Business and Operating Environment

Group structure

The TUI Group and its key shareholdings operate in tourism. The Group structure comprises TUI Travel, TUI Hotels & Resorts and the Cruises Sector. Container Shipping was treated as a Discontinued Operation as defined by IFRS 5 until the end of the first quarter of 2009. The indirect 43.33% stake in Hapag-Lloyd AG taken after the completed sale is measured at equity and carried under Central Operations in consolidated financial statements.

TUI AG

Parent company   
TUI AG is the Group’s parent company headquartered in Hanover. Via its affiliates, it holds direct or indirect interests in the main Group companies conducting the Group’s operative business in individual countries. Overall, TUI AG’s Group of consolidated companies comprised 739 direct and indirect subsidiaries at the balance sheet date, of which 45 were based in Germany and 694 abroad. A further 18 affiliated companies and 35 joint ventures were included in TUI AG’s consolidated financial statements on the basis of at equity measurement.

Organisation and management
TUI AG is a stock corporation under German law, whose basic principle is dual management by two boards, the Executive Board and the Supervisory Board. The Executive and Supervisory Boards cooperate closely in governing and monitoring the Company. The Executive Board is responsible for the overall management of the Company.

The appointment and removal of Board members is based on sections 84f. of the German Stock Corporation Act in combination with section 31 of the German Co-Determination Act. Amendments to the Articles of Association are effected on the basis of the provisions of sections 179ff. of the German Stock Corporation Act in combination with section 24 of TUI AG’s Articles of Association.

Board structure   
As at the balance sheet date, the Executive Board of TUI AG consisted of five members: the CEO and four other Board members in charge of Tourism, Finance, Controlling and Human Resources/Legal.

TUI Travel

TUI Travel was formed in 2007 from the merger of the TUI Group’s distribution, tour operator, airline and incoming operations with those of the former British First Choice Holidays PLC.

TUI Travel PLC is domiciled in the UK and has been listed on the London Stock Exchange since 3 September 2007. At the balance sheet date, TUI AG held around 53 per cent, i.e. the majority, of the shares in this subsidiary.

TUI Travel services over 30 million customers in 27 source markets with a portfolio of more than 200 products and brands. Its business is structured into four Sectors: Mainstream, Specialist & Emerging Markets, Activity and Accommodation & Destinations (previously Online Destination Services).

Mainstream   
The Mainstream Sector is the largest sector within TUI Travel. The vertically integrated tour operators included in this sector, such as Thomson, First Choice and TUI Deutschland, hold leading market positions in Europe and service around 22 million customers annually. Their portfolio comprises the sale of flights, accommodation and other tourism services, both as separate components and as package tours. Activities cover the three source markets Central Europe, Northern Region and Western Europe.

Specialist & Emerging Markets    
The Specialist & Emerging Markets Sector has over 40 specialist tour operators servicing around 1.5 million customers annually. It breaks down along geographical lines into North America, Europe and emerging markets, in particular Russia. Specialist tour operators include those dedicated to for specific destinations, premium suppliers and student trip tour operators.

On 15 April 2009, TUI Travel and S-Group Capital Management established a joint venture to enter the Russian and Ukrainian travel market and benefit more from the growth in these markets. TUI Travel holds 49% of this joint venture, while S-Group holds 51%. The joint venture aims to occupy key positions in the tour operator and distribution business in Russia and the Ukraine.

Activity    
The Activity Sector comprises travel companies in Europe, North America and Australia operating in the business segments Marine, Adventure and Ski, Student & Sport. The Marine Division clusters providers of charter yachts. The Adventure Division offers, for instance, polar cruises and escorted study tours. The Ski, Student & Sport Division covers providers of skiing and other sporting tours.

Accommodation & ­Destinations
The Accommodation & Destinations Sector (previously Online Destination Services Sector) comprises activities in Europe, North America and Asia and is structured into three segments. The business customer segment (B2B) sells accommodation online to business customers such as travel agencies and tour operators. In addition, regional incoming agencies provide classical incoming services, such as transfer and services for holidaymakers, tour operators and the cruise sector. In the final customer segment (B2C), accommodation is supplied online to individual customers via various internet platforms.

TUI Hotels & Resorts

Hanover-based TUI Hotels & Resorts manages the Group’s hotel companies. This Sector includes hotel companies in which majority interests are held, joint ventures with local partners, companies in which a financial stake is held and hotels with management contracts. TUI Hotels & Resorts links tour operators and hotel partners and thus ensures the strong positioning of the hotel brands within the Group and among the competition. Apart from strategic planning, developing future-oriented hotel formats and operative support, it also coordinates marketing and distribution activities as well as environmental and social measures by the hotel companies.

