Flight Centre is cutting 800 stores and raising $700 million to help it ride out a bleak scenario of the coronavirus throttling the travel industry for 18 months.
The cuts eliminate almost half the Flight Centre stores catering to leisure travellers and are part of the strategy to reduce costs by almost 70 per cent at the Brisbane-based travel agency.
But Monday's move also causes pain as Flight Centre’s existing shareholdings are diluted in a massive capital raising. Risks remain, too, including uncertainty about how long the pandemic will linger.
Flight Centre is among companies, including peer Webjet, slashing costs and raising funds after the virus triggered mass shutdowns of borders and economies.
The shutdowns mean Flight Centre's total transaction value – representing all money flows such as cash transferred to airlines – in March fell to as low as 20 per cent of normal levels.
To combat the impact, Flight Centre wants to reduce costs from $227 million monthly to $65 million.
It has already stood down or made redundant almost 6000 staff, dumped marketing spending and rejigged landlord arrangements.
Flight Centre chief executive Graham "Skroo" Turner flagged deeper staff hits, depending on government packages globally such as Australia's JobKeeper program.
"Property and people costs will have to come down more," he told The Australian Financial Review.
The company last month flagged closing 35 per cent of stores globally. Now the target is 50 per cent. That latest figure includes 40 per cent of Australian stores, or 426 outlets including brands such as Travel Associates.
Mr Turner said this would leave Flight Centre "with the right number of larger stores with more people in them in better locations".
The company is also raising $282 million through a placement of shares with institutions and $419 million via a non-renounceable entitlement offer to existing investors, as flagged in the Financial Review's Street Talk column. Macquarie Capital and UBS are underwriting the offer to pick up any unsold shares.
"We're confident that this will, even with almost no income over the next 12 to 18 months, this'll give us enough money to be able to take advantage when travel restrictions are lifted," Mr Turner said.
Flight Centre is raising cash at $7.20 a share, a 27.3 per cent cut to the last traded share price of $9.91.
The company’s own disclosure flags continuing risks including the pandemic’s squeeze on economies impacting travel spending, fallout from cancellation policies and the hurt to branding from cutting stores.
Risk of no revenue
Carter Bar Securities analyst Peter Drew said positives from the raising include Flight Centre potentially running for 18 months with almost no revenue. He expected income to be "substantially reduced", but not so that it is too bleak.
The company could also cut its cost base on a more permanent basis, he said.
The downside with the capital raising was dilution, as shares on issue would nearly double. This would happen at a company that Mr Drew said had managed to avoid raisings since 2007.
"That’s the reality," he said. "It’s an essential capital raising."
Mr Drew said future questions included whether Flight Centre had raised too much money. But the worst case would be to raise too little now and have to return to the market, he said.
The dilution comes with almost 40 per cent of the new equity stemming from the institutional placement, involving the use of temporary rules relaxing limits on fundraising.
The other entitlement offer is 1 share for every 1.74 shares investors already own. Company founders – Mr Turner, Bill James and Geoff Harris, who account for almost 42 per cent of existing stock – are taking up $25 million in their share entitlement, below their theoretical limit of almost $175 million.
Mr Turner pointed out the founders "are heavily diluted as well".
"I’m afraid that's what happens when you want to do a [large] share placement," he said. "It’s part of our long-term survival strategy. There’s not a lot of choice really."
Flight Centre’s lenders are also bumping up loan facilities by $200 million and will waive covenant testing for the June and December periods.
Citigroup analyst Bryan Raymond said Flight Centre's overall liquidity would be about $1.98 billion, but risks lay in factors such as debtors not being able to pay up cash to Flight Centre.
"Given the scale of the crisis ... we see elevated risk around the magnitude of debtors" in the retail and corporate arms worth about $543 million, and in bonuses for mass sales worth about $330 million, he said.
Mr Turner said the company was generally confident in collecting debts.
The pandemic was the toughest challenge Flight Centre had faced "and it is inevitable that some businesses across our industry will fail, given the significant loss of revenue", he said.
But Flight Centre flagged the possibility of being in a stronger condition than rivals and being able to access good store sites if required when the pandemic eased.
The company said some work, including charter operations, was ongoing. And in China, where the virus first broke out, weekly ticket sales were slowly recovering although remained at 15 per cent the average of the beginning of year, the company said.