Group Turnover and Earnings

Following the sale of Container Shipping, the TUI Group and its operative shareholdings trade almost exclusively in Tourism. TUI AG’s 43.33% stake in Albert Ballin Joint Venture GmbH & Co. KG was measured at equity in TUI’s consolidated financial statements. In line with the character of the shareholding, the proportionate at equity result from the Container Shipping participation to be included in Group earnings as of the second quarter of 2009 was not reflected in the TUI Group’s performance indicator EBITA. Accordingly, the comments below relate to the development of Tourism and Central Operations (Continuing Operations).

The development of Container Shipping operations in the short financial year 2009 is described from page 34 of this report.

The Annual General Meeting on 13 May 2009 decided to change TUI AG’s business year from the calendar year to the tourism year (1 October to 30 September). As a result, the short financial year 2009 only has nine months. For easier comparison, the figures for the short financial year 2009 recorded in this management report are presented alongside the figures for the corresponding period in 2008 (1 January to 30 September) and the balance sheet figures as per 30 September 2008. Comparing the figures for the short financial year with those for the full financial year 2008 is of limited value.

To ensure a transparent presentation of how operating earnings have developed in the Divisions, this section shows underlying earnings adjusted for gains on disposal of financial investments, restructuring expenses, amortisation on intangible assets of purchase price allocations and other special one-off effects (underlying divisional EBITA). The adjustments are outlined in detail in the section Development of Business in the Divisions.

Divisional turnover and earnings

Assessment of earnings   
Tourism, the TUI Group’s core business, recorded a weaker demand in the short financial year 2009 as a result of the uncertain economic environment and other external factors. Against this background, TUI Travel reduced capacity in the Mainstream business and cut its offerings in scheduled flying in Germany and UK. Customers also tended to book their holidays later than in previous years due to the uncertain economic environment. Nevertheless, the demand for differentiated holiday products at a balanced price/performance ratio remained intact in all key source markets, especially in the important summer season.

In this difficult market environment, TUI Travel achieved its price and load factor targets and increased its earnings. TUI Hotels & Resorts recorded satisfactory business development. Declines in occupancy caused by swine flu and lower bednight volumes were largely offset by cost savings. In the Cruises Sector, the TUI Cruises joint venture commissioned its first vessel in 2009. Earnings by the Cruises Sector were affected by the associated start-up costs, as expected.

Earnings by Tourism continued to be impacted by fuel costs, which were hedged at previous year’s high level in the course of the season. Prices for sourcing hotel bed capacity also rose in the Eurozone due to the weakening of the sterling exchange rate.

Overall, underlying earnings by Continuing Operations in the short financial year matched the Executive Board’s expectations. Within Discontinued Operation Hapag-Lloyd AG recorded a higher than expected drop in earnings in the first quarter.

Development of divisional turnover

Continuing Operations   
The Continuing Operations comprise Tourism and Central Operations.

Divisional turnover   

Turnover by the TUI Group’s Continuing Operations was 14% down year-on-year, in particular due to lower turnover in Tourism. The decline in turnover by 14% by Tourism was above all attributable to a fall in volumes in TUI Travel’s Mainstream business and the decline in the sterling exchange rate against the euro.

Turnover by Central Operations, which consist of the Group’s holding companies and real estate companies, declined year-on-year by 24% to €49m.

Discontinued Operations    
In the short financial year 2009, Discontinued Operations comprised the turnover of the Magic Life Group and the turnover, for the first quarter only, generated by Container Shipping. A year-on-year comparison with previous year’s nine months is of limited value.

Divisional turnover   
Since Container Shipping was no longer included as of the second quarter of 2009, aggregate turnover and earnings by the divisions are not fully comparable with the corresponding comparative periods in 2008.

TUI Travel accounted for 96% of turnover by Tourism. TUI Hotels & Resorts only represented a small portion of turnover by Tourism, as this included companies measured at equity and the high turnover with Group tour operators, which had to be consolidated from a Group perspective.

Divisional earnings

Divisional earnings (EBITA)
 

Continuing Operations   
For the Continuing Operations, operating earnings adjusted for special one-off effects (underlying divisional EBITA) declined slightly by 1% to €657m in the short financial year 2009.

Earnings by the Continuing Operations before adjustment for one-off effects (divisional EBITA) reflected special effects and other one-off expenses totalling around €421m in the short financial year 2009. The input costs included in this amount were incurred in order to create synergies. They will sustainably strengthen the profitability of Tourism and reduce the risk of future charges on earnings due to the measurement processes implemented in the short financial year under review.

