Speech of Dr Michael Frenzel, Executive board chairman Annual General Meeting on 16 May 2007 in Hanover

I. Business operations in 2006

Before I talk in detail about the future TUI Travel as well as the further measures for improving our earning power I want to report on how business operations fared last year.

TUI AG grew last year. By achieving a revenue of €20.4 billion we were able to grow by almost 7%, despite the sale of some of our marginal activities.

Tourism contributed €14.1 billion to the overall revenue in 2006, this was about the same amount as the previous year. Nevertheless at the beginning of 2006 we sold the business travel activities of TQ3, which did not fit in with our core activities, so that on a comparable basis we managed to achieve an increase in revenue. The revenue from the Shipping sector was 63% above the previous year, which was a result of the full-year inclusion for the first time of the former CP Ships business. Our two core sectors together increased the revenue by almost 13% or €2.4 billion. That is clear proof of the strong growth of our two core sectors and their respective markets.

The profit situation in our divisions on the other hand was not uniform. Whereas the Tourism division returned an adjusted EBITA of €401 million and consequently finished the year operatively up 9.5% on the previous year, the Shipping sector just managed to get into the black with a profit of €8 million. Following the record year of 2005, which yielded a profit of €323 million, this represented a significant collapse. The reasons for this are not to be seen in the company, but are in fact due to the market. A decline in the charter rates along with increasing costs, for example for fuel, initiated a cyclical downturn in the shipping industry, which also affected us.

Overall in the Group we returned an adjusted EBITA of €369 million, the figure last year was €707 million. The decline of €338 million is exclusively due to the development in shipping. Naturally we cannot be satisfied with that. Even though we cannot influence the cyclical development of the shipping business we have set ourselves the target of improving our earning power. Let me explain later the measures that we have already taken for achieving better results in the future.

If we consider the tourism markets separately then it is seen that in particular the source market Central Europe, that is Germany, Austria, Switzerland and the East European markets, has done well and made a significant step forwards as regards profit. In fact the adjusted EBITA has improved by almost 75% from €66 million to €115 million. Our efforts here in the past to reduce costs are paying off, as is the optimised capacity policy. Above all in Germany, by not following an aggressive policy to increase volume it has been possible to achieve a better price and consequently a better yield.

Also in source market North it was possible to bring about two-figure improvements in the adjusted EBITA. Profit rose by 19% from €114 million to €135 million. Considering the difficult background market conditions in the United Kingdom and Ireland this is an exceptional success, which is not least a result of the restructuring carried out over the past few years. In these countries the World Cup and the blistering summer weather dampened the demand in the 2006 summer season, and this is the season which is always important for us. At the same time the travel competition became stronger through the aggressive low-cost carriers and the online travel agencies. Once again in Scandinavia the profit increased from an already good level. We have the best profit margins in these countries. Thoroughly unsatisfactory, on the other hand, was the business development in France. The destination of Reunion, which is extremely important for our French airline Corsair, collapsed in 2006 as a result of a local epidemic. The drop in business and load factor associated with this have left deep marks in the profit situation. Although we managed to achieve improved figures in Belgium and the Netherlands, these results could not compensate for the business collapse in France.

On the other hand we achieved good earnings from our activities in the destinations. Hotels and incoming agencies showed an adjusted EBITA of €173 million. Both sectors were able to maintain the high level of profit achieved in the previous year. In particular our hotel sector has proved to be a reliable profit bearing division.

Ladies and gentlemen, by achieving a revenue of €14 billion and an adjusted EBITA of more than €400 million the Tourism sector grew in 2006 compared to the previous year. We have nevertheless not arrived at the point we need to be and want to be. If we put this result in perspective by relating it to the capital invested in tourism of €5,1 billion, then we have a return on investment of 7.9%, which is currently less than the cost of capital of 8.8%. This is unacceptable. Our top priority is to further improve our earnings power and to generate economic added value. To achieve this we will not only further improve our absolute profits, but also reduce our working capital. I will come back to this later.

