TUI’s repair job has only just begun

Airlines were among the hardest hit companies during the pandemic and now they must navigate a recession. Our head of markets walks us through these more optimistic quarterly results.

TUI AG (LSE:TUI) has seen improvements across the board as it continues its recovery following the ravages of the pandemic, but this recovery is something of a marathon and not a sprint.

If the direction of fourth-quarter trading is to become a trend, the company is well placed to repair some of the damage done to its balance sheet. Indeed, for the year as a whole, net debt has reduced from €5 billion to €3.4 billion, with background liquidity of €3.7 billion, which should provide a buffer in the event of trading difficulties.

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TUI has chosen to focus on the latest quarter for obvious reasons. Earnings before tax came in at €887 million compared to a loss of €71 million the previous year. Positive underlying earnings were seen in all business units for the first time since the pandemic, with customers at 93% of pre-pandemic levels. Airline load factors ran at 92%, while revenues increased by 123% versus the previous period, which had marked an increasing move away from lockdown restrictions.

There have been significant earnings boosts also from the Holiday Experiences unit, which comprises Hotels & Resorts, Cruises and TUI Musement. Quite apart from making a contribution to the overall figures, this breadth of choices underlines a joined up offering from the company, which gives the potential for both cross-selling opportunities as well as a one-stop shop for consumers wishing to book a traditional package.

For the year as a whole, group underlying earnings of €1 billion compared with a loss of €97 million the year previous. The previously announced cost savings target of €400 million per annum is now 80% complete, with the balance expected to come next year.

The Markets & Airlines business, which accounted for almost 60% of fourth quarter earnings, improved to €612 million on an underlying basis from a previous loss of €138 million, despite a hit of some €58 million from flight disruptions over the Summer period.

In terms of outlook, Winter bookings within the Markets & Airlines unit are at 84% of pre-pandemic levels and have risen by 134% year-on-year. Perhaps of equal importance is the average selling price – a rise of 7% compared to last year and 28% versus pre-pandemic help to mitigate some of the inflationary pressure which is currently rampant.

Even so, one swallow does not a summer make and investors will need to see evidence of an established trend before warming to the prospects of the company. In the meantime, inflation, disruptions, labour shortages and competition from lower-cost operators which could well capture the imagination of cash-starved consumers, could all provide headwinds.

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The share price performance is proof positive of the mountain which needs to be climbed to revert to the former glory days leading up to TUI’s relegation from the FTSE100 index in March 2020.

Over the last year, the shares have lost 30% compared to a decline of 15% for the wider FTSE250. As such, the shares have fallen by 70% over the last three years and by 80% over the last five. The current challenge is to shore up the balance sheet while maintaining trading momentum, and that may take several quarters of over-performance before the market consensus of the shares as a sell can be upwardly revised.