TUI downbeat over UK margins

TUI has warned that its full-year profits will be at the “lower end of the range of expectations” after a weak performance in the UK market.

The travel giant said it was being forced to sell more late holidays at lower margins, hitting UK profitability.

It said the volcanic ash cloud disruption, good weather and post election uncertainty has all hit UK sales.

The group as a whole saw a 4% fall in sales to £3.4 billion during the last quarter.

Underlying operating profit was up 1% to £103 million for the three months to the end of June.

This figure excludes the cost of the volcanic ash crisis – now estimated to be around £105 million.

“The strong booking trends experienced up until the volcanic ash disruption in mid-April and the subsequent rebound in early May were not sustained throughout the early summer period,” said Peter Long, chief executive of TUI Travel PLC.

“This was particularly marked in the UK source market where trading was affected by further airspace closures, good weather and post election uncertainty regarding the emergency budget. All of these factors have had an impact on consumers’ booking patterns.

“Consequently, the booking curve has shortened and the mix of lates market sales for summer 2010 has increased. The higher than expected proportion of sales in the lower margin lates period will inevitably affect UK profitability. Additionally in Germany, although volumes have been good, there is continued price pressure in commodity segments.

“When we take the later booking curve and the adverse impact of foreign exchange translation into account, we believe that the results for the year will be at the lower end of the range of expectations.

“Furthermore, it remains difficult to predict how the later booking pattern will change over the next 12-18 months in the light of the current economic environment. We are, therefore, taking a more prudent view of the outlook, including the timeline for the delivery of our margin roadmap.

“Nevertheless, I have a strong belief that our continued focus on differentiated product, turning around underperforming businesses and growth initiatives will enable us to achieve our medium term margin targets”.

TUI said since its last update, industry booking volumes were around 10% down on the prior year in the UK.

“Within this difficult market context we traded relatively well, but nevertheless have experienced slower booking trends (2% lower in the period) compared to the strong trading seen before April.

“This has resulted in more stock left to sell in the lates period, leading to lower booked margins than previously expected. Whilst demand has improved in recent weeks, margins are lower than previously forecast and load factor is now 83%, one percentage point lower than the prior year.”

For winter 2010/2011 cumulative bookings in the UK are up 3% and bookings in the last four weeks are up 22%.

TUI said thanks to improved productivity of its fleet in its winter flying programme and a change in the fleet mix in Canada from B757s to B737-800s, there is a capacity increase in the UK for Winter 2010/11.

“It is currently too early in the booking cycle to determine whether we will achieve a margin benefit from these actions given the current economic environment,” it said.

“Whilst encouraged by early trading for the upcoming winter season, we remain cautious on the outlook for demand beyond this financial year given the uncertain economic environment facing many of our customers and therefore we are taking a more prudent view of the timeline for the delivery of our margin roadmap.

“However, with a continued focus on offering more unique holiday experiences and improving the profitability of our poorer performing businesses we remain confident that we can still achieve our medium term margin targets.”

According to Bloomberg, TUI’s share price dropped 8.4% to 206.7p at 8:10 a.m. in London trading, while Thomas Cook’s fell 6% to 186.6p.

By Bev Fearis