Paul McIntyre: Travel firm takes flight to private sector

It looks like the busy beavers at private equity firm Pacific Equity Partners (PEP) have got a better run taking one-time Australian stockmarket darling Flight Centre out of public hands than they've had with The Warehouse.

At Flight Centre's annual general meeting on Thursday there was little resistance to the A$1.6 billion ($1.85 billion) privatisation plan for the troubled travel group.

Flight Centre's roots can be traced back to chief executive Graham Turner's ritual British trek for Australians in the 1970s which resulted in him founding Top Deck Travel, running tours out of London on double-decker busses equipped with sleeping and cooking facilities.

Until 2003 Flight Centre was a very hot stock. In 1994 it was ranked 21 in BRW's top 500 private companies with A$600 million in turnover.

A year later its shares listed at A95c and went ballistic for seven years, ultimately topping A$28.

But Flight Centre hit earth in 2004-05 when it reported its first year of declining profits since its float.

A concerted effort by airlines to slash agency commissions in 2004 and the continuing rise of internet-based travel bookings hit the business hard and shareholders have been on a roller coaster over the past year.

The stock hovered around A$14 this time last year, subsequently dived to A$9.06 in May and recovered to A$13.65 just before the current buyback offer of A$17.20 per share.

Like a number of listed firms of late, it's been a private equity player which has swooped in with a fistful of dollars and a plan to take the company out of the public spotlight for a workover.

Retail group Colorado and healthcare firm DCA are close to completing similar privatisations and in the past two weeks, for different reasons, we've seen major media sector moves involving private equity firms - James Packer's carve-up of PBL's media assets with CVC Asia Pacific and this week's plans for a private equity-assisted buyback of APN News & Media by Tony O'Reilly are two.

Retail giant Coles Myer, which has rejected a A$16 billion takeover by US private equity player KKR, is another example.

For Flight Centre, the buyback means it can cut, slash and cannibalise its traditional business for the next few years and not have investors screaming. And cannibalise is precisely what is going to happen.

With more than 1500 shops in Australia, Europe and North America, Flight Centre's top brass have been extremely reluctant to develop a serious online offering for fear of damaging its retail shops.

It's yet another example of how the internet has forced a strong and booming business to reinvent itself in less than five years. Because Flight Centre was trying to protect its bricks and mortar assets, other online players like US group Galileo, wotif.com, Best Flights and local player Webjet have done what Flight Centre should have.

And in the case of Webjet, trading activity rose sharply as news of Flight Centre's buyback hit the streets.

There was probably some speculative buying on Webjet as Flight Centre looks at options to ramp-up its online strategy.

"The internet does take the cream off your results," Turner conceded this week. People would always head to travel agents for expensive long-haul flights and packages, he argued, but they were increasingly using the internet for cheap short-haul deals.

If Flight Centre stayed public, fixing its distribution and product woes would involve more hits to profits in the short-term and the market would simply punish the share price.

"Being public has been a negative for us in terms of morale and our people," Turner said. "I think a private structure will help that in the next two or three years."

PEP and a few others will be making sure of it.

Paul McIntyre is a Sydney journalist