TT. Tui Travel

TUI Travel PLC (TT.LN), Europe's largest holiday company, Wednesday warned that the economic downturn and fears about job losses will make the upcoming winter holiday season a lot tougher than recent winter seasons, as it reported higher fiscal third-quarter profits.

Europe's travel companies have been fairly resilient so far during the downturn as many consumers kept their summer travel plans intact. But TUI Travel warned that consumers seem more prepared to forego a second holiday, and bookings for the winter are well behind the levels seen a year ago.

Chief Financial Officer Paul Bowtell told analysts he expects the 2009/10 winter season to be the "toughest period we will have."

In response, TUI has already cut capacity by 15%, helping it to raise average selling prices for winter holidays by 9%. It said it has so far sold 20% of the holidays available for this winter.

"We anticipate market conditions will remain challenging and expect the later booking pattern to continue in the next financial year," said Chief Executive Peter Long. He said the company would continue to alter capacity to match market conditions, allowing it to keep up selling prices and keep its planes as full as possible.

At 1058 GMT, TUI Travel's shares were down 10 pence, or 4%, at 242 pence, the biggest decline on the FTSE 100. Rival Thomas Cook Group PLC (TGC.LN), which reports results Thursday, showed the second-biggest decline as its shares fell 2.8%.

The company said bookings for the summer of 2010 have started positively in the U.K. - its main market contributing nearly 50% of its revenues - and are in line with last year. However, KBC Peel Hunt analyst Nick Batram warned that the company faces significant risks from higher unemployment, and the possibility of rising interest rates and higher oil prices.

TUI also said it has recently had to cut some prices in the U.K. this summer in order to clear excess stock. Bowtell reiterated that the company had been reluctant to cut prices too early in the season just to boost demand in case it set a precedent for the future, but average selling prices for the summer of 2009 were now up 7% compared with a year earlier, lower than the 9% rise it had reported in May.

Cutting capacity and raising prices has proved profitable to TUI Travel and rivals like Thomas Cook during the downturn. They were quick to predict the downturn and its impact, in contrast to most of the worlds airlines, which were slow to cut capacity and saw profits slump or turn to losses as demand fell sharply.

TUI Travel, created in September 2007 through the merger of TUI AG's (TUI1.XE) tourism assets with U.K. travel company First Choice Holidays, said its earnings before interest, tax and amortization, excluding joint venture assets, or EBITA, rose to GBP102 million for the three months to June 30, from GBP65 million a year earlier. It posted a net profit of GBP33 million, compared with a net loss of GBP216 million a year earlier.

It said it had managed to raise selling prices in some markets, notably the U.K. and Nordics, delivered a further GBP21 million in synergies from the 2007 merger, and eliminated losses in Germany and the U.K. by cutting the number of scheduled flights by its own airlines.

The company said it is well positioned to meet the board's expectations for its current financial year to end-September.

However the company estimated that swine flu hit profits by GBP8 million as it suffered cancellations that it was forced to refund and as it repatriated some of those who were affected while on holiday.

Results were also hit by weak demand in France for travel to Madagascar and the French West Indies, where there's civil unrest.

Revenue for the quarter was down 1% at GBP3.58 billion due to capacity reductions in the U.K. and Germany. However sterling's weakness boosted revenues from outside the U.K. and at constant currencies, revenue was down 9%. Average selling prices for summer 2009 were down 3% in central Europe, 2% in Western Europe, and the company is facing a fierce price war with competitors in Switzerland, where there's excess capacity.

The timing of Easter, which fell in the third quarter this year and the second quarter last year, also helped boost to results.

It said it had managed to cut its net debt to GBP886 million at June 30, down from GBP1.10 billion at March 31.

-By Kaveri Niththyananthan, Dow Jones Newswires; 4420 7842 9299; kaveri.niththyananthan@dowjones.com

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