Annual Report & Accounts for the year ended 30 September Positioned for growth.

Transcription

1 Annual Report & Accounts for the year ended 30 September 2012 Positioned for growth.

2 The investment case Reasons to invest in TUI Travel PLC Our growth levers: Creating shareholder value Delivering Mainstream growth > Unique holidays only available from TUI Travel > Distributed directly to the customer growth from online > Leveraging our scale Organic Specialist & Activity growth Leveraging our global leadership position in Accommodation Wholesaler through growth in existing markets and new market entry Investing in Accommodation OTA focus on high growth and new markets Focus on free cash flow generation

3 TUI Travel PLC Annual Report & Accounts TUI Travel PLC is one of the world s leading leisure travel groups Contents Group overview ifc The investment case 02 TUI Travel overview 04 Our structure 06 Operational and financial highlights Strategic overview 08 Chairman s statement 09 Chief Executive s statement 10 TUI Travel at a glance 12 Why we do it: Market overview 14 How we do it: Strategic framework 15 How we do it: Business models 16 How we do it: Strategy 18 How we measure it: Key performance indicators 20 What are the risks? Principal risks 28 Our people 30 Health & Safety 32 Sustainable development Business and financial review 36 Group performance 39 Segmental performance 48 Current trading and outlook Governance 50 Board of Directors 52 Directors report 55 Directors responsibilities statement 56 Corporate Governance report 66 Remuneration report 78 Independent Auditors report (Group) 79 Consolidated financial statements 79 Consolidated income statement 80 Consolidated statement of comprehensive income 81 Consolidated balance sheet 82 Consolidated statement of changes in equity 83 Consolidated statement of cash flows 84 Notes to the consolidated financial statements 147 Independent Auditors report (Parent Company) 148 Parent Company financial statements 148 Company balance sheet 149 Notes to the Company s financial statements Shareholder information 154 Financial calendar 154 Contacts and advisers 154 Glossary of key terms 155 Shareholder discount 156 Index The Annual Report & Accounts contain forward-looking statements that are subject to risk factors associated with, amongst other things, the economic and business circumstances occurring from time to time in countries and Sectors in which the Group operates. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables which could cause actual results to differ from those currently anticipated. Group overview Strategic overview Business and financial review Governance Shareholder information

4 2 TUI Travel PLC Annual Report & Accounts 2012 Group overview TUI Travel overview Our vision Making travel experiences special. Who we are TUI Travel PLC (TUI Travel or the Group) is one of the world s leading leisure travel groups operating in approximately 180 countries worldwide and comprising over 240 brands. We serve more than 30 million customers across 31 source markets making us a global player in a growing industry. Headquartered in the UK, we employ approximately 54,000 people and operate six airlines consisting of 141 aircraft. Through our global brand portfolio and our travel expertise we are focused on delivering a wide variety of leisure travel experiences designed for our customers ever changing needs. The Group reported through four business Sectors until 30 September 2012: Mainstream, Specialist & Activity, Accommodation & Destinations and Emerging Markets. As of the 1 October 2012, the Group will be reporting in a new structure which you can review in the How we do it: Our new structure section of this Annual Report and Accounts. TUI Travel is listed on the London Stock Exchange and is a member of the FTSE 250 and FTSE4Good Indices with the ticker code TT. For more information visit

5 TUI Travel PLC Annual Report & Accounts Group overview Where we operate TUI Travel is a global business operating across 31 key source markets in 180 countries worldwide. Group overview Our 31 key source markets are: Australia Austria Belgium Brazil Canada China Czech Republic Denmark Finland France Germany Hungary India Ireland Italy Luxembourg Mexico The Netherlands New Zealand Norway Poland Russia Singapore Slovenia Spain Sweden Switzerland Thailand Ukraine United Kingdom United States Our featured brands TUI Travel operates over 240 brands which are available to view on our website /brand-experience. A selection of our featured brands includes: In Germany TUI is one of the best known consumer brands and the favourite holiday brand for consumers and travel agencies alike. It has a market-leading position. Thomson has been selling holidays from the UK for over 50 years. It is one of the UK s most well-known holiday brands, delivering unique and modern holiday experiences. In 2013, 90% of hotels in its brochures will be exclusive to Thomson. Fritidsresor is the leading tour operator and retail business in the Swedish source market offering package tours to destinations worldwide including the Mediterranean, Canary Islands and Thailand. Jetair is TUI Belgium s master brand. It is a tour operator which offers a range of air and car holidays and city trips. airtours is a luxury holiday brand which, for more than 40 years, has offered the most comprehensive, individual and exclusive holidays in the German speaking market. LateRooms.com offers a large array of accommodation across the UK and worldwide from B&Bs to castles to hotels to apartments to chalets. Hotelbeds is the leading global accommodation wholesaler, supplying over 50,000 hotels across 147 countries to travel agents, airlines and tour operators. Intercruises Shoreside & Port Services is an experienced global business offering first class ground handling and port agency services to the ocean and river cruise industry. The Moorings is the world s leading yacht charter company with over 650 yachts in 27 cruising destinations worldwide. The Moorings offers a collection of memorable getaways from hands-on sailing or power yacht vacations to all-inclusive private luxury crewed yachts. For over 20 years, Quark Expeditions has been the leading provider of polar adventure travel. With its diverse fleet of specially equipped vessels and seasoned expedition leaders, it offers travellers unparalleled access to the most remote regions on earth. TUI Netherlands operates Arke, the leading B2C travel brand in the Dutch source market and a household name. Besides tour operating, it operates 130 travel shops, a call centre and the website Arke.nl. Arke is an important supplier of passengers to the airline ArkeFly, also operated by TUI Netherlands. With over 30 years experience, Crystal is the UK s number one ski operator taking customers to more of the world s best snow resorts than anyone else. From self-catering apartments to cosy, friendly ski chalets.