But first a few words about the business operations in shipping. I already mentioned the jump in revenue of 63% to €6.3 billion as a result of the first time full-year consolidation of CP Ships, which we acquired in autumn 2005. Global container traffic once more experienced large growth in volume of 9.6%, yet this was accompanied by falling freight rates throughout the year and considerably higher freight costs. Factors which proved burdensome were above all the higher prices for bunker oil and in this connection the land-based logistics. The freight related costs, which in particular include the costs for the associated upstream and downstream work as well as the costs for loading and unloading the containers, likewise increased significantly and were above the previous year’s level.

Following the excellent years from 2003 to 2005 the whole industry fell into a cyclical low in the course of 2006, from which it has not yet been able to recover.

At the end of the year Hapag-Lloyd just about managed to return a small operating profit. This negative market development prompted us to speed up the integration of CP Ships, which was acquired in 2005, so as to improve our productivity more quickly. In 2006 we formed from two organisations a new powerful shipping company. Hapag-Lloyd Shipping now has 138 ships, 635,000 containers (equivalent to 1,015,000 TEU), about 8,500 employees and is significantly stronger from a structural point of view in all the important markets than in 2004. The integration of CP Ships into the Hapag-Lloyd setup has now been successfully completed. We have streamlined the organisation considerably and have set it up as a very efficient globally operating company. We have been able to cope with the one-off costs of over €100 million that were needed for this. Indeed it has been a good investment in the future.

Ladies and gentlemen, I am convinced that shipping will recover from this cyclic period just as it has done in the past; our stronger position will then reward us with considerably higher profits.

Our German cruise liner division also belongs to Hapag-Lloyd. Business operations of Hapag-Lloyd Kreuzfahrten, which concentrates on the luxury and premium segment, again developed positively during the 2006 financial year. Our flagship, the MS Europa, was again, for the seventh time in succession, crowned as the best cruise liner in the world. It was possible to attract new customer groups and so increase the load factor as well as the profits. We are currently planning on expanding our cruise segment also in the volume market in cooperation with market leader Carnival Cruises. Under the umbrella of the TUI Cruises brand we want to be part of the future growth in this attractive market with our own independent product.

The downturn in our operating profit to €369 million following the collapse in container shipping has prompted us to suspend a dividend payment for 2006. The decision was not an easy one to make, however, from an operational point of view a dividend has not been earned and payment of one would have weakened the very substance of our Group. The reaction of the financial markets has, by the way, supported us in our decision; the positive development of our share price over the past few months also reflects this decision. That is about all I want to say on the operating development of our divisions, Mr Feuerhake will explain the annual accounts later in more detail.

2006, Ladies and Gentlemen, was also a year in which we further reduced the indebtedness of the company as planned. With the sale of our remaining steel trading activities in the USA as well as Wolf Heiztechnik, we have continued the rebuilding of the Group according to plan. The sale of the division, which was not part of our core business, has released further funds. Our level of debt has now been reduced from €3.8 billion to €3.2 billion.

We will continue to follow this path. Our aim is to continuously reduce our tied up capital including off-balance-sheet indebtedness. At the beginning of 2007, we thus sold 80% of the shares in a container terminal in Montreal, which we acquired with CP Ships, at an excellent price, thereby generating proceeds of over €300m (€325m). Programmes to further reduce our tied up capital in the flight and hotel segment are presently in planning.

Ladies and Gentlemen, to put it plainly, it is not a case of selling off the silver, but achieving an appropriate balance between tied up capital and the earning power of our companies. Our return on investment, especially in tourism, will only be sufficient if in addition to the planned further improvement of profit we also reduce the underlying capital base.

Ladies and Gentlemen, the profit-generating power of our tourism business since 2001 has developed in a more restrained manner than we expected and were able to predict. Reasons for this industry-wide development since 2001 have been the very selective growth after the shock of New York as well as the totally changed market and product structures and the immense cost pressures – triggered in particular by the development of crude oil prices. In 2006, this trend was intensified by the fall in demand in France and structural shifts in the British market. This caused us to cut back our forecasts for these markets. This is the reason why it became necessary to include depreciation in the annual review of goodwill carried as assets. The depreciation not affecting cash amounting to €710 million relates to the markets in the United Kingdom, Ireland and France as well as the hotel subsidiary Magic Life. This is also the primary item contributing to our full-year deficit of €847 million, which characterises the picture for 2006. When the difficult development – especially the accompanying cyclical downturn in container shipping – became evident to us in the course of last year, we resolved to use 2006 as a year of reorientation. Through the described revaluation of our activities in the accounts, we have laid a stable foundation for the future. At an operational level, we have also stepped up our efforts to increase the efficiency of our businesses.

