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TUI - brighter third quarter

Third quarter revenue rose from €649.7m to €4.4bn, reflecting the effects of increased travel and tourism activity following the pandemic.

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Third quarter revenue rose from €649.7m to €4.4bn, reflecting the effects of increased travel and tourism activity following the pandemic. The group's faced additional costs of around €75m relating to flight disruption caused by wider aviation industry labour shortages. Excluding these costs, TUI recorded underlying operating profit of €48m, compared to heavy losses last year.

Summer is on-track to see capacity and customers close to pre-pandemic levels. TUI said "we re-confirm our expectations to return to significant positive underlying EBIT for financial year 2022 and remain committed to further reducing debt and German Government exposure."

The shares were unmoved 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 resilient third quarter. Crucially, capacity and bookings are within a whisker of pre-Covid times.

The huge ramp up in activity in the aviation sector has come with pitfalls. The well-publicised flight cancellations and general airport chaos has led to a significant increase in costs for TUI. But these shouldn't be a repeat occurrence.

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 have delivered another consecutive quarter of positive underlying operating profit since the start of the pandemic. Occupancies and average rates are doing well. This all sounds great, but we need proof of a longer run of positive momentum.

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 10% of the group's share capital, or around €425m, 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

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 10th August 2022