6 4 TUI Travel PLC Annual Report & Accounts 2012 Group overview Our structure During the financial year ended 30 September 2012 TUI Travel was organised and managed through four business Sectors: Mainstream, Accommodation & Destinations, Specialist & Activity and Emerging Markets. Business Sectors Underlying operating profit mix** by Sector **before central costs and Emerging Markets 79% 12% 9% Mainstream Sector Accommodation & Destinations Sector Specialist & Activity Sector Mainstream Sector The Mainstream Sector makes up the largest part of our Group in terms of financial performance, scale, scope and number of employees. This Sector incorporates our familiar power brands such as our tour operators with circa 1,800 retail stores across Europe and six airlines consisting of 141 aircraft throughout our key source markets. Previously it has been structured in the following regions: Northern The Northern Region comprises the distribution, tour operating businesses and airlines in the UK & Ireland, Canada, the Nordic Countries (Sweden, Norway, Denmark and Finland) and the Hotels division consisting of hotel management companies and joint ventures in hotels. Central Europe Central Europe comprises distribution, tour operating businesses and airlines in the source markets of Germany, Austria, Switzerland and Poland. Germany is the largest market in terms of customer numbers and TUI is the market-leading brand, both here and in Austria. Western Europe Western Europe comprises the leading tour operators and airlines in the Netherlands, Belgium and France and two smaller tour operators in Italy and Spain. Accommodation & Destinations Sector Accommodation & Destinations (A&D) Sector is a global provider of accommodation and inbound travel services. Its businesses provide hotel accommodation, transfers, excursions and tours, meetings and events and cruise handling services to the travel trade, corporate clients and direct to customers worldwide. A&D competes in fast-growing areas of the travel sector through three business lines: Accommodation Wholesaler; Accommodation OTA (online travel agent) and Inbound Services. It has market-leading brands including the global brands Hotelbeds, Intercruises, Destination Services, Worldcome and Pacific World and leading local brands including LateRooms.com, AsiaRooms.com and, from 23 September 2012, MalaPronta.com. Specialist & Activity Sector If you can dream it, we can take you there. That s the ethos of our Specialist & Activity Sector. Comprising more than 100 global travel businesses, the Sector offers a wide range of unique activity and experiencebased holidays that truly capture the spirit of adventure to provide long-lasting holiday memories. Skiing, sailing, safaris and nature, polar expeditions, sports tourism, volunteering, cycling and trekking holidays, cultural tours, canal boating, family activity, sustainable travel and educational travel; this Sector brings a diverse and exciting range of holidays to 1.5m customers from around the world. Emerging Markets Sector The Emerging Markets Sector works closely with the senior management across the Group to develop and implement our participation strategies in the emerging markets. Through a combination of organic and acquisitional growth our objective is to establish a leading position in these developing economies, delivering long-term growth and optimum shareholder value.