I would like, above all, to stress the performance of our employees during this period. They have been affected by the recently introduced restructuring measures and with great energy have assisted TUI’s further development in a market environment characterised by headwind. The employees of the Group therefore deserve a big thank you.

Please believe me when I say that the necessary restructuring measures, especially those in the area of human resources, place a burden on the executive board. We will do everything in our power to use the basis we have laid by our tough but necessary decisions in 2006 to achieve positive future development.

To conclude my explanations on the business performance and figures in 2006, I would like to express my views on a further topical issue, namely on our handling of the environment.

The present discussion on climate change brings home to us that we as a society, as individuals, but also as a company, of course, bear responsibility for our environment. We at TUI AG know that in both tourism and container shipping, the responsible handling of natural resources is part of our image.

In tourism, TUI has always been a pioneer in matters of environmental protection wherever we operate. This is especially important as our customers travel with us in many countries in which environmental protection does not yet have the same priority as it does for us.

In a comparative study by “Manager” magazine on the issue of corporate social responsibility, we achieved the best score of the 130 biggest groups in Europe in the category “Environment”. In this connection, I would like to inform you that in October 2006 we handed over our TUI village in the south of Sri Lanka to 1,000 Tsunami victims. With our support, 200 houses were built for just as many families.

II Current business, 1st Quarter

Ladies and Gentlemen, allow me say something about the state of current business activities and the outlook for this year. Last Friday we published the report for the first quarter. Essentially our business units are carrying on in line with the developments of the previous year. For our tourism activities profits were slightly down on the year before. With the exception of the British market, which had to bear the brunt of extraordinary expenditures, our operations are on track. On the other hand in shipping the trend reversal is not yet in sight – also because the comparable quarter for 2006 was characterised by the then prevalent high freight rates.

Now, first, the details concerning our tourism activities. Source market Central Europe got off to a good start in 2007. We were able to register promising growth in guest numbers both with respect to the winter season that has just finished as well as for the summer season. Our position is clearly ahead of our competitors. In source market Northern Europe the competitive situation remains intensive and demand in the overall market is cautious. In Britain a surprise air passenger duty can no longer this year be passed onto customers. In the Nordic countries TUI’s business remains very buoyant. What is also promising is that there are signs of an improvement in France, in source market Western Europe. In Belgium the number of guests rose by 14% in the first quarter.

At the destinations, above all our hotels have benefited from the rise in overnight stays. Tourism overall, with the exception of source market Northern Europe, has shown a promising start. It is worth remembering, given the seasonal nature of the business, that the results for the first quarter are normally negative.

Shipping can boast a welcome growth in volume for the first quarter. The amount transported increased by 10% to 1.3 million TEU. The operating result was not able to keep pace with this development because the freight rates have not yet risen across the board. By selling the Montreal container terminal we were nevertheless able to close the 1st quarter for this division with an operating profit of plus €141 million and an adjusted profit of minus €53 million.

Allow me to sum up the prospects for TUI AG. We have implemented numerous measures and actions to strengthen our competitive edge in the tourism sector. This is augmented with our agreement with First Choice to set up TUI Travel. The figures for the tourism division for 2007 will depend very much on when the competition authorities give the go-ahead, as this determines the extent of the contribution by First Choice towards this year’s business figures. It is therefore impossible to predict the end of year results.

In shipping, following the integration of CP Ships and the significant extra manpower costs, we will be reaping the rewards of synergies and all cost-savings potential. We imagine we have passed the cyclical trough in the industry in the first quarter of 2007. We anticipate the first signs of recovery in the second quarter. We are assuming positive operating results for the second half-year of 2007. The actual figures will depend on whether we are able to impose the surcharges on the freight rates during the peak season – which is so important to us. The positive development is expected to continue in to 2008.

III. Strategy and future

Now allow me to focus on the strategy and future of our company. Where does TUI AG stand strategically? What is our destination?

