Thomas Cook Regulatory News (TCG)

14 December 2011

Thomas Cook Group plc

Audited results for the year ended 30 September 2011

·; Revenue increased 10% (8% at constant currency) to £9,809m on volume, price and mix gains and benefits from acquisitions;

·; Good performances in Central Europe, Northern Europe and Airlines Germany offset by a fall in UK profit and the impact of MENA disruption, particularly in France resulting in a 16% reduction in underlying profit to £304m;

·; Exceptional charges of £573m resulted in a loss before tax of £398m (2010: £42m profit). The charges are largely non-cash and include £428m of impairments and write-downs. Cash exceptionals were £90m (2010: £158m);

·; Free cash inflow improved by £50m to £18m despite the fall in profits;

·; Implementation of UK turnaround plan underway. Turnaround expected to deliver £110m annualised improvement in profitability, following a phased build-up over three years;

·; Further progress on asset disposals made, with the sale of five hotels in Spain, that will result in an estimated net debt reduction of £81m;

·; Cautious stance on winter capacity taken in UK, Central and West & East.

Sam Weihagen, Group Chief Executive, Thomas Cook Group plc said:

"This has been a very challenging year for the Group, despite which we still delivered an underlying operating profit of over £300m. We have instigated significant management changes and implemented a turnaround plan in the UK to address our areas of underperformance. We continue to take action to substantially strengthen the balance sheet and the Board is undertaking a full strategic review. I am confident that these changes will improve profitability and build a stable foundation from which to rebuild shareholder value.

Customers have been very supportive in recent weeks and are continuing to book with Thomas Cook. Bookings outside the UK were broadly unaffected by news of our refinancing and in the UK bookings have recovered well. For over 170 years Thomas Cook has provided customers with fantastic holiday experiences and we will continue to do so."

1 Underlying profit from operations is considered by management to give a fairer view of the year on year comparison of trading performance and is defined as earnings before interest and tax, excluding all separately disclosed items. It also excludes our share of the results of associates and joint venture and net investment income.

2 Free cash flow includes cash from operating activities, purchase and proceeds of disposal of tangible and intangible fixed assets and interest paid.

Enquiries

Presentation to analysts

A presentation of the full year results followed by the UK turnaround plan will be held for equity analysts and shareholders by invitation today at 9am (GMT), at Nomura, 1 Angel Lane, London EC4R 3AB.

Dial-in details: +44 (0) 20 3003 2666

Password: Thomas Cook

Replay number: +44 (0) 20 8196 1998

Access number: 3162585#

A live web-cast and a copy of the slides will be available on our website from 8.45am at www.thomascookgroup.com.

OPERATING AND FINANCIAL REVIEW

Thomas Cook has faced a second successive year of exceptional challenges. In 2010, we had to contend with the disruption caused by the volcanic ash cloud and, this year, the Arab Spring resulted in a dramatic fall off in travel to the important MENA destinations. In addition, within the UK our customers have been faced with declining real incomes and, in many cases, employment uncertainty. Against this difficult backdrop, we have taken action to develop and embed a turnaround programme in our underperforming UK operating segment with the intention of significantly improving profitability through stabilising the business, whilst focusing on value for our customers. In spite of these difficulties, many of our operating segments such as Northern and Central Europe and Airlines Germany delivered good results. We are also taking steps to substantially strengthen our balance sheet.

Whilst we have been faced with challenging external circumstances, our performance in the UK and France has fallen well below our own expectations. We have taken action and put in place new management teams in both these markets as well as appointing Sam Weihagen as interim Group Chief Executive Officer on 2 August 2011.

We have also completed a review of our balance sheet which has resulted in £428m of impairments and write-downs, the majority of which are non-cash and relate to impairment of goodwill in our UK and Canadian businesses and a write down of IT assets.

Despite the challenging economic environment, there remain significant opportunities to improve our performance. Many of these opportunities for improved performance are within the UK and we are in the process of implementing a significant turnaround plan, designed to substantially improve our profitability and deliver £110m of fully annualised improvement to profitability, with a phased build-up over the next three years.

As announced on 25 November 2011, the Group has agreed a new £200m bank facility and a further relaxation of the financial covenants to provide additional headroom. The Board is aligned on the need to achieve a substantial reduction in the Group's net debt and as previously announced, we have already undertaken several steps to improve our balance sheet, including:

·; Implementing a £200m non-core asset disposal programme in July, which has already realised £35m of net proceeds with a disposal agreed which will result in a further circa £81m net debt reduction; and

·; Suspending further dividend payments until the balance sheet is rebuilt.

The Group will be commencing a strategic review, which will consider further actions to accelerate the rate of debt reduction.

Revenue and underlying results

Group revenue for the twelve months to 30 September 2011 was £9,809m (2010: £8,890m), up 10% (8% on a constant currency basis). Revenue benefited from a modest volume uplift and price increases in part due to change in mix. In addition, the acquisition of Öger Tours by Central Europe and Intourist by West & East towards the end of the year added circa £341m to revenues during the period.

Group underlying profit from operations was £304m, a decrease of £58m on the prior year. The Group achieved improved underlying profits from operations in Northern Europe of £106m (up £15m), Central Europe of £70m (up £11m) and Airlines Germany of £69m (up £18m). However, disruption to our important MENA destinations adversely impacted Group underlying profit from operations by an estimated £80m and of that impact, circa £32m was incurred in France where 40% of bookings are typically to North Africa. As a result, underlying profit from operations for West & East Europe was £42m lower than prior year at £40m. Underlying profit from operations in the UK segment were £73m down on prior year at £34m as a result of both the MENA impact and a squeeze on margins. Having completed a thorough review of the UK business, a turnaround plan to improve performance is now being implemented and is set out later on.

