TT. Tui Travel

TUI Travel PLC (TT.LN) Thursday said it had continued to achieve incremental synergy benefits and made good progress in its turnaround strategy during a challenging year.

"We have seen sustained improvement in demand since July and recent trading for future seasons remains positive in most source markets," said TUI Travel Chief Executive Peter Long.

However, Long said that, while current booking activity had been good, driven by demand for its exclusive products, namely club holidays, "We remain cautious about 2011 given the continued economic uncertainty and the relatively early stage of the booking cycle."

Revenue for the year to Sept. 30 fell 2% from the same period a year earlier to GBP13.53 billion partly due to reduced scheduled flying in Germany. Operating profit rose 11% to GBP447 million from GBP401 million as a result of synergy benefits from the merger between TUI AG's (TUI1.XE) tourism business and First Choice Holidays PLC in 2007 and reduced losses relating to its Canadian and German businesses.

With the merger largely complete, it has delivered GBP195 million of synergy benefit to date, with a further GBP5 million expected to be delivered in 2011.

It proposed a 7.8 pence final dividend, taking the total for the year to 11 pence, from 10.7 pence in 2009.

The results were affected by a weaker trading performance in the U.K., primarily because of the winter losses that resulted from its smaller offering.

Like rival Thomas Cook Group PLC (TCG.LN) and airlines, TUI Travel was hit by uncertainty around the general election and budget in the U.K. and the volcanic ash clouds that closed much of European airspace for a week in the spring, which Long described as the "perfect storm."

"We then experienced an improvement in demand later in the summer period and trading closed out well in all source markets, including the U.K.," Long said.

Long described the U.K. market as a dichotomy, adding that sentiment was weakening but demand was strengthening. In part, more people were taking all-inclusive holidays, which gives them more certainty about their total spending, but they have reduced their vacation times from two weeks to 10 days to 11 days. Long said TUI Travel will sell more holidays of this duration to meet the shift in demand.

Additionally, the company has been lobbying the government against increases in air passenger duty and, in particular, for premium-economy class.

Long described the tax as ridiculous because the premium-economy class mainly catered for taller passengers who wanted more leg room, adding it would make a decision about removing premium economy from its aircraft configuration in the first quarter of 2011.

After exiting scheduled flying operations in the U.K. and Germany over the past three years, TUI Travel now is focusing on the turnaround of its French airline, Corsair.

It will cut the number of employees by about 25%, freeze salaries for three years, reduce cabin crew composition and limit allowances. TUI Travel said it will also replace its three Boeing Co. (BA) 747 aircraft with two Airbus A330s, which will help optimize capacity and route planning.

Corsair lost GBP24 million in the financial year, but TUI Travel said it now should at least break even in the current fiscal year. Material benefits from the program are expected to start to come through in 2012 with full benefits delivered in 2013.

TUI Travel is continuing to drive down costs. It is focusing on controlling more of its distribution, with about 81% of holidays sold through its own channels, while also looking to cuts IT-related costs and securing better rates from hoteliers.

TUI Travel said cost inflation will be minimal for the summer 2011 season, which is better than Thomas Cook's forecast of 2% and could put TUI Travel in a stronger competitive position.

Long expects between 250 and 300 jobs to be lost through cost cutting at TUI Travel in Luton, England, where Thomson and First Choice brands are based, but that these will occur through voluntary redundancies and attrition.

TUI Travel was forced to write off GBP117 million after it discovered discrepancies with its IT system in the U.K. and has restated 2009 results.

At 1028 GMT, TUI Travel's shares traded up 12 pence, or 5.5%, at 226 pence, making it the biggest gainer in the benchmark FTSE 100 index, which traded up 0.8%. The stock has shed 7.5% in value since the start of 2010.

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

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