The 2007 financial year was characterised by the merger of TUI’s tourism activities with First Choice. In the framework of this merger, the balance sheet total and thus also the TUI Group’s debt increased since First Choice’s debt had to be included in the consolidated financial statements. Funds of € 694 million were raised through a convertible bond, with a further € 150 million raised through private placements. These funds helped to safeguard liquidity in the framework of general corporate financing.

The Group’s financial position

Principles and goals of financial management

Principles
As a matter of principle, the TUI Group’s financial management is centrally operated by TUI AG, which acts as the Group’s internal bank. Financial management covers all Group companies in which TUI AG directly or indirectly holds an interest of more than 50%. It is based on policies covering all cash flow-oriented aspects of the Group’s business activities.

With the merger of TUI’s tourism activities with First Choice to form TUI Travel PLC, the central cash management and financial risk management system, previously managed by TUI AG alone, was divided up. TUI Travel PLC now performs these functions for the tourism division in line with the unchanged risk policy of the Group, while TUI AG continues to hold this function for all other business activities of the Group.

Objectives
TUI’s financial management aims to ensure sufficient liquidity and capital for TUI AG and its subsidiaries any time and limit financial risks from currencies, interest rates and commodity prices. All transactions serve the goal of achieving financial indicators to enhance the current credit rating.

Liquidity management
The Group ensures its liquidity in two ways:

• Through intra-Group financial remuneration, the cash surpluses of individual Group companies are used to finance the cash requirements of other Group companies.
• TUI uses syndicated credit facilities and bilateral bank loans as well as its liquid funds to secure sufficient cash reserves. Planning of bank transactions is based on a monthly rolling liquidity planning system.

Development of the Group’s capital structure

Excel-Download	© TUI AG Geschäftsbericht 2007

Capital structure
The development of the TUI Group’s capital structure in the 2007 financial year was mainly affected by the first-time consolidation of the assets and liabilities of First Choice. Overall, non-current capital rose by 20.1% to € 9,931 million; in relation to the balance sheet total, they declined by 2.5 percentage points to 60.9%. The equity ratio declined to 19.2%, down from 23.1% in 2006. Equity and non-current financial liabilities accounted for 48.2% of the balance sheet total at the balance sheet date, following 49.8% in 2006.

The gearing, i.e. the ratio of average net financial liabilities to average equity, rose to 99.1%, up from 82.1% in 2006.

Equity
Due to the issue of 225,720 employee shares in December 2007, subscribed capital rose by € 0.5 million to € 642 million. The capital reserve, which only comprised transfers from premiums, also rose mainly due to the issued convertible bond by € 77 million to € 2,472 million. Revenue reserves increased by € 22 million to € - 582 million. Equity include the hybrid bond of € 295 million issued in December 2005. Minority interests accounted for € 297 million of equity.

Provisions
Provisions mainly comprised provisions for pension obligations, current and deferred income tax provisions and provisions for typical operating risks classified as current or non-current, depending on expected occurrence. At the balance sheet date, they accounted for a total of € 2,443 million, up € 2 million or 0.1% on the previous year. This was due to the first-time inclusion of First Choice in the consolidated financial statements.

Financial liabilities
Financial liabilities rose by a total of € 1,641 million to € 5,540 million. They consisted of bonds totalling € 2,945 million, liabilities to banks of € 2,160 million, liabilities from finance leases of € 256 million and other financial liabilities of € 179 million. The increase resulted from the inclusion of the financial liabilities of First Choice in the consolidated financial state­ments and the increase of cash and cash equivalents due to the merger with First Choice which had to be financed temporarily. The classification into current vs. non-current financial liabilities was based on maturities. Financial liabilities shown as current liabilities rose to € 807 million. This was mainly attributable to the convertible bond with a nominal value of € 385 million maturing in December 2008, now classified as current. Most of the additional financial debt of the TUI Group caused by the inclusion of First Choice in consolidation was classified as non-current. The increase in non-current financial liabilities to € 4,733 million was also due, in particular, to the convertible bond of € 694 million issued in the financial year under review and the outside capital raised by means of private placements worth € 150 million. More detailed information, in particular on the remaining terms, is provided under ‘Financial liabilities’ in the notes on the consolidated financial statements.

