TT. Tui Travel

Europe's largest travel operator TUI Travel PLC (TT.LN) Tuesday proposed a higher dividend despite posting a wider first-half loss as it cut capacity to meet weak demand, and it warned that the disruption caused by the volcanic eruptions in Iceland will hit third-quarter profit.

The company said it will take a GBP90 million hit in the third-quarter after suffering 12 days of disruptions due to lingering clouds of volcanic ash clouds that forced the closure of much of Europe's airspace for several days last month, but it still expects to hit full-year targets.

"Despite the impact of the disruption, I expect positive momentum in the second half of the year as strong underlying demand improves trading and merger synergies continue to be delivered. Excluding the impact from the volcanic ash disruption, I remain confident that we can meet the board's original expectations for 2010," Chief Executive Peter Long said.

Airlines, airports and travel companies around the world have been hit by the ash cloud, which forced the cancellation of more than 100,000 flights. The volcano is still erupting and causing sporadic airspace shutdowns in the U.K. and Ireland and the Iberian peninsula as prevailing winds blow the ash southeast.

Long said that despite the widespread airspace closure in April, which caused it to cancel 175,000 holidays and repatriate 180,000 customers, booking volumes strengthened in May and the company's performance in its fiscal first half to end-March was in line with its expectations as demand continued to improve.

Bookings for June departures, ahead of the World Cup, are up 7% and Long said there was a trend for consumers to book earlier as they become more confident about keeping their jobs.

Long added the company was monitoring the social upheaval in Greece but noted that most disruptions were in the country's capital, Athens, rather than on the Greek islands, which are popular with holidaymakers.

Signalling its confidence, TUI Travel proposed an interim dividend of 3.2 pence, 7% higher than the 3 pence it paid shareholders last year.

The company's losses widened in the first half of the year, although holiday companies traditionally post a loss during the first half as the main holiday season occurs in the second half of the year.

Its pretax loss, excluding amortization of business combination intangibles and acquisition-related expenses, was GBP367 million, compared with a loss of GBP333 million a year earlier. On an operating level, losses increased to GBP314 million from GBP289 million last year after the company cut the number of holidays available and experienced yield pressure at its French airline, Corsair. Long said the company is reviewing the unit, which he said was a "viable business," but he declined to comment on whether it intends to exit the business.

Revenue for the period fell 8% to GBP5.38 billion. It will also focus growth in Russia, Canada and its activities sector.

Its loss per share was 24.3 pence, wider than the 21.6 pence posted a year earlier.

At 0844 GMT, TUI Travel's shares traded down 8 pence, or 3%, at 251 pence.

-By Kaveri Niththyananthan, Dow Jones Newswires; 4420 7842 9299; kaveri.niththyananthan@dowjones.com

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