Following a stronger than expected rebound in global travel, analysts have upgraded earnings forecasts for Flight Centre, though capacity constraints across the global travel industry could delay the company’s return to profitability.

In a trading update last Monday, Flight Centre (FLT) upgraded its fiscal year 2022 guidance, and has narrowed its forecast loss. The company now forecasts a underlying earnings loss of between $180 million to $190 million, down from $195 million to $225 million because of a rebound in travel demand globally. Higher ticket prices have helped to boost cash flows, with the limited supply of flights pushing up prices and revenue. The company report full-year results on 25 August.

Morningstar director Brian Han expects Flight Centre to return to pre-pandemic levels of profit in fiscal 2024 but won’t bring forward the date on account of a single good report given the closures and restrictions possible from further outbreaks.

“We see no reasons to amend these forecasts to account for the current better-than-expected turnaround momentum, one that could swing quickly as Covid-19 concerns mutate with economic fears,” says Han, who has an $18 fair value on the stock, which closed on Friday at $17.22.

He says the company’s corporate segment likely drove the upgrade, with many business travellers keen to get out of home and into the air. Han forecasts Flight Centre to post earnings before interest, taxation and depreciation (EBIDTA) of $282 million in fiscal 2023, before returning to the pre-pandemic level of $423 million the following year.

Strong headwinds ahead

According to several analysts, supply constraints and rising wage costs are likely to cap earnings for Fight Centre and the travel industry through the remainder of the year and into the next. Almost all US, European and Australian airlines have announced cancellations of flights in recent weeks, with key shortages in airline and airport ground staff forcing airlines and airports to reduce flight numbers.

Britain's busiest airport Heathrow capped daily passenger numbers for the summer at 100,000 passengers in July, as it tries to limit travel chaos caused by staff shortages. London's Gatwick also limited daily flight numbers and Amsterdam's main airport Schiphol cut its maximum daily passenger numbers by 13,500.

UBS suggests these constraints on flight supply will slow recovery momentum at Flight Centre. All the European airlines under UBS’s coverage have reduced schedules except for Ryanair this European summer. Similarly, US airlines have also experienced capacity cuts to varying degrees.

Locally, Qantas has announced a 15% capacity cuts for the September quarter and 10% cuts from October through March 2023, according to UBS.

“In our view labour inflation and [flight] scarcity is likely to remain a headwind for the industry going into FY23,” said a recent UBS research note. UBS forecast a net profit after tax (NPAT) of $83 million in 2022-23, up from a forecast loss of $253 million in 2021-22. The investment bank has a $17.62 target price on the stock.

Morningstar’s Han also forecasts a return to net profit of $115.2 million in 2022-23, up from a loss of $230.5 million in 2021-22.

Of the 16 analysts surveyed in July, only three have a ‘buy’ or ‘overweight’ rating on Australia’s biggest travel agency while 12 have a ‘hold’ or ‘sell’ rating, according to data from the Wall Street Journal.

Traffic still well down in Sydney

Locally, airports in Sydney and Melbourne were overwhelmed by passenger numbers during the July school holidays, though domestic travel has shown a greater rebound than international travel.

Total passenger traffic in June 2022 was 2.5 million, up from 990,000 this time last year but down 24.6% on the corresponding period in 2019.

Sydney Airport CEO Geoff Culbert said the increasing demand for travel is encouraging “but it’s clearly creating challenges for an industry that is still trying to rebuild operationally.”

Given these restrictions on passenger number, UBS concludes Flight Centre faces many battles still.

“While industry feedback and peer commentary suggests underlying demand is currently strong, reopening capacity across the industry remains somewhat bottlenecked, predominantly driven by labour constraints,” says the UBS research note.