The big rise in Flight Centre profits do not just reflect an up-tick in the Australian economy. The rise is about old fashioned business strategies that still work in the digital age and about the power of a unique marketing network at a time when there is oversupply among the product producers (airlines).
Flight Centre has the best travel marketing network in the country and one of the best in the world. For a while though, it seemed that the internet was going to eclipse Flight Centre. But, chief executive Graham Turner stuck to his guns and his store network, plus the retailing system that goes with it. The stores – plus the diversification into business travel – turned out to be of enormous value in the slump which has now translated into higher profits as the economy turns up.
In the global financial crisis demand for airline tickets, particularly international journeys, slumped and international airlines in a desperate effort to clear their stock slashed prices – a malaise highlighted today by Japan Airlines filing for bankruptcy. But it was no good simply slashing prices unless you had a distribution network to sell the tickets.
Airlines had invested in the internet, but no airline had a physical distribution system to clear tickets, so Flight Centre’s importance to the airlines was suddenly underlined in Australia and the other countries where it operates.
Flight Centre used the lower prices to substantially lift its enquiry rate and although profits on tickets were reduced, Flight Centre expanded its customer base, turning an event that could have been a disaster into a winner. One of the big supporters of Flight Centre, Singapore Airlines, pulled out. Singapore did not have its own physical distribution system so the move backfired and other airlines snapped up big lumps of Singapore market share.
In his KGB interrogation, Graham Turner descried the Singapore withdrawal: “I think Singapore had some sort of a view that their customers were owned by them and that whether we supported them or not, they would still want to fly with Singapore and we have shown that’s clearly wrong. Their market share’s gone down considerably…we switched our business over to other carriers and the reality is that these days, whether you’re Qantas, Etihad or Emirates or Singapore, there are very good alternative products.
“Since we took that action against Singapore by not signing a preferred arrangement with them, it’s made it a lot easier to conclude our arrangements with other carriers.”
Very few chief executive’s in the world could talk about their suppliers that way.
By way of analogy, one of the reasons the major four banks are so powerful is their distribution systems, which is best illustrated by the Commonwealth Bank.
Every so often a bank chief will lift short-term profits by slashing branches. It’s always the wrong move in the longer term, however.
That underlying strength of Flight Centre caused it to take other decisions which have also enhanced the latest profit. Flight Centre did not cut back on its advertising in the downturn at a time when many travel agents panicked. The combination of those cheap airline tickets, the Flight Centre distribution and the maintained advertising spend has greatly enhanced the strength of the Flight Centre business and contributed to the profit rise.
But there is another aspect to Flight Centre which many Australian companies do not understand – especially big phone companies like Telstra and Optus. It’s called direct customer service. Not everyone needs it, but today’s offerings are often so complex that untrained staff can’t find their way through via electronic communication or call centres that are either international or badly organised locally.
Call centres can do a business damage, as illustrated over the holidays when one of the current affair shows played a response by an Optus international call centre operator.
The Flight Centre operation challenges all the conventional wisdom – very little internet distribution (Turner says the margins are too low); a branch distribution system with emphasis on people, plus low prices. The latest Flight Centre profit shows it works.
This article first appeared on Business Spectator.
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