Prospects
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In recent months, prospects for the world economy have continued to deteriorate. However, the scope of the downswing triggered in the individual regions by the ongoing crisis in the property and financial sectors is not yet clear. For the industrialised countries, an overall increase in gross domestic product is still forecast for this year, although it will remain below the long-term trend. In the Eurozone, the persistent curbing effects of the rising commodity prices coincide with a further slowdown in the world economy and the spreading of the crisis in the financial markets. The emerging economies, hitherto recording robust economic momentum, will also record further declines. The slowdown in economic activity in the industrialised countries will have a curbing effect on these countries since it will cause a decrease in exports and thus restrain production growth.
According to UNWTO estimates (World Tourism Barometer, October 2008), international tourism arrivals grew by 4% in the first eight months of the current year. For the overall year 2008, the UNWTO forecasts a slowdown in growth in the overall travel market against the growth rate at the beginning of the year, with regional variations.
Tourism
The effects of the current financial crisis and a potential subsequent economic downswing in the TUI Group’s key source markets on consumer demand cannot be predicted. Latest forecast as well as bookings over the last few weeks suggest weakening demand. With the summer season completed and given the current winter booking situation, the effects on the current financial year are expected to be limited.
TUI Travel successfully completed the summer season 2008. Booked turnover in TUI Travel’s Mainstream business is 2% up year-on-year, with volumes down 6% year-on-year on an 8% reduction in capacity. In the first nine months of 2008, the capacity reduction in the Mainstream sector and the persistently sound demand for travel products resulted in an increased load factor and a lower proportion of offerings in the lates market. The resulting rise in margins and the improvement of the cost situation benefited the development of earnings. The effects caused by the substantial rise in energy costs in the course of the year were limited by means of hedges and price surcharges. The synergy potential was delivered according to plan. On the other hand, an adverse effect arose from the considerable year-on-year weakening of the British pound sterling exchange rate.
TUI Hotels & Resorts and cruises saw their expectations for the overall year 2008 confirmed by the stable development in the first nine months.
The development of earnings (underlying earnings before interest, taxes and impairment of goodwill [underlying EBITA by the division]) showed the following trend for the 2008 financial year after the completion of the first nine months:
Earnings by TUI Travel will rise in 2008, partly due to the first-time consolidation of First Choice for a full financial year. TUI Travel will show operating improvements driven by synergies caused by the merger of TUI and First Choice, margin improvements due to the capacity and product initiatives launched in the Mainstream sector as well as further growth in the Specialist, Activity and Online Destination Services sectors. Negative effects arise from the year-on-year decline in the British pound sterling exchange rate versus last year. This effects in particular the translation of positive pound based results as well as higher input costs for Euro based hotels.
In 2008, TUI Hotels & Resorts recorded persistently sound demand for hotel beds in long-haul destinations, the Canaries and the eastern Mediterranean. The number of bed nights are expected to therefore rise year-on-year. Overall, earnings by TUI Hotels & Resorts are expected to be slightly below the previous year’s level, mainly due to the currency induced negative impact in destinations in the US dollar currency region.
In the cruises segment, Hapag-Lloyd Kreuzfahrten benefited from a positive market environment for cruises and stable political conditions in the destinations. Rises in fuel costs were offset by means of higher average tour prices so that earnings are expected to match the previous year’s gratifying level. The prorated start-up costs for TUI Cruises also have to be accounted for in the cruises sector in 2008.
Central operations
From today’s perspective, central operations will achieve savings but will fall slightly short of the previous year’s level since earnings in 2007 had included positive effects of the valuation of foreign currency transactions.
Discontinued operation
The earnings situation in container shipping in the first nine months was characterised by a significant year-on-year increase in freight rate levels. Transport volumes, in contrast, fell short of expectations in the first nine months. In this context, risks for the overall year continue to relate to the effect of the crisis in the financial markets on the development of world trade. A final assessment of this risk is not yet possible at this point. Earnings will also be affected by the development of shipping bunker costs. Bunker prices continued to rise in the third quarter of 2008. An additional factor impacting the development of earnings by container shipping will be the further development of the US dollar exchange rate against the euro. Despite the strains in the economic environment, the Executive Board expects a substantial year-on-year rise in earnings levels in the 2008 financial year.
Continuing operations/Group
Overall, the Executive Board expects a significant increase in turnover for the TUI Group’s continuing operations (tourism and central operations) in the 2008 financial year, primarily driven by the first-time consolidation of the First Choice activities for a full financial year. On the basis of the earnings target for TUI’s former tourism entities, the future expected earnings contributions by the former First Choice entities and initial synergy effects, the Group expects tourism to continue to achieve substantial growth in earnings in 2008.
On the basis of the operating performance in tourism and container shipping, the Executive Board expects the Group to achieve an overall increase in underlying earnings for the year as a whole. The planned one-off expenses for the merger between First Choice an TUI’s tourism division in 2008 will cause significant variation between reported earnings and underlying earnings. While early indicators in tourism are currently still positive, the medium-term effects of the deterioration in the economic framework on demand for holiday tours cannot yet be reliable assessed from today’s perspective. In total, the TUI Travel business model is characterised by a high degree of flexibility which enables capacity adjustments to be made should demand reduce.