Clear skies for service sector growth

Suggestions that employment growth in the services sector can make up for job losses in manufacturing sometimes prompt a claim that the services sector doesn’t create wealth, it consumes it: Flight Centre’s founder, Graham Turner, would disagree.

Flight Centre reported a 14 per cent rise in December-half underlying net profit to $104.7 million on Wednesday, and is one of those companies investors wish they had picked before it took off.

It floated in 1995 at a price that valued it at about $75 million. It’s valued at just under $5 billion today, and its five-year share price return is just over 1000 per cent – 1245 per cent including dividends that total more than $1 billion since listing.

It’s got demographics on its side right now: baby-boomers are booking more trips as they get to the end of the full employment arc. They are shoring it up against the rising tide of the internet, and the Australian dollar’s fall has so far also not caused major problems.

Flight Centre says it is converting itself from a travel agent to a travel retailer that manufactures its own travel deals and builds customer databases that allow more tightly targeted marketing, and it’s a classic ”clicks and mortar” retail business. Retail shop numbers rose by 8.2 per cent to 2643 last year.

It’s also a classic services sector company – one that receives income that has been generated elsewhere, but then builds something.

It builds stores, with an attendant economic multiplier effect. It is lifting its own job numbers as it expands. Turner’s estimate is that the head count rose by about 1000 last year to about 15,000.

Flight Centre’s shares traded slightly down after it reported its results but jumped in the final hour of trading to close 2 per cent higher at $50.82. Its shares were $31.50 a year ago, and while it has maintained its guidance for 8-to-12 per cent growth in full-year earnings before tax, investors might be forgiven for thinking that the moment to buy has passed.

It is worth noting, however, that questions about the durability of Flight Centre’s business model existed a year ago, too. The bricks-plus-clicks and mortar model still appears to be holding its own against internet travel and accommodation retailers (one of them, Australia’s Wotif group, reported an 18 per cent fall in December half earnings on Wednesday), and the 14 per cent profit rise and a 15.1 per cent jump in revenue in the December half both beat the 8.2 per cent rise in shop numbers.

The weaker Australian dollar is also not yet translating to a decline in overseas travel. The $A fell from US105.6¢ in April last year to US89.9¢ by year-end, but outbound departures rose by 14 per cent in the December half.

Flight Centre says flight numbers have risen by about 80 per cent in a decade. Competition among the airlines has intensified, ticket prices have fallen. The cuts Qantas is poised to announce are a response to the pressure – but for Flight Centre, higher flight numbers are a positive force.Ziggy figures it

NBN Co chairman Ziggy Switkowski and former Labor communications minister Stephen Conroy crossed swords on Tuesday over Switkowski’s comment at a Senate estimates committee hearing that $7 billion had been spent on ”3 per cent of the [NBN] build”, but it was an argument about the number of angels on a pin-head.

Switkowski got tripped up trying to make the point that present statistics are an unreliable pointer to the future of the project.

NBN fibre has passed just over 300,000 premises, and is intended to pass 10 million. That is the 3 per cent number that Switkowski used (the NBN has referred to it before), and a total of $7.3 billion had been sunk into the project by December 31. That obviously does not mean, however, that the project will cost $210 billion to build: the NBN’s own estimate in its update last December was $33 billion.

The NBN is big, but it’s still basically a construction project, and construction projects absorb money and time at the front end as their foundations are built.

By December 31, $3.5 billion had been sunk into a broadband ”transit network” that connects towns and cities. The transit network ”passes” no premises in a statistical sense, but it is the NBN’s spine. At December 31, it was 60 per cent complete, and 38,000 kilometres long.

Another $658 million had been spent on hardware for the satellite portion of the network that will service remote areas, including two satellites that are being built in California, and a ground station at Bourke in western New South Wales.

Backbone infrastructure for the wireless portion of the network that will be sandwiched by fibre and satellite was in place at a cost of $408 million, and 94 of a planned 121 points of interconnect for companies wanting to tap into the network had been completed. The NBN is behind its original schedule, but is far from only 3 per cent complete.

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