TUI AG (TUI) ORD REG SHS NPV (DI)

TUI's first-quarter revenue rose 15% to €4.3bn, ignoring exchange rate impacts. That was driven by higher prices and passenger numbers increasing by 6% to 3.5mn in the period.

There was an underlying operating profit of €6mn, up from a loss of €153mn in the prior year. That reflects all business divisions seeing improved profitability, helped by higher occupancy rates.

Net debt fell by €1.3bn to €4.0bn, largely because of the €1.8bn rights issue earlier in the year. There was a free cash outflow of €1.8bn, improved from €1.9bn in the prior year.

The group reiterated full-year guidance, expecting revenue to increase by at least 10% and underlying operating profits to rise by at least 25%.

The shares rose 3.2% following the announcement.

Our view

TUI's record Q1 results showed that although consumer budgets may be tight, holidays aren't something they're willing to give up. Customer numbers continued to climb despite price hikes across the board. And, while it's the airline side of things that tends to grab a lot of attention, TUI doesn't just run flights.

It has a much wider package holiday business. In some ways that makes it more defensive - there's more to offer and plenty of cross-selling opportunities. But the drains on cash when you have planes, huge hotels and even cruise ships to fill are enormous, so the improved reported occupancy rates across the business come as welcome news.

Positive booking momentum has continued into the first quarter, to date, 87% of the Winter season capacity has been filled, with 8% more bookings than last year. Average selling prices are also up 4% overall, that shows just how important travel is to customers, as well as the strength of TUI's brand. It's too early to say whether the summer will be a success, but 32% of the season is currently sold which is a promising sign.

Debt levels have been a concern in the past, but the group are doing a good job of getting them under control. Helped by the rights issue last year which raised around €1.8bn of cash, the group's debt is continuing to come down. And thanks to significantly improved profitability, net debt is on target to be below 1.0 times cash profits in the medium term. Continued movement on this front will be key to any potential return of dividends, which are never guaranteed.

We can't knock progress, but remain wary on some wider risks.

A persistently challenging environment means it's still tricky to map demand accurately. Upbeat travel bookings and the swing to profit was better than expected, but the question is whether this can continue. A lot of this will be outside TUI's control, but the powers-that-be will certainly be hoping for a soft economic landing.

TUI was concerned about over-capacity in the wider industry before the pandemic. This is an ongoing concern in our opinion, which could create the need to reduce prices if market conditions change. TUI isn't 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.

There's potential for TUI to do well in the future thanks to its more diverse offering, and investors could be rewarded for their patience. But without a dividend to sugar-coat the extra risk involved, we struggle to get too excited as things stand.

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.

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