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TUI AG - 2022 in line, winter bookings 78% of pre-covid levels

At Group level TUI reconfirmed expectations of underlying operating performance to return to significant profitability for the year ending...

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At Group level TUI reconfirmed expectations of underlying operating performance to return to significant profitability for the year ending September 2022.

On Markets and Airlines, Summer 2022 now totals 12.9m bookings up 1.4m since the Q3 update at 91% of Summer 2019 levels. The peak months of July and August closed at levels of 94% of summer 2019. The division's expected to be highly profitable despite airport disruptions, with associated costs remaining elevated but improving over Q4.

Average summer prices (ASP) are up 18% at least in part mitigating inflation. Winter prices are up 26% but bookings are 78% of 2018/19 levels with bookings following somewhat of a short-term pattern as consumer demand remains strong.

Hotels & Resorts continues to perform strongly in Q4, with July and August occupancies broadly in line with expectations and average rates above pre-pandemic level. Cruises are recovering well, with bookings higher than 2019, and whilst short-term bookings dominate, TUI 's seeing an improvement in mid-term bookings as consumer confidence returns.

The shares were up nearly 3% following the announcement.

View the latest TUI share price and how to deal

Our view

With the very difficult pandemic-period now largely left behind on the tarmac, the focus now is on the present. To that end, TUI had a strong key Summer season. Crucially, bookings are within a whisker of pre-Covid times.

The huge ramp up in activity in the aviation sector has come with some pitfalls. The well-publicised flight cancellations and general airport chaos has led to a significant increase in costs for TUI. But these now seem to be moderating. There are a couple of things to keep in mind though. TUI doesn't just run flights, it has a much wider package holiday business. In some ways that's what makes TUI more defensive - it has more to offer and plenty of cross selling opportunities. But maintaining pre-pandemic levels is also a much higher priority, the drains on cash when you have planes and huge hotels to fill are enormous.

TUI Hotels & Resorts, as well as cruises are trading beyond pre-pandemic levels. This all sounds great, but we need proof of a longer run of positive momentum. The trend towards later bookings in our opinion leaves TUI more exposed to last minute discounting, particularly in a challenging consumer environment, and it is questionable whether strong price increases can persist.

And this is where the challenge lies. Looking to the future, TUI needs to work hard to maintain its competitive edge. Most holiday makers aren't too brand loyal and instead want the best deal. You could argue there's an increase in appetite for DIY rather than package holidays too, with today's Airbnb culture.

TUI was concerned about over-capacity in the wider industry before the pandemic. This is an ongoing concern in our opinion, despite the challenges faced by the sector in the last couple of years. TUI doesn't appear to be trimming its own capacity in readiness for an economic contraction and instead relies on a hybrid approach of own and third-party operated flights, which reduces, but doesn't eliminate the risk caused by an over-supplied and overly competitive industry.

TUI has also raised around €425m in May 2022, by placing new shares, as it looks to reduce debt and government funding. Again, we think this is a step in the right direction. But there's still credit risk which won't be extinguished until operations have been back up and running at full speed for some time.

TUI faces challenges, especially as the cost-of-living crisis bites and people rein in spending. There's the potential for TUI to do well in the future thanks to its more diverse offering, but we think further turbulence is likely for now.

TUI key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Third Quarter Results (10 August 2022)

In the period the group operated 82% of capacity with customers at 84% of 2019 levels. The UK and Germany are currently trading particularly well.

Revenue in Hotels & Resorts more than trebled to €259.5m from €74m, as 99% of hotels are now back up and running which improved availability for guests. Occupancy levels were 74%, with the average daily rate increasing 4% to €73. Ignoring the effect of exchange rates, underlying operating profit came in at €100.8m, up from a €70.3m loss.

Cruise revenue of €103.3 was up over €100m on the previous year, which fed into underlying operating profits of €3.4m. The improvements came as key fleets were able to return to operations, with occupancy and rates improving across the board.

The group's tour and activity segment, TUI Musement recorded revenue of €158.6m (2021: €19m). There were 2m excursions sold, up from just 0.2m the previous year. Underlying operating profit was €13.4m, up from losses of €34.7m last year, and ignoring exchange rates.

Markets & Airlines revenue rose €3.3bn to €3.9bn, reflecting more people booking holidays because of pent up demand. Higher costs weren't offset by cost saving, so underlying operating profit at constant currency was negative €143m, although this was still an improvement on 2021 (-€482.7m).

On a nine-month basis, TUI generated free cash flow of €1.6bn, against heavy outflows last year, reflecting improved profits. As at the end of June TUI had net debt of €3.3bn.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 20th September 2022