Annual Report 2018 Annual Report 2018
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TUI Group Strategy

Strategy and business model

The leisure travel market has consistently outperformed world output growth over the last decade. This market is also projected to remain very attractive in the future. However, the traditional tour operator and package holiday market remains highly competitive. Online Travel Agencies have started to combine hotel and flight offerings by providing customers with dynamic packaging. In ­addition, airline operators now provide holiday accommodation as an add-on to de-risk their own flight capacity, supported by ­increasingly sourcing hotels directly. Meanwhile it is increasingly likely that there will be new market entrants, for example in the form of global tech companies.

Against this background, TUI has strategically moved away from the traditional tour operator model and developed into an integrated provider of Holiday Experiences. We have invested in our own product offerings, enabling us to create unique holidays for our customers, which is a key differentiation factor from our competitors. A TUI customer could be inspired by TUI, and book with TUI, and then experience a TUI flight, TUI transfer in destination, TUI hotel / cruise and TUI activity, as part of our end to end integrated product offering. This means our customers receive a holistic and seamless experience, while TUI receives more accurate information about what our customers truly want, helping our aim to further facilitate individualised offerings. From an end to end customer journey perspective, around 70 % of our underlying EBITA comes from our own and committed differentiated products.

121 m Markets & Airlines customers plus a further 2 m for Cruise and from our JVs in Canada and Russia = 23 m
24 m customers direct and via 3rd party channels to our Hotels & Resort and Cruise brands
3This number includes group hotels and 3rd party concept hotels as at end of FY 2018
4As at end of FY 2018
5This number relates to Markets & Airlines and All other segments

Holiday Experiences

TUI operates 380 hotels and 16 cruise ships globally through ownership, JVs, management contracts, leases or franchise, and maintains a strong position in the growing tours & activities market with our 150 k excursion and activity offerings. Our differentiated hotel and club brand portfolio, our uniquely positioned German and UK cruise brands, and our global tours, activities and services destination business is well diversified to mitigate content cluster risks.

Our strong and in the future fully digitalised risk management tools within distribution and purchasing, allow us to optimise occupancy and yield. 23 m customers come through our Markets & Airlines, including joint ventures in Canada and Russia, complemented by 4 m customers sold either directly by Holiday Experiences, or via third parties. An optimised and in the future fully dynamic allocation of around 100 m bed nights and approx. € 5 bn third party hotel beds purchasing volume globally, will further contribute to our yield maximisation. As part of our divisional strategy, we continue to invest into the growth and diversification of our hotel and cruise portfolio, leading to a more seasonally robust business mix delivering superior margins. Looking ahead, building a new Southeast Asia hotel cluster is a strategic priority. In addition we have a strong pipeline of new ship deliveries in the coming years.

The global and pre-dominantly offline, fast growing tours and activities market, worth over € 150 bn is highly fragmented with over 300 k providers and therefore offers a strong growth and consolidation opportunity for TUI Group. By acquiring the Hotelbeds Destination Management business and the technology platform specialist Musement, TUI has built a leading and fully digitalised Destination Experiences business. From FY 2019 onwards we operate in 49 countries with over 150 k excursions and activities in destinations in our inventory for our own and third party customers. This set up allows us to offer our 27 m customers excursions and activities, in particular even prior to the customers’ arrival in the destination. The trust in our brand and our strong fulfillment capabilities allow us to fulfill our customers’ expectations from order intake to payment.

Markets & Airlines

TUI operates a customer centric and diversified distribution and fulfillment business across Europe. We combine leveraging our strong market and customer knowledge, driving customer satisfaction and retention, with service and fulfillment. Packaging and purchasing is increasingly driven through our digital platforms and our own airlines, supported by third party flights, facilitate the link between customer demand and our own, as well as third party committed and non-committed hotel and cruise offerings.

Enhancing efficiency by harmonising these regional market organisations, which include our airlines as well, is a key strategic priority.