Despite the one-off effects mentioned above reported earnings by the Continuing Operations rose significantly by 33% to €235m.

Underlying divisional EBITA: Tourism

Underlying earnings by Tourism rose by 5% year-on-year to €696m in the short financial year 2009. While earnings rose due to synergies, higher capacity utilisation and stronger margins in the Mainstream business as well as organic and external growth in TUI Travel’s Specialist and Activity Sectors, these effects were partly offset by the decline in the average value of sterling in 2009. TUI Hotels & Resorts was impacted by swine flu in the period under review. Earnings in the Cruises Sector comprised start-up losses of TUI Cruises.

In the short financial year 2009, earnings before adjustment for one-off effects in Tourism were impacted by restructuring and integration expenses and other one-off expenses incurred by TUI Travel. These expenses totalled €421m (previous year: €487m). Due to realised synergies the reported earnings by Tourism rose by 55% to €274m despite a lower business volume and higher factor costs.

Underlying divisional EBITA: Central Operations   

Earnings by Central Operations comprised the corporate centre functions of TUI AG and of the interim holdings along with other operating areas, essentially the Group’s real estate companies.

Underlying earnings by Central Operations decreased by €39m against the first nine months 2008, which had been characterised by the reversal of provisions no longer required in the financial year under review.

Discontinued Operations

Underlying divisional EBITA: Discontinued Operations   

Until the end of the first quarter of 2009, Discontinued Operations comprised the Container Shipping operations, which have meanwhile been sold.

The 43.33% stake in Container Shipping taken in the framework of the sale was included at equity in consolidated financial statements and carried under the financial result for Central Operations as of the second quarter of 2009.

The development of Container Shipping operations in the short financial year 2009 is described in brief from page 34 of this report.

According to the fundamental decision to sell Magic Life, the company is now also part of Discontinued Operations.

Earnings by Discontinued Operations before adjustment for special one-off effects totalled €823m. They included the special income from the sale of Container Shipping worth €1,135m.

Underlying divisional EBITA: Group   

Divisional earnings
Overall, the TUI Group posted underlying divisional earnings of €408m for the short financial year 2009. A year-on-year comparison with the first nine months of 2008 is of limited use, as Container Shipping has only been included in 2009 for three months. Adjusted for the above-mentioned special income and expenses, reported divisional earnings rose by €737m to €1,059m.

Value-oriented Group management

The financial objective pursued by TUI AG as a capital market-oriented company is to secure a sustainable increase in the value of the TUI Group. In order to implement value-driven management of the Group as a whole and its individual business sectors, a standardised management system has been installed as an integral part of consistent Group-wide planning and controlling.

Key management variables to enable regular value analysis are ROIC (Return On Invested Capital) and absolute value added. ROIC is compared with the division-specific cost of capital.

Cost of capital   
The cost of capital is calculated as the weighted average cost of capital (WACC). The cost of equity included in WACC reflects the return expected by investors from TUI shares. The cost of outside capital is based on the average financing costs of the TUI Group. As a matter of principle, the cost of capital always shows pre-tax costs, i.e. costs before corporate and investor taxes. The expected return determined in this way corresponds to the same tax level as the underlying earnings implicit in ROIC.

To reflect different return/risk profiles in Group sectors, specific pre-tax costs of capital are calculated for each division. In Tourism, the cost of capital was 11.7% (previous year: 10.4%). For TUI Travel, the cost of capital was 11.0% in 2009 (previous year: 11.1%), for TUI Hotels & Resorts it was 11.1% in 2009 (previous year: 9.7%), and for Cruises it was 13.1% (previous year: 10.5%). For the Group as a whole, the variable stood at 10.5% (previous year: 9.8%).

ROIC and value added   
ROIC is calculated as the ratio of underlying earnings before interest, taxes and amortisation of goodwill (underlying divisional EBITA) to the average invested interest-bearing capital (invested capital) in the segment. Given its definition, this performance indicator is not influenced by any tax or financial factors and has been adjusted for one-off effects. From a Group perspective, invested capital is derived from liabilities, comprising equity (including minority interests) and the balance of interest-bearing liabilities and interest-bearing assets. The cumulative amortisations of purchase price allocations are then factored in to invested capital.

Apart from ROIC as a relative performance indicator, value added is used as an absolute value-oriented performance indicator. Value added is calculated as the product of ROIC less associated capital costs multiplied by invested capital.

For the short financial year under review, the above-mentioned indicators have not been calculated since a comparison of the values with the reported values for 2008 would be of limited use due to the seasonal nature of the tourism business.