TUI continues to have ambitious plans, and its quest to move away from the traditional tour operating market seems sensible given the problems endured by one of its biggest competitors. But good intentions often get derailed by outside circumstances. Can it stay the course in 2020?
Losing one of your biggest competitors is usually a good thing for a business, but in TUI Group’s case things are more complicated than they seem.
On paper Thomas Cook’s bankruptcy earlier this year left a gap in many European markets — one that TUI and others were hoping to fill — the only problem being that several parts of the business survived its collapse.
In the Nordic region, Thomas Cook’s collection of tour operators and airline survived thanks to a hotel magnate and private equity money. While in Germany, Condor is flying with the help of a government-backed loan.
Fritz Joussen, the CEO of TUI, said on a media call on Wednesday that “consolidation has not happened” in all markets with Condor receiving “state subsidies” keeping prices low. In the Nordics, Thomas Cook’s operation was “bought by a billionaire… and it will live and it will compete as it has been competing in the past.”
Joussen, however, added that TUI would be “ambitious when it comes to serving the market which Thomas Cook doesn’t serve anymore.”
TUI’s profit guidance for its next financial year (underlying earnings before interest and taxes) puts it in a range of between $1 billion (€950 million) and $1.2 billion (€1.05 billion). But this includes $144 million (€130 million) cost impact from the Boeing 737 Max aircraft grounding. If you strip it out and comparing it with this year’s equivalent figure, it would represent a decline.
“The bull case on TUI has been that with Thomas Cook out of the market, they can materially grow capacity at higher profits. However, the guidance for next year is (ex Boeing) for a further decline in profits of 5 percent (partly due to IT investment),” analysts at broker Bernstein wrote in a note to investors.
On the media call Joussen, who was speaking after the release of the company’s annual results, disputed this characterization, pointing out the inclusion of a “high double-digit investment into our digital platform growth.” (This is part of TUI’s plan to grow its customer base out of its central and northern European heartlands.)
Like European rival Ryanair, TUI continues to count the cost of its decision to order Boeing’s currently grounded 737 Max jet.
TUI’s markets and airlines segment — effectively its tour operator business — which accounts for 84 percent of its total annual revenue figure, saw its annual profit (EBITA) slump 88 percent to $54 million (€49 million).
Apart from the grounding of the 737 MAX, the challenges included “a continued Brexit uncertainty, airline overcapacities in Europe, and changes in customers’ booking behavior in the traditional tour operating business,” the company said.
Growing Tours and Activities
Over the last few years, TUI has reinvested its profits into its hotels and cruise business, giving it an edge over other tour operators and online players, thanks to its own exclusive holiday ecosystem.
The next stage is to build out the digital side to grow its reach. The company has also made a big push in the tours, activities, and excursions market, thanks in part to its acquisition of Musement. TUI in 2019doubled revenue in this business and has big plans for it. It has already sealed a partnership with Ctrip, and Joussen said on a call with analysts that he wanted TUI to play a part in the “consolidation of that market.”
TUI’s pre-tax profit fell 28 percent to $767 million (€691.4 million) for the 12 months to the end of September. Most of this was down to the previously mentioned challenges in the tour operator market. Revenue increased 2.5 percent to $21 billion (€18.9 billion).
Photo credit: TUI-branded moisturising lotion. The company is looking to take advantage of Thomas Cook's collapse. TUI Group