In addition, we intend to diversify our existing market footprint further. Through our fully digital LTE platform, we are pursuing a low risk entry strategy, simultaneously improving our position to yield our Holiday Experiences’ risk capacity through additional new source market demand.

Group Platforms

Our Group platform initiatives, in particular around IT and digitalised customer relationship management, will enable us to enhance our Group yields further. By individualising our offerings and identifying the next best activity for our customers, enabled by our integrated content management and distribution business model, we enhance customer satisfaction and drive our ancillary yields, a win-win ­opportunity. As an example, our select your room initiative, allows our customers to book their preferred and specific hotel room, which moves our offering from room category pricing to individualised room pricing.

It is the integrated and double diversified nature of our business, which sets us apart from the competition. Our integrated business model proves to be robust, offering flexibility to react to external challenges, either in one of our Markets & Airlines or destinations.

Our employees

Qualified and engaged employees are a major prerequisite for TUI’s long-term success. We are ­aiming to be an attractive employer, ­encouraging our employees to engage with passion and ­personality. One of the key elements of our global HR strategy, therefore, is to attract and promote people with talent and to ­retain them by offering attractive employment ­conditions. In 2018, our ­engagement index* is 76, one point below previous year’s value. Our goal is to achieve a colleague ­engagement score of over 80 by 2020 in order to be among the Top 25 global companies.

At the same time, digital transformation creates technical, cultural and organisational challenges for our employees. However, digitalisation also creates opportunities for personalised lifestyles and work design. We are seeking to actively address these requirements and the permanent change taking place in the world of work so as to shape the future together.

* The Engagement Index comprises the individual commitment and the team commitment of our employees. Individual ­commitment means not only overall satisfaction, but also the willingness for recommendation, the pride to work for a ­company as well as the belief in its future viability.

Capital Allocation

We will continue to operate within a clearly defined and disciplined capital allocation framework. Our strong cash generation allows us to invest, pay dividends and strengthen the balance sheet. Since the merger, we have generated around € 2 bn of disposal proceeds, which we have reinvested primarily into our higher margin, lower seasonality and better quality Holiday Experiences business, with a ROIC hurdle rate for growth investments of at least 15 % on average. We also invest via ring-fenced joint ventures, make use of highly efficient asset finance and other finance instruments, as well as more ‘asset light’ hotel management contracts, to optimise the cash flow available to shareholders.

Finally, we have a clear financial policy to ensure balance sheet stability, targeting a leverage ratio of 3.0 times to 2.25 times and coverage ratio of 5.75 times to 6.75 times.

Summary

Looking ahead, we continue to expect to deliver superior annual earnings growth with improved seasonality, strong cash conversion and strong ROIC performance. This will be driven by benefits of our digitalisation efforts, efficiency measures and differentiation strategy through the ­disciplined expansion of own hotel and cruise, plus destination experience content.

Our environment

For TUI Group, economic, environmental and ­social sustainability is a fundamental management principle and a cornerstone of our strategy for continually enhancing the value of our Company. This is the way we create the conditions for long-term economic success and assume responsibility for sustainable development in the tourism sector.

The goals we set ourselves in our ‘Better Holidays, Better World‘ sustainability strategy include ‘Step lightly’, where we aim to reduce the environmental impact of our business operations and to fix clear, ambitious goals for improvements in all Group areas.

Greenhouse gas emissions and the impact of these emissions on climate change pose one of the major global challenges for the tourism sector. In FY 2018, TUI Group’s total emissions increased year-on-year in absolute terms, primarily due to the growth in Airlines & Aviation. At 66.7 g CO2 / pkm, specific carbon emissions of our airlines were flat year-on-year. This means that we already operate one of Europe’s most carbon-efficient airlines and continually seek to deliver further improvements.

Our goal: We will operate the most carbon-efficient airlines in Europe and cut the carbon intensity of our operations by 10 % by 2020 (baseline year 2014).