HL10 Aug 2022 20:27
Hargreaves Lansdown;
With the very difficult pandemic-period now largely left behind on the tarmac, the focus now is on the present. To that end, TUI had a resilient third quarter. Crucially, capacity and bookings are within a whisker of pre-Covid times.
The huge ramp up in activity in the aviation sector has come with pitfalls. The well-publicised flight cancellations and general airport chaos has led to a significant increase in costs for TUI. But these shouldn't be a repeat occurrence.
There are a couple of things to keep in mind though. TUI doesn't just run flights, it has a much wider package holiday business. In some ways that's what makes TUI more defensive - it has more to offer and plenty of cross selling opportunities. But maintaining pre-pandemic levels is also a much higher priority, the drains on cash when you have planes and huge hotels to fill are enormous.
TUI Hotels & Resorts have delivered another consecutive quarter of positive underlying operating profit since the start of the pandemic. Occupancies and average rates are doing well. This all sounds great, but we need proof of a longer run of positive momentum.
And this is where the challenge lies. Looking to the future, TUI needs to work hard to maintain its competitive edge. Most holiday makers aren't too brand loyal and instead want the best deal. You could argue there's an increase in appetite for DIY rather than package holidays too, with today's Airbnb culture.
TUI was concerned about over-capacity in the wider industry before the pandemic. This is an ongoing concern in our opinion, despite the challenges faced by the sector in the last couple of years. TUI doesn't appear to be trimming its own capacity in readiness for an economic contraction and instead relies on a hybrid approach of own and third-party operated flights, which reduces, but doesn't eliminate the risk caused by an over-supplied and overly competitive industry.
TUI has also raised around 10% of the group's share capital, or around €425m, by placing new shares, as it looks to reduce debt and government funding. Again, we think this is a step in the right direction. But there's still credit risk which won't be extinguished until operations have been back up and running at full speed for some time.
TUI faces challenges, especially as the cost-of-living crisis bites and people rein in spending. There's the potential for TUI to do well in the future thanks to its more diverse offering, but we think further turbulence is likely for now.
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