TUI hit by 737 MAX problems – cruise sector strong

2019-12-13T14:26:53+00:00 December 13th, 2019|Finance|

In line with revised expectations, for the fiscal year 2019, the TUI Group has delivered underlying EBITA of €880 mill at constant currency, 26% down on the previous year.

This drop reflected a €293 mill cost impact from the grounding of the 737 MAX aircraft. Excluding this impact, TUI said it delivered a result in line with the previous year, driven by the strong underlying growth of the Holiday Experiences businesses and offset by the Markets & Airlines business, which faced ongoing external headwinds, such as continued Brexit uncertainty and airline overcapacities, impacting overall underlying EBITA growth for the Group.

Hotels & Resorts delivered improved earnings and strong segmental ROIC of 13.5% (versus segmental WACC of 7.8%), against the previous year’s result, which included €43 mill of net disposal gains.

Cruise delivered another year of strong growth, with record ROIC of 23.3% (versus segmental WACC of 6.73%). Growth was driven by new ship launches in each of the three brands – ‘Mein Schiff 2’ by TUI Cruises in Germany, ‘Explorer 2’ by Marella Cruises in the UK, and ‘Hanseatic nature’ by Hapag-Lloyd Cruises in Germany, as well as annualisation of new ships in the previous year.

TUI said that it delivered continued high occupancies and robust average daily rates across the fleets, despite a significant increase in market capacity, particularly in the German cruise sector, demonstrating the continued demand for the differentiated brands.

Segmental ROIC grew to a record 23.3%, reflecting the equity participation in TUI Cruises, as well as strong performances by subsidiaries, Marella Cruises and Hapag-Lloyd Cruises.

Destination Experiences delivered a 22% increase in underlying EBITA in the year, and a 44% increase if excluding ~€10 mill investment in Musement platform during the year. ROIC was 21.9%, or 28.1% if excluding Musement investment.

Turnover was up 105%, driven by both underlying customer growth and the acquisition of Destination Management and Musement in 2018.

Markets & Airlines delivered a result in line with revised expectations, with underlying EBITA impacted by the 737 MAX grounding and external market challenges.

The aircraft grounding since March, 2019 led to a cost of €293 mill across the Markets & Airlines business during the financial year.

The ongoing knock-on impact of last year’s extraordinary hot summer and Brexit uncertainty led to a later booking behaviour versus previous years.

The underlying EBITA result for all other segments improved by €27 mill at constant currency versus the previous year, reflecting various one-off cost savings across central group functions.

Underlying EPS decreased to €0.89, a reduction of 24.4%, at constant currency, reflecting the operational developments as described above, offset by the effect of more efficient financing, and continued low underlying effective tax rate of 18%.

In Cruises, FY20 will see the annualisation benefit from three ships launched across our three cruise brands during FY19, plus a full-year benefit from the ‘Hanseatic inspiration’ expedition ship for Hapag-Lloyd Cruises launched in October, 2019.

The international ocean cruise market saw a record year of new capacity growth during 2019, with the German cruise market in particular seeing an estimated ~20% growth.

As a result, TUI Cruises has seen customers committing later to booking, which is expected to limit yield and growth contribution from TUI Cruises in the year.

The introduction of IMO2020, the new regulatory requirement to cap sulfur content of marine fuel oil as of 1st January, 2020, will see higher operational costs incurred for Marella Cruises (across the whole fleet), Hapag-Lloyd Cruises (across whole fleet) and TUI Cruises (relating to ‘Mein Schiff Herz’).

For Marella Cruises, average selling price growth to date has been insufficient to cover the significantly higher cost base as a result of IMO2020 and it is expected that this will fully erode any annualisation benefit from ‘Explorer 2’ in FY20.

Based on TUI’s near-term strategic initiatives, the Group forecasts an underlying EBIT range of between around €950 mill to €1,050 mill in FY20, reflecting growth in Holiday Experiences and market uncertainties that continues to impact our Markets & Airlines business, and includes about €130 mill cost impact from the 737 MAX grounding, assuming a scenario whereby the MAX returns to service by end of April, 2024.

However, if the ban on the 737 MAX is not lifted in time for a return to service by end of April, 2020 then TUI has to plan for a continued grounding for the remainder of FY20, the Group assumes a further cost of between about €220 mill to €270 mill.