TT. Tui Travel

Europe's largest travel operator TUI Travel PLC (TT.LN) Tuesday said full-year results would be hit by a sharp slowdown in bookings from the U.K., in part because of the emergency budget and related government austerity measures, sending shares sharply lower.

Since May 11 bookings from the U.K., which represents about one-third of revenue, were down 2% while many other countries have shown strong growth, such as Germany up 12% and France up 5%.

The company said that despite the hit it was doing better than rivals, and that industry bookings across the industry in the U.K. were down 10% over this period.

U.K. bookings were also hit by better-than-expected summer weather, quiet trading during the world Cup and because of greater uncertainty amongst customers about the Icelandic volcanic ash cloud and knowing if they would be able to take holidays booked - and more importantly whether they would be able to return home, Chief Financial Officer Paul Bowtell said.

However the company maintains it does still have some flexibility in the U.K. and will exit aircraft that it leases in 2011 if the market continues to be weak to keep planes full and prevent prices of holidays from having to fall much lower.

Additionally, the company's specialist, emerging markets and student leisure market products have suffered due to the exposure to weak economies.

Over the past couple of years, both TUI Travel and Thomas Cook Group PLC (TCG.LN) have weathered much of the economic downturn because of the costs they've managed to strip out of the business after mergers. However as those cost savings have been achieved, they've become more sensitive to market pressures.

The company it also expected the pound's recovery against the euro to cost it GBP10 million to GBP15 million and that results in the year to the end of September would now be at the lower end of market expectations.

"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," Chief Executive Officer Peter Long said.

He added it's increasingly difficult to predict how bookings pattern in the period closer to departure will change over the next 12 months to 18 months because of the current economic environment.

The company's shares fell sharply in early trading, dragging down the FTSE 100. At 0916 GMT, they were down 18 pence, or 8% at 208 pence, underperforming the broader FTSE 100 index, which was down 0.3%. The remarks about a broadly slower U.K. market also pushed rival Thomas Cook Group's PLC (TCG.LN) shares lower. Thomas Cook's shares fell 10 pence, or 4.8% to 189 pence.

The company said the later booking pattern in the U.K. means it has more holidays left to sell, which in turn means that it's being forced to reduce prices to encourage more people to travel, and therefore will lower margins.

Bowtell said it was taking a more prudent view and achievable earning before interest and taxation margins of 4.7% may now only be reached in 2013, some two years later than originally expected, because of the uncertain economic environment beyond this financial year.

However the company still sees opportunities in the Commonwealth of Independent States, but said there will be start-up losses in the first couple of years, of between GBP5 million to GBP6 million a year.

The Russian travel market is considered by industry watchers as potentially lucrative as European countries become more relaxed about handing out travel visas to Russians.

In 2008, some 11.3 million Russians traveled abroad, up from the 9.4 million in 2007 and 5.1 million in 2002.

The company said the total impact of volcanic ash disruptions, including the further closures in May is estimated at GBP105 million as it dealt with looking after and repatriating some 400,000 customers.

The company said in a statement: "We are very disappointed that national governments and the EU are refusing to contemplate compensating the industry for an unjustified airspace closure that was entirely beyond our control."

Revenue in the three months to June 30 was GBP3.42 billion, compared with GBP3.58 billion. It didn't give a figure for net profit or pre-tax loss for the quarter.

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

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