Tui shares: glimmers of light at the end of the tunnel

Higher demand for travel is a balm after pandemic damage, but there are still issues to be navigated, including the inflationary environment, says our head of markets Richard Hunter.

TUI AG (LSE:TUI) has not yet reached its preferred destination of profitability, but the damage wrought by the pandemic is being slowly undone.

As such, the general direction of travel as evidenced by last year’s results remains promising. Significant momentum within its Markets & Airlines business has resulted in some record booking days for the UK and Germany, with both the Winter 2022-23 and Summer 2023 seasons continuing towards capacity.

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For the group as a whole, a load factor of 85% compares to 79% a year previous, with customer levels now at 93% of those being experienced pre-pandemic. There have been significant earnings boosts also from the Holiday Experiences unit, which includes Hotels & Resorts, Cruises, where a full fleet has enabled numbers to grow by 37% year-on-year and TUI Musement, the burgeoning tours and activity business. For the latter, revenues grew from €75.1 million to €141.4 million, an increase of 88%, with an earnings loss of €13 million remaining stable due to further investment in the business.

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. TUI also has links to third-party offerings as well as its own brand, further increasing the scope for potential customers.

The resilience of the holidaying customer and the breadth of TUI’s offerings are beginning to show some signs of improvement. Revenues increased by 58% over the period to €3.8 billion, marking an important milestone in equalling pre-pandemic levels. A pre-tax loss of €273 million compared to €405 million the year before, with the underlying earnings loss also decreasing from €274 million to €153 million.

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The company remains liquid with access to borrowing facilities if necessary and in the meantime net debt is broadly stable at €5.3 billion. This buffer has helped the group weather the traditionally tougher winter period. The group has also seen the benefit of being able to raise prices to mitigate some of the effects of inflation, with those prices being up by 12% over the last year and by 27% compared to pre-pandemic. Inevitably there is no sign of a reintroduction of a dividend, which is prudent given a balance sheet in need of repair and a slowly recovering income stream.

In terms of outlook, TUI is expecting full-year earnings to increase significantly, which would, of course, continue the momentum. In the meantime, there are a number of issues to be navigated, such as an inflationary environment, potential disruptions arising from labour shortages as evidenced last summer, and competition from lower-cost operators, which could well capture the imagination of cash-starved consumers.

There are glimmers of light at the end of the tunnel for TUI, but the pandemic damage was severe and will need much more repair. The share price has fallen by 79% over the last five years, and by 63% over the last three, culminating in the stock’s relegation from the FTSE 100 in March 2020. Over the last year, the shares have declined by 40%, as compared to a drop of 6.9% for the wider FTSE 250, although a bounce of 10% over the last three months could possibly provide its own momentum. Another mountain to climb will be to convince investors that the recovery is becoming entrenched and sustainable. In the meantime, with much work to do, the market consensus of the shares as a sell is likely to remain in place.