Other liabilities
At € 5,197 million, other liabilities rose by € 1,515 million or 41.1% year-on-year. Here, too, the increase was mainly attributable to the inclusion of First Choice in consolidation.

Ratings by Standard & Poor’s and Moody’s

In the 2007 financial year, the rating agencies Standard & Poor’s and Moody’s adjusted their credit ratings of TUI AG. The corporate rating assigned by Standard & Poor’s was adjusted to ‘BB-’ (negative outlook), with Moody’s changing their rating to ‘B1’ (negative outlook). The senior notes of around € 2.0 billion issued in 2004 and 2005 and the convertible bond of around € 0.7 billion in 2007 were assigned a ‘B’ rating by Standard & Poor’s and a ‘B3’ rating by Moody’s. The hybrid bond issued in December 2005 was partly treated as equity as it was subordinated to other liabilities and did not have a fixed maturity; it was therefore rated ‘B-’ by Standard & Poor’s and ‘B3’ by Moody’s.

Key financing measures

The 2007 financial year was characterised by the refinancing of the financial liabilities of First Choice at the TUI Travel PLC level as well as the raising of outside capital by means of the issue of a convertible bond and private placements serving to safeguard liquidity in the framework of general corporate financing. A multi-annual loan was taken up in order to finance a long-term investment.

Issue of a convertible bond
In June 2007, TUI AG issued a 5-year convertible bond with a nominal volume of € 694 million and an interest coupon of 2.75% per annum. The bond can be converted into shares in TUI AG at a conversion price of € 27.68 per share. Conditional capital of up to € 64.1 million was available to service potential conversions.

Private placements
In October 2007, private placements were issued with a maturity of around three years and a total volume of € 150 million. The note loans were sec­uriti­sed in several tranches and are subject to a fixed interest rate agreement.

Refinancing by TUI Travel PLC
In August 2007, TUI Travel PLC signed a syndicated credit facility of GBP 770 million. This facility has a maturity of five years and carries floating interest rates. Under this facility, cash may be drawn and bank guarantees may be extended. The credit facility refinanced a reduction of financial liability of First Choice of approximately GBP 506 million. At the balance sheet date, around GBP 79 million of bank guarantees were used.

Bonding facility
In March 2005, TUI Northern Europe signed a syndicated bonding facility under which TUI Northern Europe or its subsidiaries were able to furnish statutory bank guarantees as security to supervisory authorities as required for the tourism business in the UK, Ireland and Scandinavia. The bonding facility was adjusted to needs in January 2007 and thus totalled GBP 280 million. In October 2007, TUI Northern Europe terminated this facility as part of a refinancing scheme. In August 2007, TUI Travel PLC signed a new bonding facility under which the bonding facility of TUI Northern Europe and the proportion of bank guarantees granted as part of the former revolving credit facility of First Choice worth GBP 310 million were refinanced. The total volume, adjusted to actual needs, amounted to GBP 430 million. The new bonding facility will mature on 31 March 2008, but can be prolonged to 31 March 2009 under an extension option available to TUI Travel PLC. As at 31 December 2007, an amount of around GBP 407 million of the bonding facility had been used.

Investment financing
In the framework of an order transaction concerning the production and delivery of six container ships with 8,750 TEU each, Hapag-Lloyd took up a consortium loan worth USD 660 million in November 2007. The loan amount covers 80% of the investment volume of the ships planned to be delivered in 2010. The term of the loan is 15 years, covering the financing of the production period and a redemption period of twelve years. The loan carries a floating interest rate. The loan has been securitised by means of the ships to be financed and of the Korean Export Insurance Corporation.

