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Flight Centre Outlines 2008/09 Result Expectations

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Flight Centre Limited (FLT) has outlined its 2008/09  result expectations, ahead of its full year accounts’ release on 25 August 2009.

After trading in line with expectations globally and  breaking even in the US leisure business during the fourth quarter, the company said it remains on track to achieve a $98million-$102million pre-tax trading profit from $11.3billion in TTV.

One-off asset impairment and write-downs will reduce actual pre-tax profit by $60million. This includes $30million in CDO and US equity impairment and write-offs reported previously and almost $30million in additional costs relating to recent property revaluations, Greater China goodwill impairment, deconsolidating India’s results and IT projects which FLT has elected to write-down for accounting purposes.

These project write-downs, totalling $14.5million, have been finalised and mean FLT’s pre-tax profit  will be below previous guidance of $50 - 60million.  Including this write-down and all nonrecurring items, FLT now expects a $38million-$42million actual pre-tax result.

Net profit after-tax is likely to be within current guidance at $36million-$40million. FLT has booked its historic US tax losses, which has decreased its effective tax rate. Assuming normal conditions during 2009/10, tax rates are likely to return to traditional levels (30%-34%).

Based on preliminary 2008/09 trading results, FLT also expects to report:

· Profit in all regions, excluding North America and Asia, over the full year

· $62million in US losses and non-recurring expenses, including the $24million in equity impairment recorded during the first half

· Lower sales volumes, reflecting significant discounting by airlines and the company’s major suppliers

· Income margin (gross profit as a percentage of TTV) in line with 2007/08

· A strong cash performance, with company cash increasing significantly during the second half to $161million and debt decreasing to $128million ($190million at December 31 and $161million one year ago); and

· A large second half operating cash inflow, reflecting the business’s seasonality.

 Cash flow over the full year will be close to breakeven, following the large outflow during the first half FLT has decided that its investment in FCm India will remain at 56%, pending resolution of outstanding issues with the company’s local partner.

In its financial statements for 2008/09, the company will deconsolidate the Indian corporate travel business's results and will now report Indian results on an equity basis.

At 30 June 2009, FLT’s global cash and investment portfolio approached $800million. This portfolio’s cash weighting increased to 88% during the year as part of a more conservative treasury policy. The balance now includes a mix of fixed and floating rate notes (10%), corporate CDOs (2%) and asset or mortgaged backed securities and hybrid products  (less than 1%).

FLT’s small corporate CDO portfolio was devalued  early in the year to reflect changing market conditions. Since these mark-to-market adjustments, the portfolio has held its value.

Managing Director Graham Turner said while non- trading factors had significantly affected overall results in comparison to 2007/08, the company’s underlying performance was reasonable with:

· Sales volumes stabilising after slowing during the second and third quarters

· Customer enquiry remaining healthy globally

· Some sectors performing well, including online, youth and adventure; and

· Cost containment strategies leading to a significant second half capital expenditure reduction, a leaner structure and wages – FLT’s major expense item – flexing in line with revenue

“Non-recurring items have hidden the company’s true trading performance and the business’s longer term outlook,” he said. “Despite very challenging market conditions, we maintained income margins, cut costs and capital expenditure and finished the year with more cash and less debt than we had six months ago.

“While timing for a full recovery remains uncertain,  some positive signs are emerging.

“Conditions appear to be stabilising as cheap airfares and holiday deals begin to stimulate demand.

“Results in the US also appear to be improving after heavy losses and one-off expenses during the first three quarters of 2008/09.

“Globally, we expect further improvement as conditions gradually rebound, changes we have made gain traction and as the $30million in annual operating costs removed in the US flow to the bottom line.

“While it is difficult to accurately predict 2009/10 results at this early stage, we have initially forecast a $125million-$135million pre-tax profit.”

 While cash reserves are building steadily and July’s results are promising, FLT is yet to experience a prolonged upturn in trading conditions. Considerable uncertainty also continues to surround the state of the US economy, airline capacity and pricing strategies, following the heavy discounting late in 2008/09.

Consequently, FLT's Board has elected to continue with its strategy of preserving cash for the future and does not currently expect to declare a final dividend for 2008/09.

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