TUI seems to have mitigated the potential damage from a challenging operating environment. It will be interesting to see how it sustains its growth over the coming years.
Travel giant TUI Group managed to mitigate with the effects of this summer’s northern European heat wave thanks to the growth of its hotel and cruise business.
The company thinks of itself less as a traditional tour operator these days and has spent a decent amount of money in recent years investing in property and ships.
When the two TUIs merged in 2014, only around 30 percent of earnings came from the hotels and cruise businesses. In just four years, they have grown to 70 percent, although its revenue only accounts for 15 percent of the group total.
Hotels and cruises are higher-margin areas with less seasonality. Controlling the asset also means you have more flexibility on pricing. Underlying profit (EBITA) in the business grew 22.7 percent to $903 million (€794.4 million) in the year to the end of September, TUI said in an earnings update on Thursday.
Underlying profit in its markets and airlines division, which includes TUI’s regional tour operators and brings in most of the group’s revenue, fell 14.1 percent to $514 million (€453 million,) due to “prolonged hot weather this summer in Northern Europe and significant levels of airline disruption.”
TUI Versus Thomas Cook
So why was TUI to cope much better than the likes of Thomas Cook? A key differentiator is its assets: cruise ships and hotels. It gives TUI more control over what it sells, at what price, and also means it is more of a year-round business than other tour operators and less reliant on the European summer months of June, July, and August. It wasn’t an easy year by any means but it managed to emerge relatively unscathed.
On a post-results conference call, an analyst asked TUI CEO Fritz Joussen about potentially buying a competitor such as Thomas Cook and he didn’t rule it out, although it is difficult to see it passing antitrust regulators.
“[T]he only thing we are looking at which makes purchase a good purchase or bad purchase is synergy, right?” Joussen said on Thursday.
“So there could be, of course, distressed competitors. If we can consolidate markets that’s one of the potential benefits.”
Brexit and Beyond
Like other airline operators in the UK, TUI is worried about the impact Brexit will have on its business and in particular whether its airlines “will continue to have access to EU airspace.”
“We are currently developing scenarios and mitigating strategies for various outcomes, including a ‘hard Brexit,’ depending on the political negotiations, with a focus to alleviate any potential impacts from Brexit for the group,” the company said.
Despite this challenge and others, TUI still expects to grow underlying earnings 10 percent per year up to 2020.
Although TUI performed well in 2018 — especially given the market conditions — statutory pre-tax profit fell 10 percent to $1.1 billion (€971.5 million.) However, this is largely because in 2017 TUI generated $195.6 million (€172.4 million) from the sale its remaining stake in the Hapag Lloyd container shipping business. Stripping this out, the TUI’s operating profit actually grew 3.3 percent to $1.2 billion (€1.1 billion.)
Gross revenue increased 5.3 percent to €19.5 billion ($22.1 billion.)
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Photo credit: An image of a TUI Group cruise ship. The company came out a tough 2018 relatively unscathed. TUI Group