The Group's underlying net interest charge for the year was £122m, reflecting higher average debt following the refinancing of the Group's original bank facility in May 2010 with a combination of bonds and bank debt with longer and varied maturities.

Separately disclosed items

Included within separately disclosed items of £573m is a £428m charge as a result of a balance sheet review. Whilst clearly a substantial sum, this amount is largely of a non-cash nature. As part of our year end review process and given the reduction in Group profitability, we undertook a review of the carrying value of goodwill and certain other assets. See page 13 for further details. Cash exceptional costs were £90m, £68m lower than the prior year.

Earnings and dividends

Taking account of the lower underlying operating profit and the separately disclosed items, the Group delivered a statutory loss before tax of £398m compared with a profit of £42m last year, and the reported loss after tax was £518m (2010: £3m profit).

The underlying basic earnings per share was 11.7p (2010: 20.4p) and the basic loss per share was 60.7p (2010: 0.3p).

The Group declared an interim dividend of 3.75p (2010: 3.75p) which was paid on 7 October 2011. As previously announced, Thomas Cook will not pay a final dividend.

Cash flow and balance sheet

The Group continued to focus on improving its cash management, delivering a £50m improvement in free cash flow to £18m. This was ahead of prior year despite increased losses, largely driven by lower capital expenditure.

The Group cash outflow (before changes in debt) was £80m, as the payment of dividends and acquisition spend was greater than the free cash inflow. Net debt at 30 September 2011 was £891m (2010: £804m).

UK Turnaround

Background and overview

Within the UK business in FY11, 74% of the revenue came from the mainstream segment, but all the underlying profit was generated by the independent business. Following the deterioration in the financial performance and outlook for the UK and Ireland operating segment during the year, the Board changed the UK management and initiated a thorough review of the business with the aim of substantially improving performance.

Despite the erosion of merger benefits and the input cost inflation the business has faced, the new management team sees a significant opportunity for Thomas Cook to operate more profitably in the UK overseas holiday market. The market is large, mainstream package travel continues to be an important component and independent travel is forecast to grow. The UK business has significant capabilities across both mainstream and independent travel. However, the business has become overly complex and too volume driven.

To stabilise the business and rebuild profitability, the UK management team has begun implementation of a turnaround plan. The plan is intended to optimise the UK airline, refocus product strategy, improve yield management, rationalise distribution and improve operational efficiency. In addition, the business will take action to deliver higher growth and better returns from its independent operations which accounted for 26% of UK revenues.

Estimated improvements and costs

The UK turnaround plan is expected to deliver a fully annualised improvement in profitability of £110m, with a phased build-up over the next three years for a total estimated cost of circa £60m.

The annual improvement in profitability and the outlay in costs are anticipated to be phased as follows:

The actions expected to deliver the largest cumulative improvement to profitability are those associated with refocusing product strategy, improving yield management and rationalising distribution.

On a fully annualised basis, management estimate that approximately 60% of the improvement to profitability will come from cost actions and 40% from actions focused on managing revenue and margin more effectively.

The achievability of the improvements and the estimated costs of achieving such improvements relate to future actions and circumstances which, by their nature, involve risks, uncertainties and other factors and may be different than anticipated.

Actions to deliver the UK turnaround plan

The initial steps taken to deliver the UK turnaround plan have included simplifying the UK organisational structure, facilitating faster decision making and establishing a transformation team to lead and track the approved changes. The following are the key aims and action points:

1. Optimise the UK airline (£10m improvement)

The expectation is to reduce Winter season losses, increase flexibility in Summer season flying and better manage seat-only volumes by reducing the size of the UK's integrated airline. Overall, the aim is to reduce the amount of in-house flying and for Summer 12 we are targeting around 85% vs. 93% for Summer 11.

To achieve this, a consultation is underway to implement a proposed reduction in the UK fleet from 41 to 35 aircraft and a realignment of cabin crew grades which will reduce fixed lease and maintenance costs by £22m. The proposed aircraft cuts are primarily focused in long haul which has a disproportionate risk profile.

2. Refocus the product strategy in mainstream package holidays (£15m improvement)

The UK business will consolidate its hotel portfolio and seek to build upon its successful exclusive and differentiated product concepts.

The business has already cut over 500 under-performing hotels for Summer 12 from a portfolio of over 2,200 hotels in Summer 11. We have boosted this by adding 90 hotels, almost half of which are exclusive to the UK or offer differentiated features. The hotel portfolio will be further reduced to circa 1,500 hotels over the next 3 years, with the aim of concentrating customers into fewer, higher performing hotels to drive stronger supplier relationships, higher customer satisfaction rates and efficiency benefits.

The aim is to increase the share of differentiated product from the current 31% to 50% of mainstream holiday sales over the next three years, which we believe should deliver an incremental margin of circa £25 per customer compared to our non-differentiated product, vs. £18 per customer in FY11. The intention is to build upon the UK's successful concepts, including Style, Aquamania and SunStar, which grew in aggregate by 39% to 800,000 passengers during 2011 and generate significantly higher customer satisfaction.

