Speech by Rainer Feuerhake, CFO Annual General Meeting, 16 May 2007, Hanover

General introduction

Our Group’s annual financial statements were prepared in accordance with international accounting rules. Let me explain the figures reported in our annual financial statements to you.

However, since our financial statements are also affected by other transactions such as e.g. divestment income, integration expenses and restructuring costs apart from our operative business, I will also try to explain the impact of our operative business on our profit and loss statement as well as the other factors reflected in it.

The TUI Group’s annual financial statements for 2006 were characterised in particular by the first-time consolidation of CP Ships for a full financial year.

Operating earnings by the shipping division were impacted by a decline in freight rates and a strong increase in other costs such as inland transportation and bunker oil costs. In addition, our non-operating earnings were impacted by one-off integration costs.

The tourism division recorded an increase in its operating earnings. The bulk of income from divestments had to be spent on restructuring measures. At the same time, goodwill amortisation of 713 million euros – the main reason for the loss for the year – was required due to the reduction in earnings expectations in France and the UK and the resulting decline in future cash flows. However, let us now outline the key factors affecting your TUI Group’s annual financial statements for 2006 in detail.

Profit and loss statement

Group turnover rose by 2.3 billion euros or 13% to 20.5 billion euros, primarily due to the inclusion of CP Ships in consolidation for a full financial year. This turnover growth went hand in hand with an increase in the cost of materials, personnel costs as well as the balance of other operating expenses and income. At around 940 million euros, earnings before interest, taxes, depreciation and amortisation (EBITDA), the crucial cash flow indicator, was clearly positive although it was 16% down year-on-year, primarily due to the decline in earnings by the shipping division. After deducting amortisation of other intangible assets and depreciation of property, plant and equipment, earnings by the division (EBITA) stood at 203 million euros. The depreciation and amortisation of 736 million euros deducted here comprised a total of 54 million euros for impairments.

For the tourism and shipping divisions as well as central operations, earnings by division were impacted by a number of special factors, as already outlined several times. The main factors were the income from divestments and the restructuring and integration expenses.

In the following, let met provide you with a more detailed explanation of the reconciliation of reported EBITA to underlying EBITA at Group level. EBITA reported for the continuing operations totalled 203 million euros, a decline of 66% year-on-year. Earnings comprised one-off earnings and expenses from divestments of 188 million euros. They mainly resulted from the divestment of the TQ3 business travel activities and the divestment of the shares in Wolf (heating technology). On the other hand, restructuring expenses of 167 million euros were incurred, of which 101 million euros related to tourism (for the efficiency and earnings enhancement programme announced in December) and 66 million euros to shipping (for the integration of CP Ships). In addition, one-off expenses from individual transactions of around 172 million euros were included in earnings, almost evenly related to tourism, shipping and central operations. Our annual report for 2006 provides you with extensive details concerning the special factors impacting earnings.

The evaluation of our operative strength hinges on an analysis of the development of earnings based on underlying EBITA. I would therefore like to outline this earnings indicator in greater detail.

Underlying earnings by tourism totalled 401 million euros, up 9.5% year-on-year. However, overall they fell short of our own expectations because improvements in source markets Central and Northern Europe were adversely affected by the deterioration in the performance of source market Western Europe. The decline in earnings in source market Western Europe in 2006 exclusively resulted from the French market. Business was affected by the slump in demand for destination La Reunion and the overall restraint in demand in Nouvelles Frontieres and Corsair. The resulting overcapacity in flight operations resulted in margin losses. In addition, oil price-induced increases in the price of aircraft fuel could not fully be passed on to passengers.

Due to the difficult market environment, shipping fell significantly short of earnings expectations; adjusted for special effects, it managed to generate slightly positive earnings of 8 million euros. The slump in operating profits in container shipping was caused by the development of freight rates, which dropped by 2.7% for all trade lanes, and additional charges caused by cost increases. In the financial year under review, oil price-induced bunker costs remained at a high level. Earnings were additionally impacted by the high charter rates caused by scarce capacity in certain ship sizes as well as the increase in land-based logistics costs.

Central operations, which primarily comprise TUI AG’s corporate centre functions as well as the Group’s real estate business, grew by 24% to minus 69 million euros.

In both divisions – tourism and shipping – our reported EBITA covers significant restructuring measures as well as a welter of measures initiated in order to strengthen our competitiveness for the future. These programmes are expected to pay off in the next few years. Having looked at the development of earnings by our divisions, let us now return to a presentation of Group earnings.

Apart from the restructuring expenses to be taken into account and the poor performance of the shipping division caused by the market situation, earnings were considerably affected by goodwill impairments of 713 million euros required in the tourism division. These impairments of goodwill primarily affected goodwill of 480 million euros for the Northern Europe sector in the British and Irish market, 210 million euros for the Western Europe sector in the French market and 23 million euros for the destinations sector in the Magic Life hotel participation.

We regularly test our goodwill for impairment. In the framework of these impairment tests, the carrying amounts of the tested business units including their goodwill are compared with the income recoverable by the units.