In the short financial year 2009, TUI Hotels & Resorts comprised a total of 243 hotels with around 154,000 beds. With 215 hotels the majority were four- or five-star hotels. 45% were operated under management contracts, 43% were owned by the respective hotel company, 9% were leased. 3% of the facilities were managed under franchise agreements.

TUI Hotels & Resorts                   

Riu
Riu is the largest hotel company in the portfolio of TUI Hotels & Resorts. The Majorca-based family enterprise has a high proportion of regular customers and stands for professionalism and excellent service. Most of the hotels are in the premium and comfort segments and are located in Spain, Mexico and the Caribbean.

Grupotel
The Majorca-based Grupotel is one of the major hotel chains in the Balearics, offering apartments, aparthotels and luxury resorts. Most hotels are in the comfort segment.

Robinson
Robinson, the quality and market leader in the premium club holiday segment, is characterised by its professional sport, entertainment and event portfolio. Moreover, the clubs offer high-quality hotel services, excellent service and a generous architecture. Most of the hotels are located in Spain, Greece, Turkey, Switzerland and Austria. The clubs also meet ambitious standards in terms of promoting sustainability development activities and meeting specific environmental standards.

Magic Life
Magic Life is the all-inclusive TUI Hotels & Resorts club brand. It offers a holiday concept with a balanced price/performance ratio and entertainment programmes in an international environment for families. Most of the club facilities are located in Turkey and Egypt. Following the decision to divest the Magic Life Group this activity has been classified as a Discontinued Operation.

Iberotel
Iberotel hotels offer a comprehensive level of comfort and excellent dining options. Most of the premium hotels are located in Egypt and Turkey. They offer top-quality products since they comply with the highest quality, safety and environmental standards. In 2009, the second German facility was opened with Iberotel Fleesensee.

Grecotel
Grecotel is a leading premium provider among Greek hotel brands. Its concept is based on traditional hotel management and focuses on cultural and environmental features. Grecotel resorts are characterised by their beach location, modern architecture and premium restaurants.

Dorfhotels
Dorfhotels are located in Germany and Austria. They combine the advantages of fully refurbished holiday apartments with the comfort of a modern holiday hotel. Set in a natural environment and featuring rural architecture typical of the region, Dorfhotels offer a broad range of activities for families and nature lovers.

aQi
Under the aQi hotel line, customers are offered holidays at an attractive price/performance ratio.

Toscana Resort Castelfalfi
The Toscana Resort Castelfalfi project was initiated in 2007. It comprises eleven square kilometres of land in Tuscany, including a medieval village and a golf course. There are plans to build additional tourism facilities.

Cruises

The Cruises Sector comprises Hapag-Lloyd Kreuzfahrten and TUI Cruises.

Hapag-Lloyd Kreuzfahrten
Hamburg-based Hapag-Lloyd Kreuzfahrten GmbH operates four cruise ships in the market for premium cruises. Its portfolio focuses on lifestyle and expedition cruises for the German-speaking market.

Its flagship is the five-star-plus vessel Europa. It was awarded this category by the Berlitz Cruise Guide for the tenth time in succession and is the world’s only ship awarded this category. The Europa primarily cruises on world tours. The Columbus, a three-star-plus vessel, also cruises the world’s seven seas. Moreover, it is the only ocean-going liner capable of cruising the Great Lakes in North America. The Hanseatic is used, among other things, for expedition cruises to the Arctic and Antarctic. It is the world’s only five-star passenger vessel with the highest Arctic class. The Bremen, a four-star vessel – also awarded the highest Arctic class – is another expedition ship travelling to similar destinations. Two of the ships were owned, the other two chartered. Average fleet age was 14 years.

TUI Cruises
TUI Cruises, a joint venture for TUI AG and the US shipping company Royal Caribbean Cruise Ltd., was formed in 2008. The Hamburg-based company has offered cruises to the German-speaking premium market since May 2009 with the vessel Mein Schiff. TUI Cruises follows a concept primarily aimed at couples and families who attach particular importance to personal choice, generosity, quality and service on a cruise.

Container Shipping

Hapag-Lloyd
Following the sale of a majority stake in Container Shipping, completed in the first quarter of 2009, TUI AG took a 43.33% stake in the purchasing company.

