TUI’s second-quarter revenue rose 1.3% to €3.8bn, ignoring exchange rates. This reflected strong demand across all its segments, with customer numbers up 2% to 5.6 million.
Underlying operating losses improved by €18.5mn to €188.3mn, despite a €40mn negative impact from the Middle East conflict. Performance across its segments was mixed, but strategic improvements in Markets + Airline (M+A) was the biggest driver of the uplift.
Underlying free cash flow fell by €0.3bn to €0.7bn. Net debt was stable at €3.0bn.
Summer bookings in the M+A division were 7% below last year’s level. Recently downgraded full-year guidance has been maintained, with revenue guidance remaining suspended. This also points to underlying operating profits falling by between 0-22% to €1.1-1.4bn (€1.3bn expected).
The shares were broadly flat in early trading.
Our view
TUI’s second-quarter performance was broadly in line with expectations, as improvements in its Markets + Airlines division helped offset some of the negative impacts from the Middle East conflict. But bookings in the second half remain weak, and recently lowered full-year guidance was maintained, with the wide range pointing to a double-digit decline in operating profit at the midpoint.
At its core, TUI operates a diverse travel business, owning an airline, cruise ships, hotels, and resorts, serving over 20 million customers across more than 180 destinations. Its lower-margin Markets and Airline segment serves as a customer-acquisition tool, funnelling guests into its other, more profitable divisions.
We’ve been impressed with TUI’s progress in recent years. Digital investments have helped drive higher sales, strong demand meant profits were growing faster than revenues, and balance sheet health was improving.
The group also made a conscious effort to balance the amount of guaranteed capacity (which carries financial risk if not sold) with options that can be adjusted based on demand. By reducing its own capacity and selling this first, profitability in the markets and airlines division also improved over the first half.
However, the Middle East conflict is having a major impact on demand over the crucial summer season. Alongside a lingering impact from the Caribbean hurricane season, the outlook for revenue and profit growth for the rest of the year has worsened materially. As a result, full-year underlying operating profit guidance has flipped from as much as 10% growth to a decline of between 0-22%.
It’s not yet clear just how long the Middle East conflict will last. It's already sent oil prices spiking higher, and while TUI has hedged fuel and energy costs well in the near term, persistently high oil prices will likely weigh on future profitability.
In the meantime, the drain on cash when you have planes, huge hotels and cruise ships to fill is big. The balance sheet is in decent shape, but we could start to see net debt trend higher again. As a result, dividends could become less of a priority.
TUI’s progress in recent years shouldn’t be overlooked. It remains a strong business, and with the recent decline in valuation, we see scope for upside over the long term. But external factors are likely to drive near-term sentiment, and things could get worse before they get better. Until the Middle East conflict ends and holidaymakers are confident that stability has returned in the region, demand for TUI’s services is likely to remain under pressure.
Environmental, social and governance (ESG) risk
The transport industry is medium risk in terms of ESG, with European firms managing them better than others. Carbon emissions, product governance, and quality & safety are the biggest risk drivers. Other key areas are emissions, effluents & waste, labour relations, and employee health & safety.
According to Sustainalytics, TUI’s management of ESG risk is average.
TUI has a very strong whistleblower programme and has appointed board-level responsibility for overseeing ESG issues. However, ESG disclosures fall short of best practice, and there is no reference to linking executive pay to ESG targets.
TUI key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
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 LSEG. 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.
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