The impairments result in particular from the difficult market environment in the UK, Ireland and France. The development of the markets has given rise to a more conservative approach in planning for expected cash flows, which is also reflected in the reduction of the earnings target for the entire tourism division. This was based on the medium-term budget presented to the Supervisory Board at the end of 2006. After deduction of impairments of goodwill of 713 million euros, earnings before interest and taxes (EBIT) totalled minus 510 million euros (previous year: plus 591 million euros).

After deduction of the interest result of 226 million euros, which rose due to the first-time inclusion of the bonds issued in 2005 (in order to finance the acquisition of CP Ships), and income taxes of 128 million euros, earnings by continuing operations totalled minus 864 million euros for 2006. Our tax burden rose despite the considerable reduction in earnings by divisions. The disproportionate increase in the tax rate resulted from the changes in the relationship between the profit contribution by tourism on the one hand and shipping on the other. Due to the tonnage tax, unrelated to earnings, in the shipping division, negative earnings in shipping do not benefit the tax rate.

Let me briefly comment on our discontinuing operations:

In the 2006 financial year, we completed the divestment of our industrial activities. Earnings by discontinuing operations declined to only 17 million euros, in line with expectations. Earnings comprised our trading activities, which were sold in the second quarter, at 6 million euros and follow-up income from rail logistics and energy operations, already divested in previous years. 2005 earnings of 196 million euros still comprised the current earnings from our special logistics and trading operations as well as the income from the divestment of VTG.

Taking account of the earnings from discontinuing operations mentioned above, Group earnings totalled minus 847 million euros. Adjusted for impairments of goodwill and the impairments mentioned before (primarily relating to the Turkish hotel complexes of Magic Life and Iberotel), the TUI Group reported Group earnings of minus 83 million euros, in spite of the adverse market environment in shipping and the restructuring expenses included in our earnings.

Group earnings attributable to shareholders (after deduction of minority interests and the dividend on the hybrid capital) declined to minus 919 million euros. In relation to the weighted average number of shares of 250.7 million units, basic earnings per share stood at minus 3.66 euros (previous year: 2.29 euros).

In order to complete my explanations on the earnings indicators let me briefly comment on the profitability level achieved. Return on Invested Capital (ROIC) is calculated as the ratio of underlying earnings by divisions (earnings before interest, taxes and amortisation of goodwill) and invested capital of the segment. The return on invested capital in tourism climbed by 1.1 percentage points to 7.9%.(The year-on-year increase was attributable to the earnings growth in the sector and a reduction in invested capital. The reduction in invested capital was driven by the impairment of goodwill. Return on invested capital before impairment was 7.4%. As in 2005, the profitability level in tourism was below the division’s specific cost of capital.)

Due to the drop in earnings in shipping, caused by the market trend, ROIC declined to 0.3% following the high level achieved in the 2005 financial year. Invested capital rose due to the inclusion of the increased capital base in the wake of the acquisition of CP Ships in 2006. I would like to underline once again that this is not a specific phenomenon in Hapag-Lloyd. The entire container sector dropped into a cyclical low following the 2004 and 2005 boom years and has not yet been able to recover.The average return generated by Hapag-Lloyd since the beginning of its affiliation with our Group until 2006 was 20%, and we are confident that we will again achieve good return levels in our shipping division in future.

At Group level, ROIC was 4.7% and was thus below the cost of capital of 8.5%, in particular due to the decline in ROIC in the shipping division. Following the presentation of our Group’s earnings situation, let me now turn to the key changes in the balance sheet.

Balance sheet / net debt

In the 2006 financial year, assets were substantially reduced due to the divestments and the revaluation of our goodwill. This trend affected both our balance sheet total and our asset and capital structure.

For the reasons mentioned above, the balance sheet total declined by 2.4 billion euros or 15.4% to 13 billion euros.

Equity declined by around 1.4 billion euros, totalling 3 billion euros. This was attributable to the reduction in revenue reserves in the wake of the impairments made. As a result, the equity ratio declined from 28.4% in 2005 to 23.1%.

The gearing, i.e. the relationship between debt and equity, deteriorated to 129.5% (previous year: 99.8%).

Thanks to the divestment programme, our Group’s net debt, defined as the balance of financial liabilities and liquid funds, was reduced by 0.5 billion euros to 3.2 billion euros.

The Group aims to bring net debt further down to approx. 2.5 billion euros by the end of the 2008 financial year. A new programme was adopted in December in order to achieve this goal.

This programme also comprises the divestment of the port terminal in Montreal/Canada, completed in the first quarter of 2007 (however, TUI continues to hold a 20% interest). As a result, net debt was already reduced to 3.0 billion euros by 31 March 2007.

Our net debt target does not take account of the merger with First Choice. We will comment on the new target parameters following the final decision by the anti-trust authorities and the establishment of TUI Travel PLC. In this context, we are currently also checking the extent to which the Group’s current financing structure may be optimised, both by means of collateralised and non-collateralised tools and in terms of maturities, with TUI Travel PLC.

This concludes my comments on the consolidated financial statements for 2006.

Thank you very much for your attention!

Speech by Rainer Feuerhake, CFO Annual General Meeting, 16 May 2007, Hanover

Other Topics

General introduction

Profit and loss statement

Balance sheet / net debt