Via its indirect financial investment, TUI AG is the largest individual shareholder in Hapag-Lloyd AG. The remaining 56.67% of the shares in Hapag-Lloyd AG are held by Hamburgische Seefahrtsbeteiligung Albert Ballin Holding GmbH & Co. KG on behalf of the City of Hamburg (40.67%), Kühne Holding AG (26.55%), the HSH Nordbank and M.M. Warburg banks (8.4% each) and the insurance companies Signal Iduna (12.61%) and HanseMerkur (3.36%). 

Business activities

Tourism

Market
For 2009, the UNWTO expects total consumer spending to decline by 4-6% in the worldwide travel and tourism market (source: UNWTO World Tourism Barometer, September 2009). Following a decrease of around 7% in the first eight months of 2009, international arrivals are expected to recover slightly in the second half of the year. Overall, the worldwide deterioration in the economic environment has thus also impacted demand in the travel sector.

The market for business and leisure hotels was also impacted by the economic environment in 2009. City hotels in Europe recorded declines in private and business trips, which were partly offset by selective marketing strategies. Tighter capital market requirements rendered follow-up project financing more difficult for hotel operators (source: Deloitte, Hospitality Vision, March 2009). Holiday hotels in the Eurozone suffered from capacity cuts by the major tour operators and the weakness of sterling, which caused a shift in demand to destinations outside the Eurozone. The impact on hotels in Spain was particularly strong.

The European market for cruises remained a growth market. According to a study by the European Cruise Councils (ECC: Statistics and Markets, March 2009), the number of European passengers on ocean cruises grew by almost 11% year-on-year to 4.4m in 2008. The German ocean cruises market also achieved record levels in terms of passenger and turnover figures for 2008. Passenger volumes grew by 19% year-on-year to around 906 thousand (DRV: Der Kreuzfahrtenmarkt Deutsch-land 2008; March 2009). 2009 saw the commissioning of additional liners for the German ocean cruises market, including Mein Schiff, the first vessel for TUI Cruises.

Competition    
In 2009, the European tourism sector was characterised by a considerable deterio­ration in the economic environment. Tour operators pursuing integrated or non-integrated business models competed with hotel companies, airlines and online agencies. The leading tour operators and airlines continued to pursue highly restrictive capacity policies in 2009. As a result, the travel market was not faced with oversupply in spite of declines in demand driven by the unfavourable economic conditions. Therefore, residual stock left for sale at reduced prices remained limited.

European tour operators only benefited to a limited extent from the decline in aircraft fuel prices in 2009 as fuel price hedges entered into in 2008 left some prices at a relatively high level. Travel was also impaired by the emergence of swine flu in the course of the summer of 2009. In this environment, TUI Travel continued to benefit from its strong market position and flexible business model.

The competitive environment in the holiday hotel market continued to be marked by the rising popularity of the all-inclusive approach and an ongoing trend towards golf, spa, wellness and health products. Customers’ awareness of environmental issues continued to play a major role. As one of the leading European providers of holiday hotels, TUI Hotels & Resorts took account of these trends in developing its attractive portfolios.

The international ocean cruises market is dominated by a few large cruise companies. The German-speaking cruise market comprises national and international providers, the latter numerically outweighing the former. However, passengers travelling with German cruise companies account for 57% and thus a higher percentage than passengers travelling with international providers (DRV: Der Kreuzfahrtenmarkt Deutschland 2008; March 2009). In 2009, Hapag-Lloyd Kreuzfahrten remained the leading provider in the German premium and luxury segment for classical and expedition cruises. Cruises offered by TUI Cruises primarily address German-speaking customers aged 35 to 69 years. This target group mainly originates from the package tour and individual travel market but also the cruises market.

Business model   
TUI Travel offers its customers a broad variety of products, ranging from package tours all the way through to its specific portfolio of specialist products. It is structured into the Mainstream, Specialist & Emerging Markets, Activity and Accommodation & Destinations Sectors.

The Mainstream Sector accounts for the largest share of TUI Travel’s business operations. It comprises all activities in the package tour segment from distribution via tour operation to aviation. Mainstream is made up of several integrated tourism groups, each with a focus on a specific source market. Moreover, TUI Travel holds leading market positions in several, often highly fragmented specialist markets and occupies promising positions in growth markets such as Russia.

Due to its broad customer base in 27 source markets, TUI Travel is able to compensate for fluctuating trends in individual source markets or product groups. In addition, TUI Travel pursues a flexible capacity management policy in its Mainstream business. Only a very small portion of flight and hotel commitments are fixed by means of contracts.

The flight capacity of Group-owned airlines is primarily oriented towards the needs of the respective tour operators. Thanks to staggered leasing agreements for the aircraft used by the Group’s own airlines, with non-Group third-party airlines providing almost one third of the flight capacity required, TUI Travel is able to respond flexibly to changes in demand.

