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TUI Profit Takes a Hit From Max Grounding

Patrick Whyte, Skift
TUI Profit Takes a Hit From Max Grounding

The enforced grounding of the entire Boeing 737 Max fleet following two fatal crashes, continues to cast a long shadow over the entire aviation industry.

German travel giant TUI Group blamed the shutdown for a slump in profit during the third quarter of its financial year thanks to a $162 million (€144 million) hit associated with the aircraft. Pre-tax profit fell 58 percent to $66 million (€59 million).

TUI had previously guided that the overall impact would be around $336 million (€300 million) should the grounding continue into the summer, which it has. So far during the year it has accumulated costs of $167 million (€149 million), meaning up to an additional $169 million (€151 million) could come in the final quarter.

CEO Fritz Joussen declined to go into details about any potential compensation from Boeing but said that the financial pressure from the disruption would lesson as 2019 progresses.

The seasonality of TUI’s business means that while in summer it has “been under quite some constraint” winter is “not so important”, Joussen said on an earnings call with the media on Tuesday.

TUI has a fleet of around 150 aircraft, including 15 grounded Max aircraft. It was due to take another eight at the end of May 2019.

The continuing Max crisis overshadows what were in reality an improved set of results.

“[If] you had excluded one-off effects, we would have been able to increase profitability for Q3. That was very different than the position in Q2,” Joussen told analysts on a separate call.

TUI’s holiday experiences division, which includes its cruise, hotels, and tours and activities businesses, saw profit (EBITA) growth of 15 percent to $230 million (€205 million).

Bookings for this summer have also improved compared to the previous quarter and now stand at just 1 percent down on 2018, up 2 percentage points.

Richard Clarke, senior analyst at Bernstein, said in a note to investors that TUI had produced a “good update” indicating a “strong finish to the year” but warned about the downside risks of both Brexit and the 737 Max.

As is always the case with seasonal European holiday companies, the key profit-making period is the July-September quarter.

Strategy Update

TUI continues to make progress on several of its new initiatives. Part of this is growing its cruise and hotels business. Earlier this year the company rolled-up several of its hotel brands under the TUI Blue name with the aim of getting to around 100 hotels by 2020 and eventually becoming the world‘s largest leisure hotel brand.

Another part of the plan is use TUI’s digital platform to quickly and cheaply expand into new markets beyond Europe such as China, Brazil and India.

TUI previously targeted 1 million customers by 2022 but now believes it might achieve this earlier than expected. One partnership already in operation is with Malaysia Airlines. Joussen said the company might put in place a “more aggressive” target given the initial success.

At the same time as growing in new areas, TUI is also pulling back from others. The day before its results announcement it said it had agreed to sell two of its traditional German tour operators to a private equity fund for around $112 million (€100 million).

Berge & Meer Touristik and Boomerang Reisen are separate to other parts of the group and TUI wants greater levels of co-operation between the different European markets.

Earlier this year it also agreed to sell a majority stake its non-charter airline Corsair.

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