3. Improve yield management (£35m improvement)

Yield management has not been effective, with high frequency price changes driven by volume coupled with high discounting at the point of sale which resulted in margin erosion. Going forward, the focus will be on increasing margins by improving central yield management capabilities and by implementing clear parameters in retail discounting.

To drive yield management improvement, the business is extending its existing yield management system across all UK tour operator products and implementing a new system for seat-only flight products. In addition, the business is strengthening its control processes, management information and yield tools to bolster its trading strategy and gain more benefit from better yields on its early season sales and in the lates market, closer to customer departure.

Retail discounting has not been adequately linked to yield management. As a result, management estimate the business has lost considerable margin opportunity, for example, by unnecessary retail discounting on high demand product. To remedy this, retail discounting policies and incentives will be closely aligned with central yield decisions and focused on products where it is clear consumers need incentives to buy.

4. Rationalise Distribution (£25m improvement in the JV)

Increasing the proportion of in-house distribution is strategically important as it reduces external commission costs, provides better yield control and drives higher repeat business. The UK business' high street retail shops are particularly important for package holiday sales, with 48% of the UK business' package holiday sales made through this channel in 2011. Given the importance of high street retail, the UK business recently sought to bolster its position through its retail joint venture with The Co-operatives, which completed on 4 October. This is expected to increase controlled distribution to 84% for mainstream. To realise cost synergies from the joint venture, we have begun the process of consolidating our back offices and systems.

A thorough review of the profitability of the UK business' combined retail estate of 1,300 shops shows the current need for a phased closure of circa 200 under-performing shops where leases expire within the next 2 years. We will continue to review the performance of the remaining portfolio as leases come up for expiry and more customers move online. In addition, we will continue with the modernisation programme of our remaining stores to ensure that the brand retains customer appeal.

We are continuing to invest in our online offering and are in the process of upgrading and re-launching our websites in time for peak trading. We also expect to see the current 25% share of total UK online bookings increase to between 40%-50% over time. Improvements made to our UK websites are intended to help achieve this.

5. Operational excellence (£25m improvement)

Reviewing the performance of the business highlighted significant operational inefficiences driven by a siloed structure combined with overlapping, manual processes. We are now focused on operational excellence and are seeking to improve productivity, remove manual processes where appropriate and focusing on cost effectiveness.

In total, the UK management have identified 20 projects across the business where they believe they can improve operational effectiveness, spanning retail and call centre staff rostering, the introduction of paperless ticketing and a reduction in brochure wastage. Most of these projects are expected to complete within the next 12 months with a £10m benefit in FY12.

6. Independent business

The independent business has grown substantially in recent years, largely through acquisitions. This has led to a collection of businesses which are not well co-ordinated and in some cases have been significant underperformers. The focus now is on improving the management of these businesses and better integrating them in order to leverage off each other and achieve the growth that is forecast for this market.

There are two distinct operating models, risk and non-risk, and in total they carried 2.9m passengers in the financial year ended 30 September 2011. The risk model has many similarities to the mainstream business, with niche concept products across the activity, youth and sport brands. The non-risk model, which includes accommodation only, dynamic and scheduled packages, has been driving the growth in recent years and is expected to continue to do so.

We are taking further action in the niche specialist businesses, targeting an increase in passenger volumes and improvement in margin. Neilson, for example, is expecting to increase the number of its activity holiday properties from 8 to 10, and expects to drive a 22% increase in passengers as a result. The youth brand Club 18-30 has been expanding its concepts and now includes music festival formats such as NOMUD and the Big Reunion, which are expected to continue to grow.

Growth in the non-risk business is supported by growth in the market environment. The management team is targeting an increase in market share through better leveraging the UK's distribution platform and increasing awareness of the breadth of products available under the umbrella Thomas Cook brand. Our bed banks, Hotels4U and Medhotels, which have grown strongly are currently mainly wholesale and have performed well. There is also a significant opportunity to sell direct to the consumer and better allow customers to create dynamic packages with Gold Medal, our flight consolidator and ancillary business providers.

Strengthening the balance sheet

Since early 2010, Thomas Cook has been subject to a number of external shocks, most notably the closure of European airspace due to volcanic ash clouds in April 2010, and more recently the political and civil unrest in the important MENA region destinations, the combination of which have significantly reduced the Group's financial flexibility. We have also seen a more recent deterioration in trading as concerns over the Eurozone economy start to impact consumer confidence.

Against this backdrop, the Board is undertaking a strategic review with the objective of delivering a substantial reduction in net debt over the next eighteen months.

The Board has already taken the following steps to improve the Group's liquidity position and reduce its net debt:

Amendment of the Group's existing bank facilities

On 25 November, we announced that we had reached agreement with our banking group to amend the terms of our existing bank facilities to widen our financial covenants and increase financial flexibility for the Group until March 2013. In addition, we agreed a new £200m facility to provide additional headroom. This replaces the £100m short-term facility announced on 21 October 2011 and is available until April 2013.

Non-core asset disposal programme

On 12 July 2011, the Group announced its intention to dispose of certain hotel and surplus assets, which are expected to generate net proceeds of up to £200m over a six to eighteen month period. To date, the Group has completed four disposals. These include its share of the sale of certain hotel assets in Spain and the Group's minority stake in Jacaranda, a hotel in Tenerife, in addition to the sale of Moranda, a vacant hotel in Mexico, and the sale of its Dutch retail business. These four transactions will reduce the Group's net debt by £35m.

In addition, on 12 December, the Group signed a binding agreement for the sale of its interest in HCV, the indirect owner of 5 hotels and a golf course in Spain. This transaction is expected to reduce the Group's net debt by a further circa £81m. The transaction is subject to shareholder approval and is expected to complete in the first quarter of 2012.

The Group continues to review options for the sale of other non-core assets.

Suspension of dividends

On 29 September 2011, the Board announced its decision not to declare any further dividend payments whilst the Group rebuilds its balance sheet. In the 2010/11 financial year the Group paid out dividends of £92m.

Current trading

The first quarter has got off to a slow start for what is in any event a seasonally quieter time of the year for the business. Whilst there was some initial adverse impact on bookings as a result of the announcement on 22 November 2011 this was predominantly in the UK and we have been pleased with the reaction of customers and suppliers to the announcement of further significant financial support from our banking group on 25 November 2011. In particular the reaction of UK customers to our recent summer promotion has been encouraging and summer bookings for the UK, whilst still early in the cycle, are 8% ahead of prior year.

Summer 11

Our summer programme finished on 31 October with cumulative bookings in line with capacity. Pricing trends are in line with those reported in September and our departed load factor was high.

Note: In Central Europe and West & East Europe, bookings represent all bookings including cars/overland, however capacity represents airline seat capacity only. Northern Europe summer season is April - September. Central Europe bookings and ASPs include Öger Tours (comparator restated to include Öger Tours).

Winter 11/12

Winter typically accounts for around 35% of our annual Group revenue and this year has got off to a slow start as economic concerns weigh on consumers' minds. As a result, we have taken a cautious stance on capacity and will, if needed, reduce further. It should also be noted that comparators are distorted by the impact of MENA which only affected holidaymakers from January of this year.

Note: Figures as at 10/11 December 2011. In Central Europe and West & East Europe, bookings represent all bookings including cars/overland, however capacity represents airline seat capacity only. Northern Europe winter season is October-March. Central Europe bookings and ASPs include Öger Tours (comparator restated to include Öger Tours).

The UK programme is currently 54% booked overall. Capacity cuts have been focused in long haul, where we are now 82% booked, with 58% less left to sell than last year. In contrast, medium haul bookings are slightly behind prior year at this point. The change in average selling price is distorted by the reduction in higher price long haul bookings.

Central Europe continues to reduce its committed flight capacity to increase flexibility, but retains the ability to increase this if market demand strengthens. Stronger demand for long haul and dynamic packages has been countered by lower volumes in other products as a result of market pricing pressure.

Capacity cuts in the West & East segment reflect lower bookings to the MENA region, particularly in France which has been slow to recover with bookings down 30% over the last four weeks. Bookings to non-MENA destinations continue to be close to prior year levels and pricing is benefiting from an increase in long haul.

Capacity increases in Northern European markets largely reflect growth, but remain flexible to adjust for changes in consumer demand. Bookings are up 6% but margins are weaker due to higher costs, especially for fuel which has a more significant impact on the longer haul winter destinations.

In our German airline, capacity growth reflects greater short haul aircraft productivity and growth in our long-haul business. Bookings, up 21%, are in line with planned capacity increases, and result in part from the timing of promotions in our continental business. Higher fuel costs are not being fully recovered, and although pricing is down, this reflects a significantly higher share of short haul bookings, but we are seeing yield increases on intercontinental routes.

Summer 12

The Summer 12 programme was launched in the UK at the end of April 2011 and in Northern Europe in September 2011. At this stage, the programme has only just been launched in our German and West & East Europe markets.

In the UK, the programme is now 24% booked, with bookings currently 8% ahead of last year and average selling prices up 5%. Notwithstanding these increases, we are taking a cautious stance and planning for an 8% capacity cut at this point, reducing across all haul lengths as a counterpoint to continued uncertainty in the economic outlook.

In Northern Europe, the programme was launched in September and we are 10% sold, broadly in line with last year, with average selling price up 8%. We see continued strong demand for our differentiated content and have added further hotels for the summer season, taking the share of capacity attributable to differentiated products up to 41%.

Board and management changes

As announced on 21 September 2011, the Board appointed Frank Meysman as Chairman designate from 1 October 2011. He became Chairman on 1 December 2011, when Michael Beckett retired from the Board. Frank Meysman is currently conducting a review of the Board and expects to make changes to refresh and strengthen its composition in the near term.

The Board is progressing its search for a replacement Group CEO. Sam Weihagen, who took up the position on an interim basis in August 2011, has agreed to remain in his position until the appropriate candidate is found.

From 1 January 2012, Susan Duinhoven will become CEO for the West Europe business. The East Europe business will be transferred into the Central Europe segment under the leadership of CEO Peter Fankhauser. Thomas Döring, the current CEO of West & East Europe, who started building the Group-wide OTA function a year ago, will turn his full attention to Group e-Commerce and hotel only business.

Outlook

The first half of the current financial year and in particular the first quarter, is expected to be adversely impacted by the uncertain economic environment across Europe, input cost inflation and the ongoing disruption in MENA. In addition, the acquisition of the Co-op and Intourist will add to seasonal losses in the first half given that these businesses earn all their profit over the summer months. We have taken action to cut capacity and costs where appropriate. In the second half results should begin to see the benefits of the UK turnaround plan. Overall, we expect it to be another challenging year given the economic backdrop and we will focus hard on strengthening the balance sheet and improving the performance of our UK business.

