Webjet chief says discounted airline prices here to stay, announces 37% profit increase

Webjet chief executive David Clarke believes the retail sector has permanently transformed into a culture of discounts and bargains, saying successful operators will need to learn how to survive by catering to customers who only buy products on sale.

The comments come as the company reported a 37% annual increase in net profit after tax to $10.5 million, with Clarke telling SmartCompany today that cheaper airline tickets have little impact on the company’s overall financial performance.

Airline ticket prices have continued to remain extremely low, especially for international trips, even after the impact of the global financial crisis and as the economy recovers. Clarke says while a ticket between Melbourne and the US might have been $1,400 a few years ago, that price was cut to $900 during the GFC and now the same trip goes for $800.

“We thought prices would definitely go up, and they haven’t. In one sense that doesn’t matter to us because our income isn’t based on a ticket price, it’s service driven, but it indicates the discretionary spending market is not robust at all.”

“There is a sensitivity in the general consumer market, so we are being cautious in that regard, but downward prices are very good for us because consumers are hunting for those bargains.”

But Clarke doesn’t believe this is a phase that will pass quickly. Instead, he says the entire scope of the retail industry has changed forever and businesses need to adapt.

“People are now going to wait for a sale, and then they will buy. The market has just been saturated with sales, and look at the big retail groups like David Jones and Harvey Norman, they’re all experiencing it. You might think, what’s the circuit breaker for this behaviour? But there isn’t one.”

“I think this is really it, this is the market now. I don’t see any factor that will change this phenomenon. The peak in retail spending will be generated in sales. A lot of this has to do with the internet as well, but I really think this is the way companies need to operate now.”

Yesterday Webjet reported TTV was up 30% to $504 million, with total revenue also up 29% to $38.9 million. EBITDA gained 41% to $13.1 million while basic EPS gained 36% to $13.93 million.

Clarke noted in the company’s report the emphasis on deal-finding has allowed the company to secure solid results, given bargain-hunters will be looking for the cheapest flights available. “It is in that context we consider Webjet’s strategic emphasis on deal finding to be particularly relevant,” he said.

Clarke says this increased need for bargain-hunting suits the company just fine, as it operates on a service-fee model instead of taking a commission of the ticket price.

“Our total income, the vast majority of it comes from service fees we charge the customers. The remaining income is a mixture of marketing support, insurance income, hotel income, and a very small amount comes from the airline tickets themselves.”

“Our business is scalable, and so as we grow we’re able to counter that by making sure we don’t have any cost explosions. We operate on an economy of scale, that’s how we’ve managed our growth.”

A heavy marketing push has also helped the company over the past year, Clarke says, as he wants to take as much advantage of the thirst for discounts as he can.

“We’ve been very aggressive in marketing, with a heavy push there. We want to make sure we’re using the environment in our favour, and so we’re just putting ourselves out there as much as we can.”

Part of that marketing push will involve the launch of a comprehensive Webjet iPhone app, to be released to the App Store next month.

As for the rest of the year, Clarke said in the annual report it is still too early to assess expectations for the next financial year, given economic conditions are still uncertain.

“The macro outlook of economic activity remains unclear and although Australia has so far weathered macro conditions better than many major countries, interest rates have increased and there are signs of inflation pressures on utility costs, property and services,” he said.

However, there is no end in sight to the discounting – and that’s the way Clarke wants it.

“Some airlines will do better than others, but it’s pretty tough for them. Two years ago, a ticket to America cost $1,400. Now it costs about $800 – that says it all.”