Interest rates and terms

Financing environment
In the course of 2007, the environment for financing schemes in the money and capital market deteriorated slightly for the TUI Group due to the lower rating assigned by Standard & Poor’s and Moody’s. However, a considerably stronger effect was caused by the persistent confidence crisis in the financial market, which began in the second half of the year and caused a substantial increase in credit margins across all sectors and in particular in the non-investment grade segment.

Interest rates
The increase of the financial debt year-on-year and of the interest level in this period with its effects on the variable interest-bearing financing instruments caused an increase of interest expenses. Both interest rates and maturities of the financial liabilities are detailed under the item ‘Liabilities’ (financial liabilities and liabilities to banks) in the notes on the consolidated financial statements. The temporary increase of liquid funds due to the merger with First Choice and the increasing interest level caused a raised interest income.

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Off-balance sheet financing instruments

Operating leases
In the 2007 financial year, off-balance sheet financing instruments (operat­ing leases) were used in the tourism division in order to further optimise financing structure. In connection with the ongoing renewal of the aircraft fleet in tourism, a total of 18 new aircraft were added in 2007. For all aircraft, operating leases were concluded, including eleven sale-and-lease-back transactions. In shipping, long-term charter contracts were concluded for two 8,750 TEU vessels which have been ordered and will be delivered in December 2009. Long-term charter contracts were also concluded for two newly commissioned 4,250 TEU vessels. In addition, medium-term charter contracts were concluded for five container ships with a capacity of 1,000 to 2,800 TEU in order to expand the fleet.

The development of the operating rental, leasing and charter contracts is presented in the section ‘Net assets’ in the management report. More detailed explanations and information on the structure of the remaining terms of the associated financial liabilities are provided in the section ‘Other financial liabilities’ in the notes on the consolidated financial statements. There were no contingent liabilities related to special-purpose companies.

Liquidity analysis

Cash reserve
In the 2007 financial year, the TUI Group’s solvency was secured at all times by means of cash inflows from operating activities, liquid funds as well as bilateral and syndicated credit agreements with banks.

In December 2005, TUI AG concluded an agreement on a syndicated credit line (multicurrency revolving credit facility) totalling € 1.75 billion, maturing in December 2009 following the exercise of an extension option. In January 2007, the credit facility was reduced to € 1.0 billion, as needed, due to the implementation of initial measures concerning a programme to reduce invested capital. Besides the syndicated credit line TUI’s cash reserve was made up of unused bilateral credit lines with banks and cash and cash equivalents. TUI’s cash reserve thus totalled € 2.6 billion.

No restrictions on the transfer of liquid funds
At the balance sheet date, there were no restrictions on the transfer of liquid funds within the Group that might have significantly impacted the Group’s liquidity such as restrictions on capital movements or restrictions due to credit agreements concluded.

Change of control
TUI AG’s listed bonds, the private placements issued in 2006 and 2007 and a bilateral credit line agreement included change of control clauses. A change of control occurs if a third party directly or indirectly acquires depending on contract control over at least 30% or the majority of the voting shares in TUI AG.

In the event of a change of control, bond holders must be offered a buyback of the corresponding bond. This provision applies to all listed bonds with the exception of the hybrid bond and the convertible bonds. For the hybrid bond, an interest mark-up has been agreed to take effect in the event of a change of control should the rating be downgraded. For the convertible bonds, a right of termination or reduction of the conversion price has been agreed.

Concerning the private placements and a bilateral credit line agreement, the lenders are entitled to terminate the agreements in the event of a change of control.

The total volume of financing instruments and credit lines with correspond­ing change of control clauses currently amounts to around € 3.9 billion. In addition, there are no agreements in guarantee, leasing, option or other financial contracts that might cause material early redemption obligations that would be of significant relevance for the Group’s liquidity.

Apart from the financing instruments mentioned above, a framework agreement between the Riu family and TUI AG includes a change of control clause. A change of control occurs if a shareholder group represents a predefined majority of AGM attendees or if one third of the shareholder representatives on the Supervisory Board is attributable to a shareholder group. In the event of a change of control, the Riu family is entitled to acquire at least 20% and at most all shares in RIUSA II S.A. held by TUI.