FINANCIAL REVIEW

Against a very difficult trading backdrop, the Group achieved a £49.7m improvement in free cash flow and going forward we are fully focused on strengthening the balance sheet.

Financial results and performance review

Group

Revenue and underlying profit from operations

Group results were heavily impacted by the disruption caused by the Arab Spring on our important MENA destinations, particularly in our French source market, and a poor performance from our UK business.

Group revenue for the year increased by 10.3% to £9,808.9m (8.1% at constant currency). Revenue benefited from a modest volume uplift and price increases in part due to change in mix. In addition, the acquisition of Öger Tours by Central Europe and Intourist by West & East Europe towards the end of the year added circa £341m of the Group's revenues during the period. Group revenue was derived 74% from mainstream travel, 25% from independent travel and 1% from financial services. 52% of passengers bought mainstream travel products and 48% of passengers bought independent travel products.

Group underlying profit from operations was £303.6m, a decrease of £58.6m on the prior year. We estimate that disruption to our important MENA destinations adversely impacted underlying profit from operations by circa £80m and of that impact, around £32m was incurred in France where around 40% of sales are typically to North Africa in a given financial year. Underlying profit from operations in the UK segment was £73m down on the prior year as a result of both the MENA impact and a squeeze on margins. UK margins were down as a result of rising input costs and price competition as customers' disposable incomes were squeezed by tough economic conditions. As commented on elsewhere in this report, we are currently implementing a UK turnaround plan. Offsetting these adverse results were improved underlying profits from operations in Northern and Central Europe and Condor, our German airline.

3 Underlying profit from operations is defined as earnings before interest and tax, and has been adjusted to exclude all separately disclosed items. It also excludes our share of the results of associates and joint venture and net investment income.

4 Free cash flow includes cash from operating activities, purchase and proceeds of disposal of tangible and intangible fixed assets and interest paid.

The main drivers of the year on year fall in underlying profit were:

It is estimated that exchange translation has positively impacted the translation of our overseas operations results into sterling by circa £22m.

Separately disclosed items

Separately disclosed items consist of exceptional operating and finance items (including the impact of a review of balance sheet carrying values), IAS 39 fair value re-measurement, profit or loss on disposal of associates and the amortisation of business combination intangibles. These are costs or profits that have arisen in the year which management believes are not the result of normal operating performance. They are therefore disclosed separately to give a more comparable view of the year on year underlying trading performance.

The table below summarises the separately disclosed items, which have been included in the full year accounts. Further details are provided in note 4 to the financial information in Appendix 1.

Exceptional operating items

Exceptional operating items (excluding balance sheet review and impairment) were £101.9m (2010: £166.3m), of which £57.3m relates to restructuring programmes mainly in the UK (£28.8m) and West & East Europe (£16.6m) operating segments. £37.6m is provision in relation to a disagreement with HM Revenue & Customs regarding place of business. A breakdown of the remaining balance of £7.0m is set out in note 4 to the financial information in Appendix 1.

As part of our year end review process and given the reduction in Group profitability, we have undertaken a review of the carrying value of goodwill and certain other assets. In total, the write-down is £428.1m and is largely of a non-cash nature.

£278.7m is impairment of goodwill, mainly in relation to our UK and Canadian businesses and reflects a decrease in management's estimates of the likely future profitability and cash flows of those businesses. £86.3m relates to other intangible assets, principally in respect of the historic costs associated with a long running major IT project that has yet to be fully commissioned by the Group's incumbent provider and which management believe to carry increased costs, execution risk and timeframe to delivery which exceed the previously anticipated benefits. Following the management changes in our UK business and the substantial deterioration in trading within our French operation, we have carried out a balance sheet review of those businesses, which has resulted in net balance sheet write-downs of £63.1m.

IAS 39 fair value re-measurement

IAS 39 (as amended) requires the time value element of options used for hedging the Group's fuel and foreign currency exposure to be written off to the income statement as incurred. As this is purely a timing issue but can give rise to significant, unpredictable gains and losses in the income statement, management has decided to separately disclose the impact in the income statement to assist readers of the accounts in better understanding the underlying business development. For consistency, we also separately disclose the timing effect within net finance charges of marking to market the forward points on our foreign currency hedging. We have therefore separately disclosed a loss of £5.9m in the operating result (2010: gain of £2.0m) and a loss of £9.1m in net finance costs (2010: gain of £7.3m).

Amortisation of business combination intangibles

During the year we incurred non-cash costs of £34.3m (2010: £30.9m) in relation to the amortisation of business combination intangibles. £22.2m of the amortisation relates to the merger of Thomas Cook and MyTravel and represents the amortisation of brand names, customer relationships and computer software. The remaining £12.1m relates to other acquisitions made post-merger.

Income from associates and joint ventures

Our share of the results of associates and joint ventures, which comprises mainly hotel participations, was a loss of £2.3m (2010: profit of £3.2m). This result largely reflects deteriorating trading in a business that has now been sold. The prior year result included the £2.0m reversal of a previous impairment.

Net investment loss

The net investment loss in the year was £4.8m (2010: £1.5m) and mainly comprised a £3.8m impairment of an investment in a German tour operator, Aldiana.

Net finance costs

Net finance costs (excluding separately disclosed items) amounted to £121.9m, an increase of £5.8m on the prior year. The increase reflects higher levels of average borrowings and a rise in the level of fixed interest charges following the bond issues in April 2010. These increases have been partly offset by a reduction in other interest, including, in relation to the Group's defined benefit pension schemes.

Tax

The tax charge for the year was £119.8m (2010: £38.9m). Excluding the effect of separately disclosed items, change in tax rates and the impairment of a deferred tax asset, this represents an effective tax rate of 41.0% (2010: 27.6%) on the underlying profit for the year. An impairment to the deferred tax asset has arisen in the year reflecting the reduced likelihood of utilising UK taxable losses within an acceptable time period.

Total taxable losses available to carry forward in the Group at 30 September 2011 were £2.1bn and as at 30 September 2011 deferred tax assets were recognised with respect to £0.7bn of this amount.

Earnings per share and dividends

The underlying basic earnings per share was 11.7 pence (2010: 20.4 pence). The basic loss per share was 60.7 pence (2010: 0.3 pence).

The interim dividend for the year of 3.75p per share was paid on 7 October 2011. As previously announced, the Board has decided not to declare any further dividend payments whilst the Group rebuilds the balance sheet. The total dividend per share for the year is therefore 3.75p (2010: 10.75p).

Despite the decline in profitability, the Group recorded a substantial cash inflow from operating activities of £288.6m and a £49.7m increase in free cash flow during the period. The improvement in free cash flow was the result of significantly lower capital expenditure mainly because the prior year included payments of £66.2m to acquire two aircraft, which were previously on operating leases. The increase in interest paid of £33.2m mainly reflects the first annual interest payment due on the Group's euro and sterling bonds, which were launched in April 2010. Acquisition of businesses outflow of £19.2m follows the acquisition of Öger Tours a Turkish specialist operating out of Germany, our joint venture stake in Intourist in Russia and deferred consideration on prior year acquisitions, Gold Medal and Hotels4U. The increase in dividends is a result of timing of payments with only the final dividend for 2009 being paid out in 2010, whereas for 2011 the cash flow includes payment of both the 2010 interim and final dividend. Following the payment of the recent interim dividend in October 2011, the Group has announced a suspension of dividend payments until it has rebuilt the balance sheet.

Net debt (being cash less borrowings, overdrafts and finance leases) at the year end was £890.9m (2010: £803.6m). Headroom under the banking facilities as at 30 September 2011 was £821m compared to £890m as at 30 September 2010. It should be noted that £50m was repaid under the term loan agreement just after the year end, during October 2011.

Hedging

We are almost fully hedged for Winter 2011/12 and continue to build our positions for Summer 2012 in line with our hedging policy.

As at 9 December 2011

Segmental performance review

Segmental performance presented here is based on underlying financial performance before separately disclosed items and the segmental narrative is provided on this underlying basis.

UK

See Appendix 2 for key.

The results of our UK segment reflect significant underperformance during a very difficult year. Underlying profit from operations was reduced to £34.1m (2010: £107.5m) and the underlying operating profit margin reduced to 1.0% (2010: 3.4%). Within the overall UK segment, operations in the UK generated £3,199m revenue and underlying operating profit of £19.5m with operations in India and Egypt generating the balance. The adverse impact of political unrest in the MENA region on the UK business' profit from operations for the year was £15.2m.

External trading conditions were tough as consumer sentiment deteriorated and we faced significant input cost increases but these external factors were exacerbated by internal operating inefficiency and a lack of responsiveness. As described in more detail elsewhere in this report a new management team was appointed during the year and a thorough review of the business undertaken. This has identified significant opportunities to improve performance through actions including optimising distribution, improving yield management and product strategy.

Our tour operators suffered most from increased input costs and were unsuccessful in passing these on to customers due to price sensitivity resulting from a combination of low consumer confidence and increased competitive pressure. However, our UK airline delivered a strong operational performance with good on-time statistics and significant operating cost savings. Following the overall deterioration in trading and the management changes, we undertook a review of the UK balance sheet and have identified several areas where recovery of the carrying value of assets at the previous year end was no longer considered achievable or where recognition of additional liabilities was considered appropriate. The overall impact of this reassessment was £49.7m and given its size and impact, it has been disclosed separately within the Group results.

The increase in mainstream passengers of 1.5% to 3.7m and capacity of 1.9% was principally in short haul as passengers moved away from medium haul travel due to the MENA disruption. Similarly it was in short haul and long haul that we saw the largest increases in average selling price, although this was insufficient to cover the effect of the higher input costs.

Our Independent businesses had a mixed year with good growth in Hotels4U and our Essentials businesses but margin and volume pressure in Gold Medal. Gold Medal faced aggressive competition in its markets and a decline in the effectiveness of key third party agents which was exacerbated by poor systems which made recognition of the underlying margin performance difficult.

See Appendix 2 for key.

Our Central Europe segment delivered another good result this year with underlying profit from operations up 19.1% to £69.8m (2010: £58.6m) and an underlying operating margin of 3.0% maintained. The adverse impact of disruption due to the unrest in the MENA region on underlying profit from operations was £4.9m and the benefit from exchange translation was £4.1m. The overall margin we achieved in Germany (including Airlines Germany) improved from 4.1% to 4.4%.

Currency-adjusted revenue growth was 16.9% and the acquisition of Öger Tours at the start of this financial year drove the largest element of this increase, comprising 12.1%. The integration of the Turkish specialist tour operator has been successfully managed and the business added £8.6m to profit from operations for the segment. Revenue growth was also driven by a move towards flight inclusive products causing a mix effect on the average selling price. Underlying average selling prices of both flight inclusive and non-flight inclusive were also increased as cost increases were passed on to customers.

The segment continued to see growth in dynamic packaging, adding further to the existing flexibility of the business model which has enabled it to perform well despite the disruption arising from MENA and the competitive price pressure in the German market.

The reported proportion of departed passenger bookings through controlled and internet distribution has fallen in the year as a result of the inclusion of Öger Tours, which will increase bookings through our controlled distribution networks in the future. Excluding Öger Tours, controlled and internet bookings were ahead of the prior year by 0.8% and 4.1% respectively.

See Appendix 2 for key.

Our West & East Europe segment has been particularly affected by the political unrest in the MENA region as it is an important destination for these source markets, making up around a quarter of the Mainstream programme for the segment overall and 40% of the Mainstream programme for France. West & East underlying profit from operations was £40.4m (2010: £82.0m) and the impact on this result of the MENA disruption is estimated at £43.5m and the benefit from exchange translation was £4.7m. Within this, France recorded an underlying loss from operations of £11.3m (2010: £34.4m profit), with MENA estimated to have reduced French profits by £32m. The underlying operating profit margin for the segment fell to 2.1% (2010: 4.8%).

Currency-adjusted revenue in West & East Europe increased by 9.5% year on year, in part due to the impact of the Russian acquisition as well as increases in most markets, driven by an increase in passenger numbers and changes in product mix towards higher priced, flight-inclusive holidays and away from non-flight inclusive tours. The acquisition of Intourist's tour operating and retail network in Russia was completed on 12 July 2011 and that business' summer trading has added £98.9m to revenue and £2.3m to the underlying profit from operations for the year. The segment has driven increased volumes through e-commerce channels during the year with consequent increases in related IT and marketing expenses. These increased costs together with general inflationary pressures have been partially offset by the reassessment of certain aircraft related liabilities.

Following the deterioration in trading and a change of management in our French business, the carrying value of certain assets and liabilities that had been recognised at the previous year end has been reassessed. It is now considered that certain accounting judgements regarding collectability of assets and recognition of liabilities were incorrect. Revision of these accounting judgements and a generally more cautious approach in light of current trading conditions has resulted in a charge totalling £13.4m in the year and the more cautious approach has been maintained in the judgments made at 30 September 2011. Due to the one-off nature of the £13.4m additional charge this year, it has been included within separately disclosed items.

Northern Europe

See Appendix 2 for key.

Our Northern Europe segment delivered its best ever results with underlying profit from operations of £106.3m (2010: £91.7m) almost 16% ahead of the prior year and underlying operating margin further improved to 9.2% (2010: 9.0%). This success was driven by the continued focus on providing exclusive and differentiated products and on operational efficiency and cost control; enabling the business to continue to improve its performance despite strong competition.

Currency-adjusted revenue was up 4.2% on the prior year, driven by volume growth, with average selling prices remaining broadly in line with the prior year. The negative impact of the political unrest in the MENA region on the underlying profit from operations was £4.9m and the benefit from exchange translation was £8.9m.

Northern Europe's industry-leading operating margin is in part due to the high proportion of its bookings taken through controlled and internet distribution and it has again experienced strong growth in this area. Controlled distribution through owned websites, shops and call centres accounted for 85.7% (2010: 84.4%) of departed passengers and, within that amount, internet sales grew to 65.6% in the year.

See Appendix 2 for key.

Note: Internet distribution % includes independent travel bookings.

Our North American segment performed ahead of the prior year helped by an exchange translation benefit of £0.9m, with underlying profit from operations of £10.5m (2010: £9.1m) despite the continuing difficult market conditions for its Mainstream business. This business continues to experience lower margins due to the strong price competition resulting from overcapacity and to address this we have focused on growing the sales of our exclusive and differentiated products and cost reduction. The start of our new flying arrangements with Jazz, following the collapse of our principal seat provider in the previous year, has provided significant savings in flying costs and substantial improvements in customer satisfaction.

Revenue in North America fell, on a currency-adjusted basis, by 4.6% with passenger volumes and average selling prices down. In our mass market tour operator we focused on maximising sales of available seats and saw a consequent increase in load factors.

Our Independent operation has continued to grow passenger volumes and has seen improved average selling prices and margins such that it now contributes more than 70% of the North American passenger volumes. Within this business our dynamic booking engine, Travelgenie, has continued to perform well and now accounts for 17% of our Independent land sales.

Controlled distribution rose to 42.6% following the start in January of our licensing agreement to operate Sears Travel. The integration of this operation is on track and delivering significant benefits. Later in the year we signed an agreement with the Advantage consortium of independent travel agencies, which has added 90 stores to our franchise network. 2011 is the first year we have been able to use the Thomas Cook brand in Canada and we are confident that its strength will benefit our products in this competitive market.

Overhead cost reductions of approximately £5m were delivered during the year to help keep our cost base low. Efficiency was improved by further adoption of technology-based solutions.

See Appendix 2 for key.

Our Airlines Germany segment delivered another strong set of results with underlying profit from operations up 35.6% to £69.3m (2010: £51.1m) and underlying operating margin growing from 5.1% to 6.2%. This improvement was achieved despite the introduction of a new German air passenger tax and strong competition in Germany.

Total revenue was 12.5% higher at £1,120.3m, with currency-adjusted total revenue 11.6% ahead following the expansion of long haul capacity. The profitable growth to long haul destinations drove the 18.5% increase in seat only sales and the 3.8% increase in average yield, which excludes the effect of the new air passenger tax. The adverse impact of the disruption in the MENA region on profits was estimated at £11.7m and the benefit from exchange translation was £3.7m.

Increased maintenance, landing and training costs were offset by cost savings from the segment's ongoing efficiency programme and a refund of overcharged security fees. In addition, the segment result benefited from lower depreciation (£6m) and participation in the Group wide airline synergies project which delivered savings of £9.5m.

See Appendix 2 for key.

The costs associated with running the corporate headquarters and central functions relating to the Group OTA, Destination Management and central IT functions have reduced by £11.0m to £26.8m. This decrease is mainly a result of reduced personnel costs both from lower charges relating to employee incentive schemes in the current year and the non-recurrence of certain people costs in the prior year period. These reductions have been partly offset by the full year impact of costs within the central functions which were brought into the Corporate segment in the second half of the prior year, particularly the OTA which continues to drive forward our main branded tour operator sites in the UK, Central and West & East Europe.

TREASURY ACTIVITIES

The Group's Treasury Department has primary responsibility for treasury activities and these are reported regularly to the Board. The Group Treasury function is subject to periodic independent reviews and audits, which are then presented to the Audit Committee.

Treasury policies

The Group is subject to financial risks in respect of changes in fuel prices, foreign exchange rates and interest rates. It is also exposed to counterparty credit risk and availability of credit facilities within its business operations. To manage these risks, the Board has approved clearly defined treasury policies covering hedging activities, responsibilities and controls. The policies are reviewed regularly to ensure that they remain appropriate for the underlying commercial risks. The policies also define which financial instruments can be used by the Group to hedge these risks. The use of derivative financial instruments for speculative purposes is strictly prohibited.

Management of liquidity risk and financing

Group Treasury's primary objective is to ensure that the Group is able to meet its financial commitments as they fall due. This involves preparing a medium-term cashflow forecast using the annual budget and three-year plan and ensuring that the Group has sufficient available cash and headroom under its committed facilities. In addition, a rolling 13-week cashflow forecast is used to manage the Group's short-term cash and borrowing positions.

Borrowing facilities

The Group's funding arrangements include a €400m bond maturing in June 2015 and a £300m bond maturing in June 2017, both issued in April 2010. In addition, the Group has committed bank credit facilities totalling £1.2 billion provided by a syndicate of banks. These comprise a £150m amortising term loan, a revolving credit facility of £850m and, as announced on 25 November 2011, a new £200m facility agreed with a syndicate of banks to provide additional liquidity around the seasonal cash low points in December this year and next. During the year the amortising term loan and revolving credit facilities were extended by one year and now mature in May 2014. The new £200m facility matures in April 2013 and replaces the £100m short-term facility announced on 21 October 2011. In addition, certain amendments to the terms of its committed bank facilities have been agreed, principally to provide greater financial flexibility for the Group by increasing the headroom under its financial covenants. As at the 30 September 2011, the average remaining term of the bonds and committed bank credit facilities was 3.2 years (2010: 3.7 years).

Since the year end, and as announced on 25 November 2011, the Group has agreed with its syndicate of banks, a new £200m bank facility to provide additional liquidity around the seasonal cash low points at the end of December this year and next. This facility is available until April 2013 and replaces the £100m short-term facility announced on 21 October 2011. In addition, certain amendments to the terms of its committed bank facilities have been agreed, principally to provide greater financial flexibility for the Group by increasing the headroom under its financial covenants.

Guarantee facilities

In addition to debt facilities, the Group has a requirement for bonding and guarantee facilities, principally for consumer protection guarantees. The Group has £200m of committed bonding and guarantee facilities provided by seven of the syndicate banks. During the year, these guarantee facilities were extended and now mature in May 2013.

Counterparty credit risk

The Group enters into fuel, foreign exchange and interest rate derivative contracts and deposits surplus cash with approved banks and financial institutions with strong credit ratings. Each counterparty has a credit limit authorised by the Board and credit risk is reduced by spreading the deposits and derivative contracts across a number of counterparties.

PRINCIPAL RISKS & UNCERTAINTIES 

We place great importance on internal control and risk management. The table below lists the principal risks and uncertainties that may affect the Group and also highlights the mitigating actions that are being taken. The content in the table however is not intended to be an exhaustive list of all the risks and uncertainties which may arise.

During the year the focus has been on the key risks of liquidity, the management of capacity in response to difficult trading conditions (particularly in the UK and in France), the consequences from the civil and political unrest in the MENA region and the need to refresh much of the Group's information technology infrastructure.

Over the year we have significantly improved the mitigation of certain risks including the closure of the UK final salary pension scheme, further development of business continuity plans and the renegotiation of banking facilities.

The focus next year is expected to remain on market related risks and on delivering the initial actions of the turnaround plan for the UK business.

Principal operational and strategic risks

Principal financial risks

Principal other risks

Appendix 1 - Audited statutory information with comparatives

* Separately disclosed items consist of exceptional operating items (2011: £(530.0)m; 2010: £(166.3)m); IAS 39 fair value re-measurement (2011: £(15.0)m; 2010: £9.3m); amortisation of business combination intangibles (2011: £(34.3)m; 2010: £(30.9)m); profiton disposal of associates (2011: £10.3m; 2010: £nil); and exceptional finance costs (2011: £(3.8)m; 2010: £(18.2)m).

All revenue and results arose from continuing operations.

 The movements in equity for the year ended 30 September 2011 were as follows: