Flight Centre (ASX.FLT) has downgraded fiscal 2026 earnings guidance, with underlying pretax profit, or PBT, projected at $275 million-$295 million. The midpoint is down 13% from that of prior guidance.

Why it matters: Investors were well-braced for the downgrade, with management only last month flagging an $10 million PBT impact on the leisure unit for April 2026 due to Middle East tensions. The total impact for the June quarter is now expected to be AUD 50 million in PBT.

  • The disruptions could not have come at a worse time, heading into the seasonally busy period and with currency moving adversely. It is also a pity, as leisure was on track to post $200 million PBT in fiscal 2026 before April 2026—a result that would have been up 14% on fiscal 2025.
  • The question is whether the $50 million PBT hit will promptly snap back in fiscal 2027, now that a US-Iran peace deal has ostensibly been agreed. Or is it more realistic to assume a gradual recovery, as consumers recalibrate their travel plans amid still so much uncertainty?

The bottom line: We assume the latter and cut our fair value estimate on Flight Centre by 5% to $17.50. This reflects an average 8% reduction in our operating earnings forecasts, with our fiscal 2026 PBT estimate cut by 15% to $279 million, compounded by a $10 million currency hit.

  • Despite the downgrade, shares in the no-moat group remain attractive at current levels, trading 30% below our intrinsic assessment. The undervaluation is such that another $200 million buyback has been activated, following the completion of a similar amount only recently.
  • Critically, while the leisure unit is in a cyclical funk, the corporate unit’s resilience is continuing. In fact, we forecast corporate earnings to rise by double digits in fiscal 2026 and potentially enjoy further tailwinds, with a major Australian-based competitor in serious turmoil.

Flight Centre downgrades fiscal 2026 guidance but shares still undervalued

Flight Centre is one of the world’s biggest travel agents, but it still generates substantial earnings in Australia and New Zealand. Unrivalled scale and brand strength in the domestic travel market have delivered buying power and pricing flexibility that resulted in high returns on capital. Flight Centre has a strong network of services that has driven solid end-user traffic and bookings over the past 20 years, but we do not believe this is sufficient to protect the company against online competitors over the next 10 years.

Due to the discretionary nature of travel and high levels of operating leverage, earnings can be very volatile.

Flight Centre’s significant scale and extensive store network have made the firm a key distribution channel for travel suppliers and generated cost advantages that enable it to offer competitive prices. However, with the threat from online competitors increasing, we believe physical stores are likely to lose relevance in the long term.

From about 2005, facing a maturing domestic market, the company increased its focus on offshore markets, particularly the United Kingdom and the United States. The group made several offshore acquisitions during this period. The company is also increasingly focused on corporate travel, which is more structurally resilient than leisure. Corporate Travel earnings are now comparable with leisure travel earnings.

Bulls say

  • A strong balance sheet allows Flight Centre to take advantage of weakness in the economic cycle via opportunistic acquisitions or increasing market share via investment in marketing initiatives. It also enables the development of new products to more effectively address specific market segments.
  • Brand strength provides a potent underpinning for the blended online/physical store offering.
  • Travel agents are customer aggregators. As it is the largest agent in Australia, scale enables Flight Centre to negotiate favorable deals with travel providers.

Bears say

  • Domestic market success does not guarantee long-lived success of offshore expansion.
  • Occupancy and staff costs reduce the competitiveness of brick-and-mortar travel agents, such as Flight Centre, relative to online-only competitors who contend with much lower overheads. New generations of consumers are increasingly confident about shopping online, which reduces the cost of market entry for new players.
  • Exposure to consumer sentiment and discretionary spending results in volatile revenue. High levels of operating leverage exaggerate the earnings impact.