TUI AG (TUI1) ORD REG SHS NPV

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TUI’s first-quarter revenue rose 1% to €4.9bn (€4.9bn expected), ignoring exchange rate impacts. All business segments contributed positively except Markets and Airlines (M+A), which were flat as higher prices offset a small drop in volumes.

Underlying operating profit rose 51% to €77.1bn (€63.0bn expected). Performance was driven by a 71% uplift in profitability in its Cruises segment to record levels, helped by its fleet expansion and higher occupancy rates.

Net debt improved by €0.5bn on the prior year to €3.6bn.

Full-year guidance has been maintained, with revenue and underlying operating profits expected to grow by 2-4% and 7-10% respectively.

The 2025 dividend of €0.10 per share was reiterated.

The shares were broadly flat in early trading.

Our view

TUI’s first-quarter profits sailed past market expectations, driven by strong demand in its cruise business. But softer booking numbers in its Markets and Airline (M+A) business took some shine off performance on the day – more on that later.

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 acts as a customer acquisition tool, feeding guests into its other, more profitable divisions.

TUI has 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. This gives a much more robust earnings profile than a few years back. Alongside operational improvements, that’s helping profits outpace revenue growth.

Stiff competition and heavy investments in the M+A segment have been a drag on profitability of late. Bookings for winter and summer were also down slightly in the quarter. But this looks to be part of the group’s strategy shift to reduce its own capacity and sell this first before turning to third-party inventory. As a result, the M+A division is still expecting strong growth in underlying operating profit this year, and group-level full-year guidance remains intact.

Despite broader economic pressures, consumers have been prioritising travel, enabling TUI to raise prices while filling more rooms and cruise cabins. In some ways, having a wide package holiday business 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 cruise ships to fill are enormous, so keeping occupancy rates high from here is key.

It hasn’t all been smooth sailing though. One of its key markets (Germany) has been relatively weak in recent times. There are early signs of improvement here, but they aren’t guaranteed to last. A lot depends on the ongoing health of the broader economy.

Good progress has been made in reducing debt levels to a comfortable place. That’s given management the confidence to reinstate dividend payments, with a prospective 2.8% dividend yield on offer. But as always, no shareholder returns are guaranteed.

With a diverse offering and a much-improved balance sheet, TUI’s business is looking a lot stronger than it has for some time. That’s reflected in the valuation, which has climbed above the long-term average in recent months and now looks about right to us. Plus, with some questions over near-term demand and the cyclical nature of the industry, there could be more ups and downs ahead.

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.

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.

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.

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