Report on Expected Developments

Economic environment

Macroeconomic situation

General development   
The situation in the global financial markets relaxed in the second half of 2009. Incoming orders rose again in the real economy, and production also picked up again in most sectors. The economic recession therefore seems to have bottomed out. Economic recovery was largely driven by the stabilisation of financial markets due to intervention by central banks and bail-out programmes and loans from governments. The real economy is also benefiting from state-backed economic stimulus packages.

For 2010 the economy is expected to show a moderately positive trend. Risks are related to the recovery of international financial markets, which has yet to prove it will be sustainable. Following the termination of state-sponsored programmes, private consumption will have to be a stronger growth engine again. A further increase in energy prices might place a renewed burden on consumers and companies. In many countries, employment has not yet adjusted to cuts in production. As transitional regulations such as short working hours expire, rising unemployment rates might place a substantial burden on recovery in 2010, despite increasing production.

Against this background, the International Monetary Fund expects global growth of 3.1% in its forecast for 2010 (IMF, World Economic Outlook, October 2009).

Development in the regions   
The IMF expects the pace of economic recovery to differ considerably from one region to another. Moderate growth is expected for the United States at 1.5%, Japan at 1.7% and the countries of the Eurozone at 0.3% in 2010. By contrast, the emerging economies of Asia have almost returned to their pre-crisis economic growth rates. China and India, in particular, have been in an upward phase since the spring of 2009. For 2010, the IMF expects China to post economic growth of 9.0%, and India to achieve growth in gross domestic product of 6.4%. The IMF expects the Eurozone to show an uneven picture. The UK (+0.9%), Germany (+0.3%) and France (+0.3%) are expected to grow again in 2010. The Spanish economy, by contrast, continues to suffer from the real estate crisis and is therefore expected to contract by 0.7%.
 

Expected development of gross domestic product
 

Market trend in the divisions

Tourism   
Against the backdrop of difficult global economic conditions, international tourist arrivals declined by around 7% in the first eight months of 2009. The high-volume markets showed considerably slower declines of 3% in July and August compared with the first half of 2009, which recorded a total decline of 8%. The UNWTO (World Tourism Barometer, October 2009) therefore concludes that the negative trend observed since September 2008 reversed in the second half of 2009. For the overall year 2009, the UNWTO expects international arrivals to decline by 5%.

For 2010 the UNWTO expects the tourism market to generate slight growth of 1 to 2%, with the individual regions recording different trends. Risks for tourism relate to the uncertain future of employment rates following the expiry of state-sponsored economic stimulus packages. Swine flu constitutes a further uncertainty factor given that it is still too early to anticipate its progress.

Trends in operating earnings

In the completed financial year, the TUI Group introduced a short financial year comprising a period of nine months. Comparability with a full financial year is limited since the profit contributions of the fourth quarter (October to December) are negative for structural reasons, in particular in Tourism.

The statements below on the expected development of earnings by the TUI Group and its Divisions are therefore based on a reference period from the previous year that is comparable with the TUI Group’s future financial year. Corresponding information on earnings in the pro forma financial year (October to September 2008/09) has therefore been published on the internet at www.tui-group.com/en/ir.

Tourism

Development of business   
TUI Travel has a broad customer base in 27 source markets and is able to offset developments in individual markets or product groups. In the high-volume Mainstream business, TUI Travel pursues a flexible business model, contracting only a part of its aircraft and hotel bed capacity commitments. The aircraft capacity of Group-owned airlines is largely oriented to the needs of the respective tour operators. Lease agreements staggered over time help to adapt the capacity of Group-owned airlines in response to changes in demand in the short to medium term. Third-party flying accounts for almost one third of the aircraft capacity required.
   
In financial year 2009/10, TUI Travel intends to build on its leading position in the European travel market. The proportion of differentiated products is to be in-creased, and controlled distribution is to be further expanded. In financial year 2009/10, stimuli will emerge in particular from the commercial agreement between TUIfly and Air Berlin in Central Europe and in the Northern Region Sector, from the delivery of further synergy potential in the UK and possible cooperation in the Canadian travel market. Activities in Russia will also be stepped up.

In the light of the uncertain economic framework, TUI Travel will adopt a cautious approach to capacity management and has reduced capacity for the winter season 2009/10 to ensure that supply is in line with demand.

Earnings   
For 2009/10, TUI Travel expects underlying earnings to be stable year-on-year. The main earnings drivers in TUI Travel are rising synergies from integration and stable product margins due to capacity and product-related measures initiated in the Mainstream business. By contrast, risks are posed by the persistent weakness of sterling and the potential rise in unemployment rates in the main volume markets.

TUI Hotels & Resorts is planning to keep capacity stable and achieve a slight in-crease in bednights against the comparative prior-year period, which is expected to generate higher occupancy rates in the hotels. The Sector will press ahead with its active cost management. Risks result from the trends for tour operator customers in the major source markets, which might fall short of expectations. Operating earnings are predicted to reproduce the level recorded in the comparative prior-year period.

Operating earnings by the Cruises Sector are expected to match the level achieved in the comparative period in 2009/10.

Based on the current earnings estimates for TUI Travel, TUI Hotels & Resorts and Cruises, the TUI Group expects Tourism, its core business, to post stable overall development of operating earnings compared with 2009/10. The business develop­ment in Tourism will be strongly affected by the trends in unemployment rates and the associated consumer propensity in the large volume markets.

Given a further recovery of the economic framework according to expectations, both business volume and operating earnings in Tourism activities are expected to increase again as from the financial year 2010/11.

Development of the financial position

Financing   
The Group’s net debt totalled €2.3bn at the balance sheet date. Based on the expected operative cash flow and in particular the debt reduction effect of the asset streamlining programme, financial year 2009/10 is expected to see a slight decline in net debt.

Investments   
In the light of investment decisions already taken and planned projects, TUI expects financial requirements of almost €0.5bn for financial year 2009/10. About 70% are related to TUI Travel. Most of these funds will be used as investments in property, plant and equipment. Total planned investments in TUI Travel include the purchase of aircraft spares and yachts. Further funds are earmarked for the selective expansion and preservation of the hotel portfolio.

Additional projects or acquisitions, in particular for expanding the tourism port­folio, will only be considered and implemented if attractive opportunities should arise or if they should prove expedient in the course of business development. Should economic conditions deteriorate substantially beyond current planning, the TUI Group will be able to adjust planned investment projects to current demand.

Expected overall development

For financial year 2009/10, the TUI Group expects operating earnings by Tourism to be stable against the comparative period in 2009/10, with Central Operations achieving cost reductions. Underlying earnings by the TUI Group’s Continued Operations will therefore rise slightly against the previous year.

Hapag-Lloyd AG has based its planning for the forthcoming financial year 2009/10 on recovery tendencies expected in the container shipping market. Overall, however, profit contributions by Hapag-Lloyd AG are expected to be negative again for financial year 2009/10. Although they are not included in EBITA, the TUI Group’s operative performance indicator, they impact consolidated earnings through after-tax earnings to be taken into account in the framework of at equity measurement.