre Limited has two broad thrusts in targeting profits through acquisitions. The first is to look at opportunities that provide a step change in growth of our total business or which fill a niche in our total business which otherwise would involve a long period of development. The second is the acquisition of, in most cases, small and focussed businesses that add product or sales outlets to our business. ITG, American International Travel and Britannic Travel are clear examples of Flight Centre Limited's acquisition strategy at work. In the cases of ITG and AIT, the new businesses have delivered tangible benefits to Flight Centre Limited in a fraction of the time and for a fraction of the cost of organic growth into these countries or market sectors. The Britannic deal was only completed last month, so it would be premature to make any major predictions. Having said that, the Britannic acquisition clearly reaffirms Flight Centre Limited's position as an emerging presence in the global business travel market. The deal has transformed the United Kingdom into one of Flight Centre Limited's largest markets, with annual sales from Britannic and the company's existing businesses likely to be in the order of $700 million. We already have an expanding business travel operation focussing on small to medium sized companies in the UK, but it would have taken years of organic growth and major financial investment to achieve Britannic's results, size and market penetration. We view Britannic as an attractive fit with Flight Centre's expanding corporate travel businesses, which have traditionally focussed on small to medium sized corporate travel accounts. The addition of Britannic provides us with immediate scale in the UK market, a strong network of branches, a high-end client base and an experienced management team. Overseas As mentioned previously, the Britannic deal makes Flight Centre a significant player in the United Kingdom corporate travel market. The company has also boosted its presence in the United Kingdom recently through generic expansion. By the start of the 2003-2004 fiscal year, we will have almost 100 stores and support businesses in the UK, including a number of outlets outside of London. In North America, this year we have opened a new store in a second US city, Chicago, while expansion in Canada continues, with the company now pushing into Alberta and Quebec. Business growth also continues in New Zealand, South Africa and Australia. In our newest international market, Hong Kong, our aim is to grow the business and we now have a dedicated sales presence there actively targeting new corporate travel accounts for the first time.

Technology

Each year, Flight Centre invests significant resources and capital in the area of technology. In fact, the Information Technology area, along with the fit-out of new shops, accounted for the major area of capital expenditure during the 2001-2002 fiscal year. This expenditure is delivering tangible benefits to the company and its customers. In Lumina technology, we own one of the best business travel management tools in the world. We have also established a profitable online travel business in Flight Centre Direct and a website in flightcentre.com that is generating significant customer enquiry. Flight Centre is constantly improving its website and, as a result, is seeing a large increase in business being done by telephone and email. As a company, we are extremely well placed to deliver our customers with the best possible service now and into the future. This service can be provided in any number of ways, with our global shop network, the telephone and via the internet being just some of the possibilities. Looking ahead, we believe we are as well placed as any travel company in the world to deliver the best possible service to the travelling public.

Strategy for tough times

Challenges continue to arise and no doubt there will be new hurdles in the future. Given the recent uncertainty in the world, it is impossible to predict just what these challenges might be. In the long and short term, we will continue our expansion and to aggressively market our services to holidaymakers and business travellers. FC will always strive to improve customer service and is working from a very competitive base.