Europe´s Largest Travel Company Puts Cap on Rampant Losses

TUI AG, Europe´s largest travel company, plans almost to double its earnings from tourism in the next three years by cutting costs, opening hotels and expanding its Hapag-Lloyd Express and Thomsonfly low-cost airlines.

Pretax profit before goodwill amortization at the main tourism business will climb to about 700 million euros ($903 million) by 2008 from 362 million euros last year, Chief Executive Officer Michael Frenzel told shareholders today in Hanover, Germany, where TUI is based.

Consumers with TUI packages are flocking to holiday destinations such as Spain and Tunisia following a three-year slump in the industry. The company aims to increase profitability by drawing more U.K. and German customers to its airlines and hotels and adding more Internet offerings. The tourism unit brings in about three-quarters of TUI´s sales.

Still, Gierse called for more transparency and criticized TUI managers for generating less profit from tourism than competitors. He also branded the budget airlines “subsidized businesses” that aren´t earning money and can´t keep pace with larger rivals such as Ryanair Holdings Plc and EasyJet Plc.

The shares gained 42 cents, or 2.2 percent, to 19.75 euros at 2:08 p.m. in Frankfurt, boosting the company´s market value to 3.53 billion euros. The stock is 2005´s seventh-best performer in Germany´s benchmark DAX Index, which is little changed.

TUI will improve profit by 150 million euros by cutting distribution expenses in the U.K. and Germany as well as airplane maintenance costs. Apart from the 2,000 job cuts already announced in the U.K., TUI said further cuts aren´t a focus of its plan.

The company will open 21 hotels with 13,000 beds this year and 13 hotels with 6,000 beds in 2006, which will contribute to 35 million euros in annual profit growth. In markets that haven´t met internal growth targets last year, such as Switzerland and the Netherlands, TUI will undertake overhaul measures that will result in 50 million euros in annual savings.

With more online offerings, as consumers book flights and accommodations on the Internet, TUI also plans to tap an area it expects to lead to 35 million euros in annual profit growth.

The company yesterday said its first-quarter tourism loss narrowed as summer bookings surged 9.5 percent. Cost cuts at Hapag- Lloyd Express and Thomsonfly and in the U.K. will help increase tourism profit this year by more than 10 percent.

Including the newly consolidated low-cost carriers, summer bookings have gained 11 percent from a year earlier, the company said yesterday. The number of people traveling with TUI has risen 8.6 percent, or 20 percent including the airlines.

Such measures helped tourism earnings account for 2.8 percent of sales last year, up from 1.6 percent in 2003. Frenzel´s objective has been to increase that to 5 percent. The CEO said in March he expects booked sales to rise as much as 6 percent in the year through October as the industry expands up to 5 percent.

Hapag-Lloyd Express is adding 15 aircraft and routes in an effort to compete with no-frills airlines such as Ryanair Holdings Plc and EasyJet Plc. The low-cost airlines last year reduced their losses to a combined 49 million euros. Hapag-Lloyd Express will report a profit this year, Chief Financial Officer Rainer Feuerhake told analysts yesterday, Thomsonfly in 2006.

As bookings rebound, TUI and competitors such as Thomas Cook AG and First Choice Holidays Plc have reserved fewer rooms and flights, reducing the possibility of having to sell off extra capacity at a discount.