With respect to container shipping, it was one year ago at this same venue that I was announcing that the Group had substantially expanded its shipping activities with the purchase of CP Ships and that we had seriously consolidated our long-term growth strategy in container shipping with a major acquisition.

Container shipping is a global business. The number of transported containers has more than doubled over the past ten years. Over this period the transport volume grew on average at a rate of 1.9% per year – growth rates that exceed the rise in global trade and the global gross domestic product. All predictions confirm that this growth trend will continue unabated in the future.

Hapag-Lloyd is in an excellent position in this business. It is the number 5 in the world ranking of the biggest container lines. In terms of efficiency and profitability we are at the very top – only the market is not playing ball at this juncture.

The main focus at Hapag-Lloyd is now on fully exploiting all optimisation potential. The structures for making this a success already exist, for Hapag-Lloyd has a unified world-wide organisation. All offices work on the basis of standardised processes and this assures a high degree of efficiency. Our IT systems are recognised throughout the industry as the best. They are subject to continuous further development and evolve with the changing demands and requirements of our customers. The in-house-developed freight information system handles the whole transport chain and associated processes, and delivers data in real time. Our e-business solutions tailored to our customers needs accelerate data and information exchange between customers and suppliers. The systems and processes also allow detailed analysis of the cost components, their impacts and related opportunities. With the completion of the integration of CP Ships in 2006 we are again operating with Hapag-Lloyd’s accustomed high productivity. As planned, we have achieved our aim of raising the productivity of CP Ships to the Hapag-Lloyd level.

The course has been set for successful growth. Thanks to our capacity we will also be able in the future to profit from the expected growth in freight volume. In this aspect we are investing above all in large ships. For instance, a few days ago one of the world’s biggest container ships was launched under the name Tsingtao Express. Another big ship will follow this year.

In the context of this growth strategy over the last few days we have just approved orders for another eight container vessels to be completed in 2009 and 2010. We will decide closer to the time whether we shall buy them outright or charter them.

With respect to the unsatisfactory development of the results for 2006 we have, of course, been giving this very close scrutiny and attention. Should we change our strategy for the Shipping division? Was the investment in shipping a mistake?

The answer to both questions is a resounding no. Despite the cyclical nature of the industry we remain absolutely convinced about the future and the long-term profitability of the Shipping division. Container shipping has gone through a number of cycles over the last ten years and will return to the accustomed profitability after this temporary phase has come to its end. Between 2001 and 2006 Hapag-Lloyd’s long-term profitability during the cycles characteristic of the industry averaged 20% ROIC, raising it clearly above the industry average.

The purchase of CP Ships and its successful integration has substantially increased the value of our shipping business. The acquisition price was reasonable and not excessive. With our new structure we are in an excellent position for benefiting over-proportionally from the future upturn in the industry.

Now let me move on to our strategic development in tourism. Compared with shipping our position here is much more complex. We are indeed the world’s number one and did manage to improve our profits last year – but our competitive position and profitability are under pressure. The structural changes shaping tourism – which became apparent after the attacks on 11 September 2001 in the USA – are still in progress, and we still face considerable challenges ahead. The changes can be clearly noticed in three areas:

The unabated growth in low-cost carriers.
The increasing acceptance of the internet by broad sections of the population.
And finally, the changed booking behaviour of our customers, who make their holiday choices at a much later stage than before.

We have not been caught unawares by these shifts in the market. On the contrary, we initiated steps and measures early on. For instance, we fast-forwarded development of our products, we have implemented new technologies and above all else we have cut costs considerably. I would like to underscore that we have reduced costs in tourism by some €360 million. This was the only way of assuring and consolidating our market position and our profitability. The operating profit in tourism of €400 million for 2006 means we have taken another step forward in the right direction.

However – and I have already alluded to this – the improved figures do not cover our capital costs. Therefore in 2006 we launched another profit improvement programme under the project name Amadé. The aim of the project is to lever more earnings potential in all sections of our tourism value chain. A large proportion of the one-off costs associated with these programmes has been largely accounted for in the results for 2006.

Allow me to sketch some examples of our strategy. The trend towards modular holidays continues unchecked. Customers put together their own holiday package using the internet and/or travel agencies. The bottleneck in the main holiday season is often the flight. The offer of an attractive flight programme is therefore an essential success factor. TUI, having more than 120 aircraft, is one of Europe’s major carriers. Since the beginning of the year, Hapagfly and HLX products are now being offered in Germany under the brand TUIfly. TUIfly combines the product-oriented charter flight programme with the price-focused positioning and presentation as a low-cost airline. The aim is to attract new customer groups for flight-only business as well as see the improved sale of hotel products at the destinations. In March 2007 TUIfly.com with 1.7 million visitors came second place behind Bahn.de in the travel site ranking and lay clearly ahead of our major competitors. The launch of the new brand has been a distinct success. Now we have to build on this and further differentiate our product.

Because of the process of consolidation on the German flight market we are currently considering the creation of long-haul capacity operating out of Germany. In the Group we have long been operating long-distance flights for source markets Northern and Western Europe. To be able to expand our long-haul products TUI has negotiated attractive options for 11 Boeing B787 Dreamliners for delivery between 2010 and 2013. First Choice has also ordered 12 aircraft, which will already be delivered from 2008 onwards. This means that TUI Travel plc will have one of the biggest 787 fleets with the earliest delivery dates in Europe. The Boeing B787, with its systematic use of carbon-fibre components, represents a new generation of aircraft that puts us in a position to offer our customers a completely new long-haul experience. With the B787, TUI will be operating the most environmentally-friendly long-haul aircraft. With this order the total orders placed with Boeing now amount to 58 aircraft.

With respect to the internet – my second example – we are going for a major expansion of our products and programmes and have been achieving substantial growth rates year in year out. About 17% of our sales in 2006 were generated over the internet. In the most important markets – Germany and the UK – we are frontrunners. TUI made early investments in attractive products and platforms. In Europe we are one of the leading internet providers and we are continuously expanding this business model.

The further improvement of our cost structure is crucial for increasing profitability in the future. We intend to cut production process and administration costs by an additional €350 million by 2008. The goal of improved efficiency remains in place even after the merger with First Choice. On top of cutting costs we are also investing in improving the quality of our products and in new growth segments. In line with this we will be expanding our hotel portfolio as well as incoming agency business.

Our large-scale project in Italy is a good example of our growth strategy. TUI Hotels & Resorts is planning tourism development in Tuscany. Under the name Tenuta di Castelfalfi we intend to develop and expand in an environmentally sound and sustainable manner our tourism product and programme range on an eleven-square-kilometre site that features old buildings, a medieval castle, a hotel, and a golf course. This includes establishing a Robinson Club, an Iberotel as well as villas and apartments. The preservation of existing farming practices as well as the largely self-sufficient supply of renewable energy represent crucial components of the concept, which we have passed on to the local authorities for their consideration and approval.

Now allow me to put the spotlight on what is probably the most important strategic step – the equivalent of another quantum leap in terms of our tourism strategy. This February the strategic opportunity arose for assuring another surge in growth. In discussions with the management of First Choice it became clear that a merger of our tourism activities was a logical step. Both sides became more and more convinced of the substantial advantages and benefits of a fusion. With the merger we have forged by far the biggest and one of the most profitable travel groups in the world -- with a customer base of almost 30 million. In the competition with low-cost carriers and online portals we are assuring and securing our Group and consolidating our position in the special travel segments that are associated with growth and profitability.

About our partner: First Choice is an integrated travel operator, operating in 17 countries with a staff of some 15,000 employees. This group owns 409 travel agents, 34 aircraft and two cruise liners.

In the fiscal year 2005/06 EBITA profit of slightly more than €200 million was achieved for sales revenues totalling €4 billion. First Choice stands out by probably achieving the highest profit per turnover in the industry – namely about 5%. In addition to the volume business, one of First Choice’s main strengths lies in specialist travel, accounting for almost 50% of sales and associated with particularly high profits and high growth rates. Apart from Britain First Choice’s regional focus lies in North America and France, where it has managed to develop profitable activities.

We are forming a new enterprise under the name TUI Travel plc. The company will be quoted on the London Stock Exchange. We hold a 51% stake. We are contributing substantial parts of the tourism division: retailing, tour operators, airlines and incoming agencies. The hotel business and the German cruise lines will continue to be held and managed directly by TUI AG.

About TUI Travel: For our tourism division the merger opens new expansion opportunities in highly profitable special markets. By merging functions we can create additional synergies totalling some €150 million. These will become fully effective within three years after completing the merger. Most of the synergies will be accounted for by the British market.

Before setting off on this new chapter in the history of the TUI Group, some hurdles still remain. Having just heard of the decision by the competition authorities in favour of the merger of Thomas Cook and MyTravel, I am very optimistic that our merger will be given the green light, too, by the European Commission by early June. The British Exchange Supervisory Authority also has to approve and then the shareholders in First Choice have their chance to decide on the merger. On the basis of the current timetable we expect this to happen in July and to be listed on the LSE by the end of August.

The integration of our tourism division in TUI Travel, listed on the LSE, also means a change in the tasks and responsibilities at TUI AG as the lead holding company in the Group. We can significantly downsize central functions and cut back central costs. We will be in a position of being able to drastically slash our holding costs from €110 million to some €40 million.

What does this step imply for TUI AG? Where does the Group go from here?

In principle there are “major benefits” in terms of the architecture of the Group. The “new” TUI Group, with TUI Travel, the hotel business and the Shipping division, has an excellent starting position on the path to achieving higher returns on invested capital. With this restructuring we are increasing our flexibility and leverage.

Our most urgent task remains to give our tourism activities in TUI Travel a good start. We will be restructuring our hotel division. More efficiency improvements will put container shipping in good shape for the coming boom. Our top priority is to deliver improved operating performance in all divisions – a categorical precondition for the long-term existence of these Group divisions.

We are also very aware that we still have to lobby for the acceptance of our Group portfolio. We are noticing an increasing interest of the financial markets to invest directly in operational businesses, ie avoiding multilevel group structures. The opening up also of German medium-sized businesses for private equity and venture capital as well as the successful floating of constituent group divisions of DAX 30 companies are examples of this. It is not for nothing that the announcement of the merger, which in the end is equivalent to floating our tourism activities, has meant that you, our shareholders, and those in First Choice have made substantial stock market gains within but a few weeks.

After completion of the IPO of TUI Travel – which we will be handling with more than the necessary transparency requirements of the past – we will be in possession of a very cost-effective, flexible group structure that holds open multifarious options for the continued development of the Group. It is our duty to constantly review our strategy and policy, taking into full account not only the interests of our shareholders but also those of our customers and the many thousands of employees and their locations.

IV. Summary and outlook

Dear shareholders,
In conclusion, let me now summarise. Despite a turbulent time over the past few years, the Group is looking good. We are operating in two global growth markets. The measures we have introduced to improve the operating earning power are starting to take effect. And the merger between TUI tourism and First Choice will open up new opportunities for more earnings. The hotel sector and the cruise segment are both attractive divisions waiting to be expanded. Growth in container shipping continues unabated with Hapag-Lloyd AG poised at an excellent starting position ready for when the freight rates start to pick up again. Our new Group structure provides us with the ability to react extremely flexibly to strategic changes that occur in our markets.

The room to manoeuvre that this has given us is reflected in the increase of the TUI share price since the beginning of the year.

The chart shows that up to now in 2007 we have easily out-performed the Dax overall. From the curve you can see two strong features. Firstly, the announcement of the merger with First Choice was received and assessed very positively by the financial markets. Secondly you will notice that our share price was following an upward trend even before the announcement. Following an unsatisfactory year in 2006 the markets now believe in us again. From the developments over recent months we can say that TUI AG up to now in 2007 is one of the absolute winners in the DAX.

Let me assure you, also on behalf of my colleagues in the executive board, that we will do everything in our power to ensure that this positive trend continues.

Major tasks – clear targets. The Group, your TUI AG, is on the right track.

I thank you for your confidence and your attention, and I look forward now to the discussions with you.

Speech of Dr Michael Frenzel, Executive board chairman Annual General Meeting on 16 May 2007 in Hanover

Other Topics

I. Business operations in 2006

II Current business, 1st Quarter

III. Strategy and future

IV. Summary and outlook