7 TUI Travel PLC Annual Report & Accounts Group overview Group overview Our new structure From the start of the new financial year, TUI Travel PLC will report in three sectors: Mainstream, Specialist & Activity and Accommodation & Destinations. The businesses within our sectors follow either the Tour Operator or Online Accommodation business model depending on which market they address (see How we do it: Business models). As previously announced in April 2012, the Mainstream Sector will be reporting via key source markets instead of regionally. The Emerging Markets Sector has been absorbed into other sectors depending on whether the specific business addresses the Tour Operator or Online Accommodation market. The Accommodation & Destinations Sector divisions will now report through two business lines Online Accommodation and Inbound Services. Online Accommodation includes the Accommodation Wholesaler and Accommodation OTA businesses. Inbound Services include our businesses that provide transfers, excursions, tours, tailor-made products, cruise handling services and meetings and events. This business line straddles both models as its businesses serve both individual travellers and tour operators. UK & Ireland Nordics Mainstream Germany France Other Tour Operator Specialist & Activity Inbound Services Accommodation & Destinations Online Accommodation Online Accommodation

8 6 TUI Travel PLC Annual Report & Accounts 2012 Group overview Operational and financial highlights Record year of profit and improved operational efficiency > Operating profit increase of 12% to 526m on a constant currency* basis. Underlying operating profit of 490m (2011: 471m), an increase of 4%. > Record Mainstream underlying operating profits, on a constant currency* basis, in all markets with the exception of France and Southern Europe. > Outstanding performance in the UK with a record underlying operating profit of 197m (2011: 149m) and operating profit margins of 5.4%, up from 4.2% in the prior year. > Business improvement programme outperformance with 42m delivered in the year. > Strong underlying earnings per share growth of 9% to 25.8p (2011: 23.6p). Statutory earnings per share grew by 62% to 12.5p (2011: 7.7p). > Final dividend increase of 4% to 8.3p per share (2011: 8.0p), resulting in a full year dividend of 11.7p per share (2011: 11.3p). Modern Mainstream strategy delivering results > Sales of higher margin unique holidays increased by three percentage points to 65% of Mainstream holidays. > Online sales up three percentage points to 33% of Mainstream sales. Direct distribution up two percentage points to 65% of Mainstream sales. Significant international expansion across Online Accommodation > Online Accommodation profits up 3% to 35m, including an 11m investment in our Accommodation OTA. > Accommodation Wholesaler continues to consolidate its global leadership position; TTV growth of 13% to 1.4bn. > Accommodation OTA continues its investment in high growth markets; TTV growth of 4% to 447m including AsiaRooms growth of 25%. Clear strategy continuing to drive strong trading momentum > Very encouraging Winter 2012/13 trading. > Strong Summer 2013 bookings in the UK, Nordics and Germany. Significant growth in profitable market share in the UK. > Clear roadmap for sustainable future growth with an annualised underlying operating profit growth rate of between 7 to 10%. *Constant currency basis calculated by translating the 2012 results at 2011 exchange rates

9 TUI Travel PLC Annual Report & Accounts Group overview Revenue 12 14,460m -2% 11 14,687m Group overview Underlying operating profit m +4% m Underlying profit before tax m +8% m Free cash flow m -47% m Basic underlying earnings per share p +9% p Dividend per share p +4% p Underlying results 1 Statutory results Change Year ended 30 September m m % m m Revenue 14,460 14,687-2% 14,460 14,687 Operating profit % Profit before tax % Free cash flow % Basic earnings per share (pence) % Dividend per share (pence) % ) Underlying operating profit excludes separately disclosed items, amortisation of business combination intangibles, acquisition related expenses, impairment of goodwill and available for sale financial assets, predecessor accounting for Magic Life in 2011 and interest and taxation of results of the Group s joint ventures and associates.

10 8 TUI Travel PLC Annual Report & Accounts 2012 Strategic overview Chairman s statement 2012 has been a record year for our business. We are pleased to be reporting a 4% increase in underlying operating profit for the full year to 490m (2011: 471m). This is even more impressive against a backdrop of global economic uncertainty, political turmoil, weak consumer sentiment, the Eurozone crisis, natural catastrophes and downgrades to forecasts across numerous consumer industries. Underlying operating profit +4% The travel and tourism industry has grown by an average of 4% every year since This year is no different with the number of international arrivals set to reach one billion in The market today is directly worth over US$2 trillion to global GDP and supports 98 million jobs worldwide. By offering our customers exactly what they want, not what we think they need, we are very well positioned to benefit from the size and growth of this vast industry in the long-term. Results The Group has achieved record results this year. Whilst we have witnessed a slight decrease in revenue to 14,460m (2011: 14,687m), mainly due to foreign exchange translations following the Eurozone crisis, we have seen record underlying operating profit increase 4% to 490m (2011: 471m). Underlying profit before tax is up 8% to 390m (2011: 360m) for the full year whilst underlying basic earnings per share increased by 9% to 25.8p (2011: 23.6p). Our statutory profit before tax (PBT) has increased 40% in the year from 144m to 201m and our statutory earnings per share (EPS) rose 62% from 7.7p to 12.5p. These results prove that we have the right strategy and are executing it well. