General

TUI AG, based in Hanover, Karl-Wiechert-Allee 4, is the TUI Group’s parent company and a listed stock corporation under German law. The Company has been registered in the commercial registers of the district courts of Berlin-Charlottenburg (HRB 321) and Hanover (HRB 6580).

TUI continues to operate two core businesses, tourism and shipping. The tourism division comprises TUI Travel PLC, a company newly established in the 2007 financial year in the wake of a merger between the TUI tourism division – with the exception of the hotels managed by TUI Hotels &Resorts – and the First Choice Holidays Group, as well as the TUI Hotels &Resorts sector. In the shipping division TUI Group operates Hapag-Lloyd, one of the world’s five leading container lines, and cruise activities operated by Hapag-Lloyd in the German-speaking premium and luxury market.

The members of the Executive Board and the Supervisory Board as well as other board mandates held by them are listed separately in an annex to the section ‘Corporate Governance’ in the annual report.

The Executive Board and the Supervisory Board have submitted the declaration of compliance concerning the German Corporate Governance Code required pursuant to section 161 of the German Stock Corporation Act (AktG) and made it permanently accessible to the general public on the Company’s website (www.tui-group.com).

The financial year of TUI AG corresponds to the calendar year. If any of its sub­sidiaries (in particular those of the TUI Travel PLC Group) use other closing dates, audited interim financial statements are prepared in order to include these sub­sidiaries in the TUI Group’s consolidated financial statements.

The consolidated financial statements were prepared in euro. Unless stated otherwise, all amounts were indicated in million euros (€ m).

Accounting principles

Pursuant to section 315a sub-section 1 of the German Commercial Code (HGB), in combination with the relevant EU Regulation (EEC No. 1606/2002), TUI AG is legally obliged to prepare consolidated financial statements in accordance with the rules of the International Accounting Standards Board (IASB), the International Financial Reporting Standards (IFRS).

The IFRS were applied in the form in which they have been transposed into national legislation in the framework of the endorsement process by the European Commission. In addition, the commercial-law provisions listed in section 315 sub-section 1 of the German Commercial Code were also complied with. As of the beginning of the 2007 financial year, the following interpretations published by the IASB, had to be applied: IFRIC 7 ‘Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies’, IFRIC 8 ‘Scope of IFRS 2’, IFRIC 9 ‘Reassessment of Embedded Derivatives’, IFRIC 10 ‘Interim Financial Reporting and Impairment’. The application of these standards did not give rise to any material changes to the TUI Group’s accounting and measurement methods.

In addition, application of the newly adopted IFRS 7 ‘Financial Instruments: Disclosure’ and the changes concerning additional disclosures related to capital management under IAS 1 ’Presentation of Financial Statements’ had to be applied as of 1 January 2007. Accordingly, the additional disclosures required in the notes for the year under review and the previous year as a result of these new standards were incorporated in the present financial statements.

The following directly approved, revised or newly issued standards and interpretations by the IASB, were not yet applicable in the 2007 financial year:

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This table exclusively lists regulations that will be effective as of the 2008 financial year or later, with endorsement of some regulations by the EU Commission still pending. The detailed effects of the application of these standards on TUI AG’s consolidated financial statements are currently not yet known or cannot be reason­ably assessed.

Changes in accounting and valuation methods and the structure of items of the profit and loss statement

According to IAS 8, the effects on the previous year’s figures of changes in accounting and valuation methods implemented in the current financial year must be shown by restating the previous year’s figures. In order to enhance comparability, the restated previous year’s figures both for the profit and loss statement and the balance sheet are presented alongside the originally published previous year’s figures.

Since the beginning of the 2007 financial year, TUI AG has exercised the option under IAS 1 to structure the consolidated profit and loss statement according to the cost of sales. Under this format turnover is presented together with the cost of sales incurred to generate the turnover. Structuring the consolidated profit and loss statement in accordance with the cost of sales format enhances the international comparability of reporting. This change in the presentation format relates to all operating income and expenses with the exception of turnover.

Using the allowed alternative treatment under IAS 23, TUI AG has changed its accounting method for borrowing costs in connection with qualified assets. The accounting method now applied results in the capitalisation of borrowing costs directly attributable to the acquisition, construction or production of qualified assets (in particular aircraft, hotels and ships within TUI Group). This presentation provides a more meaningful presentation of the acquisition costs for assets entailing major financing costs and facilitates comparison with the acquisition costs of assets for which the financing costs have been included in the calculation of the purchase price.

The capitalisation of borrowing costs had the following effects on items in the consolidated financial statements:

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The interest rate for inter-group financing is 5.81% for the financial year 2007 and 5.63% for 2006.

The retroactive application of the capitalisation of borrowing costs resulted in an increase in revenue reserves of € 9.1 million in the opening balance sheet as per 1 January 2006. The change of this method does not have any significant change on the cash flow or the earnings per share.

Besides the changes to the recognition and valuation methods resulting from the exercise of alternative treatment options offered under individual standards, the following adjustments were made:

Due to the integration of the operating activities of the CP Ships Group in Hapag-Lloyd, the primary economic environment of the shipping division changed fundamentally, so that the functional currency was changed from Euro to US dollar. The assessment of the functional currency was based on both, freight rates as well as cash inflow and cost structures. Since 1 January 2007, the operating container shipping companies have therefore prepared their financial statements in US dollar.

In the period under review, the valuation method for provisions for leased aircraft maintenance work was changed. As a result, the corresponding provisions rose by a total of € 21.8 million as at 31 December 2006. At the same time, provisions for deferred income taxes declined by € 6.6 million.

In order to enhance international comparability, the expenses and income from changes in the value of financial instruments due to hedging transactions for bunker oil, aircraft fuel and future cash flows in foreign currencies were allocated to the expense or income items under which the hedged item were reported and were no longer shown under the financial result. As a result, the financial result declined by € 47.4 million for 2006 and € 126.5 million for the 2007 financial year.

Principles and methods of consolidation

Principles

The consolidated financial statements included all major companies in which TUI AG was able, directly or indirectly, to determine the financial and operating policies so as to obtain benefits from the activity of these companies (subsidiaries). As a rule, the control was exercised by means of a majority of voting rights. The consolidation of the RIUSA II Group was based on de facto control, with TUI AG and the co-share­holder holding equal interests and voting rights. In the light of overall conditions and circumstances, TUI AG was able in this case to determine the financial and operating policies so as to obtain benefits from the activity of this hotel group. In assessing whether the Group is able to exercise control, the existence and effect of potential voting rights which may currently be exercised or converted are taken into account. Consolidation of such companies started as from the date at which the TUI Group gained control. When the TUI Group ceased to control the corresponding companies, they were removed from consolidation.

The consolidated financial statements were prepared on the basis of the annual individual or consolidated financial statements of TUI AG and its subsidiaries, prepared on the basis of uniform accounting, valuation and consolidation methods and audited by auditors.

Shareholdings in companies in which the Group was able to exert significant influence over the financial and operating decisions within these companies (associated companies, where as a matter of principle there is shareholdings of 20% but less than 50%) were carried at equity. Companies managed jointly with one or several partners (joint ventures) were also measured at equity. The dates as of which as­sociated companies and joint ventures were included in or removed from the group of companies measured at equity were determined in analogy to the principles applying to subsidiaries. At equity measurement in each case was based on the last audited annual or consolidated financial statements, whereas the financial year corresponded to the calendar year. One joint venture had a differing financial year from 1 April to 31 March and three companies had financial years from 1 November to 31 October of the following year.

Group of consolidated companies

In the 2007 financial year, the consolidated financial statements included besides TUI AG a total of 46 domestic and 683 foreign subsidiaries.

56 domestic and 93 foreign subsidiaries were not included in the consolidated financial statements. Even when taken together, these companies were not significant for the presentation of a true and fair view of the financial position and performance of the Group.

Since 31 December 2006, a total of 369 companies were included in consolidation for the first time. This number included 342 companies (including TUI Travel PLC) added to consolidation due to the acquisition of control over First Choice Holidays PLC on 3 September 2007. In addition, a further 20 companies were added to the group of consolidated companies due to acquisitions. Five additional companies were added to consolidation due to the expansion of their business activities, and two newly established companies were included in consolidation in 2007. The additions to consolidation included 367 companies added to the tourism division, with two companies added to the shipping division.

Since 31 December 2006, a total of 27 companies were removed from the group of consolidated companies. Eleven of these companies were from the tourism division while 16 companies had been operating in the shipping division. Six of the deconsolidated companies were removed from the group of consolidated companies due to the sale of the Irish Budget Travel Group. A further 21 companies were deconsoli­dated due to the liquidation or merger of companies.

Seventeen associated companies and 33 joint ventures were measured at equity. The group of companies measured at equity declined by four year-on-year. While two companies were added to the group of consolidated companies due to the purchase of additional shares, four companies were removed from the group of companies measured at equity due to the sale of shares, liquidation or reduction of the business activities. Additions to this group mainly resulted from the acquisition of interests in two companies. One company was reclassified from associated companies to joint ventures.

1) excl. TUI AG

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The major direct and indirect subsidiaries, associated companies and joint ventures of TUI AG are listed in the major shareholdings section. A complete list of shareholdings is published in the electronic Federal Gazette www.ebanz.de

The effects of the changes in the group of consolidated companies in the 2007 financial year on the years 2007 and 2006 are outlined below. While the balance sheet values of companies removed from consolidation in the 2007 financial year were shown as per closing date for the previous period, the items in the profit and loss statement were also shown for the 2007 financial year due to prorated effects.

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Acquisitions – divestments

Through the purchase agreement dated 31 January 2007, the tour operator TUI Deutschland GmbH purchased the remaining 25% of the ordinary share capital of E.V.S. Beteiligungsgesellschaft mbH, Rengsdorf (Berge & Meer Group). This company had already been consolidated by the TUI Group, at a purchase price of € 19.1 million in addition to the 75% share already held.

On 4 June 2007, the EU Commission approved the merger, agreed on 19 March 2007, between TUI’s tourism division – with the exception of the hotel companies operated by TUI Hotels & Resorts – and the British travel group First Choice Holidays PLC to form TUI Travel PLC. Approval was granted subject to the condition that TUI AG sells its Irish subsidiary Budget Travel. On 29 June 2007, TUI AG and First Choice Holidays PLC published the prospectus for TUI Travel PLC, the company created by the planned merger, in order to enable admission to trading on the London Stock Exchange. On 25 July 2007, the shareholders of First Choice Holidays PLC approved the merger at an extraordinary annual general meeting.

The merger was implemented on 3 September 2007 by means of a share swap with the newly established TUI Travel PLC, whose shares have since been traded on the London Stock Exchange. In the wake of this share swap, TUI AG received 51.0% of the shares in TUI Travel PLC and a compensation claim to create the debt agreed in the Merger Agreement for TUI’s tourism division involved in the merger in exchange for all shares in companies of TUI’s tourism division held by the TUI Group. The share swap in First Choice Holidays PLC was effected by means of a scheme of arrangement under which one share in First Choice Holidays PLC was swapped into one share in TUI Travel PLC. TUI AG now holds with 51.0% of issued shares in the company, i.e. the majority of voting rights, while the former shareholders of First Choice Holidays PLC hold 49.0% of the shares in TUI Travel PLC.

Pursuant to IFRS 3, the transfer of TUI’s tourism division had to be treated as a `transaction under common control’ and was therefore explicitly excluded from the scope of IFRS 3 with regard to TUI’s tourism division.

The equity of the First Choice Holidays Group, provisionally determined in accordance with the International Reporting Standards, totals GBP - 65.7 million (€ - 97.1 million). In accordance with IFRS 3, the fair values of the assets, liabilities and contingent liabilities acquired and the acquisition costs have only been calculated on a provisional basis to date due to the short period passed since the acquisition of the extensive First Choice Holidays Group. The proportionate net assets of TUI tourism division at fair value on the day of the stock exchange was € 1,164.6 million plus incidental costs of € 12.3 million. The elimination of the acquisition costs against the proportionate, provisionally revalued equity taking into account the minority share (€ - 50.8 million) resulted in the capitalisation of goodwill of the equivalent of € 1,227.7 million in the consolidated balance sheet.

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In the period from September to December, the First Choice Holidays Group posted external turnover of GBP 945.4 million (€ 1,342.5 million) with earnings after tax of GBP - 57.1 million (€ - 81.0 million) including the depreciation of the revalued assets carried in the wake of the purchase price allocation. Taking account of TUI Travel PLC’s loss for the year, earnings after tax showed an interest-induced decline of a further GBP 7.6 million (€ 10.8 million). From the beginning of the financial year until the date of first-time consolidation, the First Choice Holidays Group generated turnover of GBP 2,231.0 million (€ 3,305.2 million) an underlying EBITA of GBP 136.7 million (€ 202.5 million) and an EBITA of GBP 70.3 million (€ 104.1 million) as well as earnings after tax of GBP 21.0 million (€ 31.1 million).

In March 2007, the Italian Tenuta di Castelfalfi S.p.A., established in 2006 with a co-partner holding a 15.0% stake, acquired around 1,100 hectares of land with historical buildings in Tuscany, in the Montaione municipality, at a purchase price (including incidental costs) of a total of € 105.6 million. In connection with the comprehensive hotel and property project ‘Toscana Resort Castelfalfi’, based on this property purchase, the land and buildings were carried at their fair values, provisionally determined for similar property based on the sales comparison approach in accordance with IFRS 3. The fair value of the land and buildings was provisionally determined as € 45.0 million and recognised accordingly in the balance sheet. This resulted in goodwill of € 60.6 million.

In addition, a further 17 companies were acquired in the financial year under review at total acquisition costs of € 115.8 million (incl. incidental costs).

1) The acquisition costs in foreign currencies were translated into € at the exchange rate as at the date of the respective transaction and also comprised the incidental costs.
2) Following the acquisition of 42.3%, TUI AG now holds 90.2% of the shares of the previous joint venture.

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Besides the purchase prices already paid, the cost of acquisition in some cases also comprised the best possible estimate of additional purchase price portions depending on future events.

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The difference of € 105.2 million between the cost of acquisition and the revaluated net assets acquired was provisionally carried as goodwill for the respective companies.

Since the date of first-time consolidation, the companies mentioned above have generated turnover of € 11.0 million and earnings after income taxes of € 1.1 million. Until the date of the transfer of the shares, the companies generated turnover of € 75.3 million and earnings after tax of € 1.0 million.

With effect from 5 January 2007, the minority share in Germanischer Lloyd AG held by Hapag-Lloyd AG (around 2.6%) was sold at a purchase price of € 15.1 million. In accordance with IFRS 5, this minority interest was classified as a non-current asset held for sale and shown in a separate balance sheet item as at the end of the 2006 financial year.

On 21 February 2007, CP Ships Limited concluded a contract concerning the sale of the essential assets and liabilities of Montreal Gateway Terminals to Montreal Gateway Terminals Limited Partnership, a company established for that purpose by Morgan Stanley Infrastructure Partners. The agreements were effective as at 9 March 2007. Montreal Gateway Terminals were part of the business operations of the container shipping line CP Ships, acquired in 2005.

Since the sales negotiations had become increasingly specific, the assets and liabilities of Montreal Gateway Terminals held for sale had already been classified as a disposal group in accordance with IFRS 5 and shown in separate balance sheet items as at the end of the 2006 financial year.

Until 9 March of the 2007 financial year, Montreal Gateway Terminals generated turnover of € 17.1 million and earnings after tax of € 1.4 million. In the first quarter of 2006, turnover amounted to € 25.8 million with earnings of € 9.9 million.

The container terminal business was acquired at a price of the equivalent of € 324.6 million by Montreal Gateway Terminals Limited Partnership in the form of an asset deal. The purchase price was paid in cash for the most part, with the remainder paid in the form of a transfer of a 20% share in the new company. This interest was measured at equity by the TUI Group. After deduction of expenses of € 4.6 million associated with the sale and taking account of the disposal of the goodwill thus removed totalling the equivalent of € 4.4 million, the divestment generated overall positive earnings before tax of € 185.4 million in the shipping division in the 2007 financial year.

In complying with the condition linked to the approval of the merger between First Choice Holidays PLC and TUI’s tourism division to form TUI Travel PLC by the anti-trust authorities, all shares held in the Irish Budget Travel Group were sold to the Islandic Primera Travel Group against payment of € 5.5 million with a book loss of € 6.8 million in October 2007. The goodwill of this Irish TUI group had previously been fully amortised in the third quarter of 2007 at an amount of € 33.7 million on the basis of the value ratios of the forthcoming divestment. From January to August 2007, the Budget Travel Group generated turnover of € 129.2 million and earnings after tax of € 5.4 million. For the entire year 2006, this group had posted turnover of € 169.2 million and a loss after income taxes of € 1.5 million.

Currency translation

Foreign currency transactions were translated into the functional currency at the exchange rates as at the date of the transaction. Any gains and losses resulting from the execution of such transactions and the translation of monetary assets and liabilities in foreign currencies at the exchange rate as at the date of the transaction were shown in the profit and loss statement, with the exception of gains and losses to be carried in equity as qualified cash flow hedges.

The financial statements of companies have been prepared in the respective functional currency. The respective functional currency corresponds to the currency of the economic environment in which the company primarily operates. With the exception of the operative container shipping companies and two companies in the tourism division, the functional currencies of all subsidiaries corresponded to the currency of the country of incorporation of the respective subsidiary.

Where subsidiaries prepared their financial statements in currencies other than the euro, i.e. the Group’s reporting currency, the assets, liabilities and balance sheet notes were translated at the mean rate of exchange applicable at the balance sheet date (closing rate). Goodwill allocated to these companies and adjustments of the fair value arising on the acquisition of a foreign company were treated as assets and liabilities of the foreign company and also translated at the closing rate. The items of the profit and loss statement and hence the profit for the year shown in the profit and loss statement were translated at the annual average rate. Any currency differences arising from the translation of net investments in economically indepen­dent foreign sub-entities, debt and other currency instruments classified as hedges of such investments were carried in equity with no effect on results.

Translation differences related to non-monetary items with changes in their fair values eliminated with an effect on results (e.g. equity instruments measured at fair value through profit and loss) were carried as a gain or loss from measurement at fair value in the profit and loss statement. In contrast, translation differences for non-monetary items with changes in their fair values taken to equity (e.g. equity instruments classified as held for sale) were carried in revenue reserves under the revaluation reserve.

The TUI Group did not hold any subsidiaries operating in hyperinflationary economies in the financial year under review, nor in 2006.

The currency translation of the financial statements of foreign companies measured at equity followed the same principles for adjusting equity and translating goodwill as those used for consolidated subsidiaries.

Differences resulting from the translation of the financial statements of foreign subsidiaries were carried with no effect on results and separately shown as differences from currency translation in the statement of changes in equity. When a foreign company or operation was sold, any currency differences previously carried in equity with no effect on results were recognised as a gain or loss from disposal in the profit and loss statement. If the net investment in a foreign company or operation was reduced, the corresponding currency differences were realised through profit and loss at an amount in relation to that reduction.

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Consolidation methods

The accounting of the net assets of acquired subsidiaries was based on the purchase method. Accordingly, initially irrespective of existing minority shares, a complete fair value measurement of all identifiable assets, liabilities and contingent liabilities was effected as at the acquisition date. Subsequently, the acquisition costs plus the costs directly attributable to the acquisition, were eliminated against the revalued equity allotted to the acquired interest. Debit differences from acquisitions were recognised as goodwill for all companies purchased since 1 October 1995 and recog­nised as an asset for the acquired subsidiary in accordance with the provisions of IAS 21. Debit differences from acquisitions arising before that date continued to be eliminated against other revenue reserves. Any negative goodwill was immediately reversed with an effect on results, with the reversal effect carried under ‘Other income’.

Due to the application of IRFS 3 `Business Combinations’, goodwill was no longer amortised. Goodwill was regularly tested for impairment, at least annually, following the completion of the annual planning process. Additional impairment tests were effected if any triggering events suggested a potential impairment in goodwill.

As before, transactions involving minority interests were treated in the same way as transactions with equity providers for the Group. Goodwill arising in the framework of the acquisition of minority interests was directly eliminated against other revenue reserves. Goodwill arising in the framework of the divestment of minority interests was also directly carried in other revenue reserves.

In the event of acquisitions in stages, a complete fair value measurement of assets and liabilities of the acquired company was effected as at every acquisition date. The goodwill to be recognised arose from the elimination of the acquisition cost against the acquiree’s revalued equity attributable to the acquired share at the respective acquisition date. Any changes in the fair values of assets and liabilities arising in between the acquisition dates were recognised in equity in the consolidated balance sheet in accordance with the participation quota which did not yet result in consolidation of the company, with no effect on results and were carried in the revaluation reserve. In the framework of the removal of a company from consolidation, this revaluation reserve was eliminated against other revenue reserves.

The difference between the income from the disposal of the subsidiary and prorated Group equity, including recognised translation differences, previously carried with no effect on result, differences from the revaluation reserve, the reserve for changes in the value of financial instruments as well as interim profits, was carried as a profit or loss in the consolidated profit and loss statement as at the disposal date. This principle did not apply to actuarial gains or losses carried in Group equity with no effect on results in the framework of the recognition of pension obligations in accordance with IAS 19. In the event of a disposal of subsidiaries, the goodwill attributable to these subsidiaries was included in the determination of the gain or loss on disposal.

The Group’s major associated companies and joint ventures were measured at equity and shown in the balance sheet at the cost of acquisition as at the acquisition date. The group’s share in associated companies and joint ventures included the goodwill arising in each acquisition transaction.

The Group’s share in profits and losses of associated companies and joint ventures was carried in the profit and loss statement as from the date of acquisition (Result from companies measured at equity), while the Group’s share in changes in reserves was shown in its revenue reserves. Accumulated changes arising after the acquisition were eliminated against the carrying amount of the participation. Where the share in the loss of an associated company or joint venture equalled or exceeded the Group’s share in this company, including other unhedged receivables, no further losses were recognised as a matter of principle. Any losses exceeding that share were only recognised where obligations had been assumed or payments had been made for the associated company or joint venture.

Intra-group receivables and liabilities or provisions were eliminated. Where the conditions for a consolidation of third-party liabilities were met, this consolidation method was applied. Interim profits from transactions between subsidiaries and companies measured at equity were eliminated in relation to the Group’s share in the companies. Any interim losses were also eliminated unless the transaction entailed indications of a potential impairment of the transferred asset. Where the accounting and measurement methods applied by associated companies and joint ventures differed from the uniform accounting rules applied in the Group, amendments were made unless the relevant facts were sufficiently known or accessible.

Intercompany turnover and other income from intercompany transactions as well as the corresponding expenses were eliminated. Intercompany profits and losses from intra-group deliveries or services were eliminated with an effect on results, with deferred income taxes taken into account. However, intercompany losses were understood as suggesting that an impairment test had to be effected for the transferred assets. Intra-group deliveries and services were usually provided at the arm’s length principle. Intercompany profits from deliveries to and from companies measured at equity were eliminated on the basis of the same principles when the corresponding facts were known.

Accounting and measurement

The financial statements of the subsidiaries included in the TUI Group were prepared in accordance with uniform accounting and measurement principles. The amounts stated in the consolidated financial statements were not determined by tax regulations but solely by the economic presentation of the net worth and financial position as set out in the rules of the IASB.

Realisation of income

Goodwill and other intangible assets