Opinion: Tui shows resilience in a tough market

A balmy summer and airspace closures hit the travel giant’s Q3 performance – but the overall picture is not bad under the circumstances, says Ian Taylor

Travolution executive editor Ian TaylorTui Travel’s third-quarter results may disappoint some in the financial markets, but they demonstrate an underlying resilience in a weakening UK market.

The group forecasts full-year results “at the lower end of expectations”. As analyst Nick Batram of KBC Peel Hunt points out, this is “by no means disastrous”.

UK summer 2010 bookings for the three months to August 1 were 2% down on the previous quarter. However, cumulative bookings for the summer were 2% up year on year. That is not bad – about in line with Tui’s capacity increase for the season. UK summer trading looks even better when a 10% rise in average selling price is included.

Other markets including Europe’s largest, Germany, are generally up by more – Germany by 3% for the season and 12% for the quarter, while the Nordic Region, Tui’s third major market, is up 17% to date.

So Tui can report an underlying operating profit for the nine months to June 30 almost unchanged on a year ago – £103 million for the current financial year against £102 million last time, despite a 4% fall in revenue.

That £102 million underlying profit after nine months became a £443 million underlying profit at year’s end – although this transmuted into a £52 million loss before tax after all other costs were tallied.

However, the current underlying profit (£103 million) excludes the cost of the volcanic ash cloud – a bill Tui now puts at £95 million for aid to passengers and cancelled flights and a further £10 million in “lost contribution”. In other words, it wipes out the underlying profit – and is money neither Tui nor anyone else is going to see back from government.

It is the ash bill coupled with the deterioration in the UK since May that led Tui to lower its expectations. The group reports: “The UK market has slowed markedly . . . Since our last update, industry booking volumes were c. 10% down on the prior year . . . margins are lower than previously forecast.”

Even this deterioration must be seen in context. UK market analyst GfK Ascent reported cumulative summer sales down 5% year on year at the end of July and 12% down for the month. In all respects, Tui appears to be outperforming the market – with overall sales up in a market that is down and a higher average selling price.

Bear in mind this follows a global financial meltdown reminiscent of 1929-31 and the most severe downturn in the world economy since World War Two. The world’s biggest outbound travel group appears to have weathered these shocks rather well.

Like almost everyone else, Tui blames the UK decline on a combination of factors through the spring and early summer: “The recurrence of airspace closures, the emergency budget and subsequent austerity measures, the better than average UK weather combined with quiet trading during the World Cup.”

These are all valid explanations, but it is the economy that drives demand. The realisation that a substantial recovery is not around the corner is key to understanding the current UK market.

The only real surprise in the circumstances was the 4.25% leap in the Tui share price the day before the results – three times the overall rise in the FTSE. Such feverish expectation says more about the uncertain state of the financial markets, awash with capital seeking a sure bet when all is shifting sand. Watch out for the next market plunge.

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