A corresponding agreement concerning a change of control in TUI AG was concluded with the El Chiaty Group. Here, too, a change of control occurs if a shareholder group represents a predefined majority of AGM attendees or if one third of the shareholder representatives on the Supervisory Board is attributable to a shareholder group. In that case, the El Chiaty Group is entitled to acquire at least 15% and at most all shares in the joint hotel companies in Egypt and the United Arab Emirates held by TUI.

Under the licence agreement concluded with the allocation of the tourism business to TUI Travel PLC, the licensee, TUI Travel PLC, is entitled to acquire TUI AG’s total brand portfolio in the event of a change of control.

A further change of control agreement was concluded in connection with the establishment of the joint venture TUI Cruises between Royal Caribbean Cruises Ltd. and TUI AG. The agreement gives the partner the right to demand termination of the planned joint venture and to purchase the share held by TUI AG at a price which is lower than the price of their own share.

Excel-Download	© TUI AG Geschäftsbericht 2007

Net cash inflow from operating activities
The net cash inflow from operating activities of € 569 million in 2007 resulted from the consolidated earnings, totalling € 1,116 million adjusted for depreciation/amortisation, interest expenses and gains on disposals of fixed assets. The largest portion of these earnings was attributable to the operating results produced by tourism and shipping, the core businesses. The net cash inflow was reduced as a result of an increase in net current assets caused by the first-time consolidation of First Choice.

Net cash outflow from investing activities
In 2007, the net cash outflow totalled € 712 million. A cash outflow of € 1,169 million primarily resulted from the investments in property, plant and equipment as well as financial investments in the tourism and shipping divisions. Disposals of property, plant and equipment as well as investments generated a cash inflow of € 517 million. One of the key disposals in this context was the divestment of the Montreal Gateway Terminals in the shipping division.

Net cash inflow from financing activities
The net cash inflow from financing activities accounted for € 699 million. The main items were the cash inflow from the issue of a convertible bond in June 2007, the cash inflow from a new syndicated credit line taken up in the wake of the refinancing scheme for TUI Travel PLC in August 2007 and the private placements issued in October 2007 totalling € 2,034 million. Interest payments caused a cash outflow of € 298 million, up 28.0% year-on-year. The redemption of bonds and debt created a cash outflow of € 988 million.

Excel-Download	© TUI AG Geschäftsbericht 2007

The detailed cash flow statement and more detailed information on the cash flow statement are provided in the consolidated financial statements and the section ‘Notes on the cash flow statements’ in the notes on the consolidated financial statements.

Analysis of investments

The development of fixed assets including property, plant and equipment and intangible assets as well as shareholdings and other investments is presented in the section ‘Net assets’ in the management report. Additional explanatory information is provided in the notes on the consolidated financial statements.

Excel-Download	© TUI AG Geschäftsbericht 2007

Additions to property, plant and equipment by division

At € 1,008 million, investments in property, plant and equipment in 2007 had a part of 80.5% of additions to fixed assets. At € 570 million or 56.6%, shipping accounted for the largest portion of these additions. Tourism invested € 433 million in property, plant and equipment. This corresponded to 42.9% of the total volume. At € 6 million, 0.6% of the additions to property, plant and equipment related to central operations.

Excel-Download	© TUI AG Geschäftsbericht 2007

Tourism
At € 275 million, the largest part of investments in the tourism division was invested in the TUI Hotels & Resorts sector, including an amount of € 197 million invested in ongoing and newly launched large projects in Jamaica, Mexico, Italy and the Cape Verde Islands.

Shipping
In the shipping division, investments accounted for € 570 million, primarily including additions of € 232 million from the commissioning of three container ships and payments on account for six new builds planned to be delivered in 2009 and 2010. In addition, investments of € 75 million were made for container equipment in the completed financial year.

Investment obligations

Order commitments
Due to agreements concluded in the 2007 financial year or in previous years, order commitments for investments totalled € 3,451 million at the balance sheet date, € 577 million of which were related to scheduled de­liveries in the 2008 financial year. More detailed information is provided in the section ‘Other financial obligations’ in the notes on the consolidated financial statements.

Tourism
In tourism, order commitments for investments mainly related to the airlines’ fleet renewal programmes. Ten aircraft (Boeing 737s) were delivered in the course of the year under the order commitments with Boeing, from purchase agreements and the exercise of options. Due to the merger with First Choice, order commitments rose by a further twelve aircraft (Boeing 787s) so that total orders at the end of 2007 amounted to 67 aircraft to be delivered by 2013. A further ten aircraft are planned to be delivered in 2008.

Shipping
In the shipping division, Hapag-Lloyd had ordered a total of ten container ships with a capacity of 8,750 TEU each, to be delivered by 2010, including two ships already to be delivered in the 2008 financial year. Eight ships were directly ordered, with long-term charter contracts concluded for two ships. CP Ships had concluded long-term charter contracts for nine container ships with a capacity of 4,250 TEU each in 2003 in order to expand its fleet. One of these ships was delivered in 2005, a further six in 2006 and two in 2007.

Financial position of TUI AG

The financial position of TUI AG was essentially characterised by its function as the TUI Group’s parent company and central financing entity. The changes in equity outlined for the TUI Group, in particular changes in the capital stock and reserves as well as bonds, were also reflected in TUI AG’s balance sheet.

Excel-Download	© TUI AG Geschäftsbericht 2007

Development of TUI AG’s capital structure

Equity
At € 3,706 million, TUI AG’s equity rose slightly by 2.5%. The subscribed capital of TUI AG consists of no-par value shares, each representing an equal share of the capital stock. The proportionate share in the capital stock per share was around € 2.56. The issue of 225,720 employee shares in December 2007 hardly impacted the amount of subscribed capital. It remained almost flat at € 642 million. At the end of the financial year, subscribed capital thus comprised 251,245,575 shares. Capital reserves rose slightly, especially due to the issue of a convertible bond by € 23 million to € 2,420 million. Revenue reserves increased due to the allocations of the profit of the year. Net profit available for distribution grew by € 33 million to € 88 million. The equity ratio declined slightly to 32.9% (previous year: 34.3%).

The special item with an equity portion tax value adjustments on fixed assets remained almost unchanged.

Provisions
Provisions increased considerably by 44.4% to € 1,054 million. They comprised provisions for pensions of € 198 million (previous year: € 224 million) and other provisions of € 856 million (previous year: € 506 million). The increase was caused by higher provisions for anticipated losses for derivative financial instruments in other provisions.

Liabilities
TUI AG’s liabilities totalled € 6,458 million and thus increased by € 321 million or 5.2%.

Authorisation of the Executive Board to repurchase and issue shares
The Annual General Meeting (AGM) of 16 May 2007 authorised TUI AG’s Executive Board to acquire own shares of up to 10% of the capital stock. The authori­sation will expire on 15 November 2008 and replaces the authorisation granted by the AGM of 10 May 2006. To date, the possibility of acquiring own shares has not been used.

The AGM of 10 May 2006 resolved to authorise conditional capital of € 100 million. Accordingly, bonds with conversion options or warrants as well as profit-sharing rights and income bonds of up to a nominal amount of € 1.0 billion may be issued up to 9 May 2011. With the issue of a convertible bond with a nominal volume of € 694 million of 1 June 2007, € 64.1 million of the conditional capital was used.

Further unused authorised capital of € 317 million was available. It comprised authorised capital for the issue of employee shares of € 7 million. TUI AG’s Executive Board has been authorised to use it by 17 May 2009. In addition to the authorised capital for the issue of employee shares, the AGM of 10 May 2006 resolved to create authorised capital to issue new shares against cash or non-cash contribution worth € 310.0 million. The issue of new shares against non-cash contribution was limited to € 128.0 million. TUI AG’s Executive Board has been authorised to use it by 9 May 2011.