It only invests in its own assets where this provides the company with new unique selling propositions vis-à-vis the competition, for example by letting its own charter yachts.

Strong market positions in the various source markets and product segments result in well-tapped economies of scale. Thanks to a high proportion of exclusive and differentiated products in all four sectors, sold via a variety of sales channels including the internet, TUI Travel offers its customers far-reaching flexibility and choice and gains strong customer loyalty.

TUI Hotels & Resorts has its own hotel capacity in existing and potential growth destinations. It will selectively expand this capacity while at the same time streamlining its product portfolio. Besides distribution via tour operators, the selective establishment and expansion of additional sales channels will optimise occupancy of Group-owned hotels and secure high-quality earnings.

With its current fleet, Hapag-Lloyd Kreuzfahrten occupies a leading position in the German-speaking market for luxury, expedition and study tours. Sharpening the profile of the four vessels has reinforced this position.

TUI Cruises is the first national provider to have occupied the premium volume segment in the German-speaking market for cruises. Mein Schiff, the first for TUI Cruises, will stand out even more strongly from its competition in future because of the values its embraces: individuality, diversity and enjoyment.

Strategy   
In Tourism, the following strategic priorities have arisen for the forthcoming financial year:

• increasing the proportion of differentiated holiday products and strengthening web-based sales
• realising the integration and synergy benefits of £200m sterling per annum by financial year 2010/11 in TUI Travel
• expanding the tour operator business in growth markets like Russia and the Ukraine
• engaging in pro-active capacity management in TUI Travel’s Mainstream business by adjusting flight and hotel commitments to align supply and demand
• focusing on a high-yield, differentiated hotel portfolio in TUI Hotels & Resorts
• expanding the market share in the German-speaking volume market for cruises
• pursuing restrictive cash and working capital management.

Economic framework

General development   
Following the decline in the first half of the year, the world economy started to pick up again in the third quarter of 2009. This positive trend is expected to consolidate by the end of the year. For 2009, however, the International Monetary Fund (IMF, World Economic Outlook, October 2009) is still predicting a fall of 1.1% in global gross domestic product as a result of the recession in the first two quarters.

Development in the regions

America and Asia   
In the United States, the decline in gross domestic product slowed down substantially in the second quarter before the trend reversed in the third quarter. Expanding government demand mainly drove this development. Private consumption, by contrast, declined due to the unfavourable framework that brought a rise in unemployment, significant losses of assets and uncertain income perspectives. Overall, gross domestic product is expected to decline by 2.7% in 2009. Canada also recorded a decline, which, at 2.5%, will be similar to that in the United States.

The Japanese economy, by contrast, already saw considerable trends towards recovery in the second quarter. However, the slump in the first quarter had been substantially bigger. For 2009 as a whole, GDP is still expected to contract by 5.4%. Other Asian economies already started to recover in the spring. In general, growth continues to be driven by China (+8.5%) and India (+5.4%). Significant growth is expected in particular for the second half of the year, since demand has picked up again in industrialised countries and pressure on the financial markets has decreased.

Eurozone   
For the Eurozone, the IMF expects the economy to contract by 4.2% in 2009. The decline in gross domestic product almost came to a halt in the second quarter, followed by a reversal of the trend in the third quarter. However, different countries reported different trends. While Germany and France recorded notable increases early on, the Netherlands, Italy, Austria and in particular Spain, which continues to be hit by the real estate crisis, had to wait considerably longer to see positive movement.

Development of tourism

Tourism   
According to the World Tourism Organisation (UNWTO, World Tourism Barometer, September 2009), the declining trend in tourism, which started in the second half of 2008, was further aggravated in the first half of 2009. International arrivals decreased by 7% in the first eight months of the year 2009. In July, however, the decline slowed down substantially. For 2009 as a whole, the UNWTO expects a 5% contraction in the tourism market.

Assessment of the economic framework

Overall, macroeconomic development in the short financial year 2009 did not fully match the expectations of the Executive Board. The scope and pace of the not­able deterioration in macroeconomic parameters in the first half of 2009 had not been anticipated in the budget. While the impact on Tourism was limited, in particular thanks to TUI Travel’s flexible business model, dramatic declines in volumes and freight rates in Container Shipping resulted in a fall in earnings by Hapag-Lloyd exceeding the expected level. Against this backdrop, TUI AG as the largest individual shareholder in Hapag-Lloyd made contributions to the financial stabilisation of Container Shipping, which had also not been expected in this form.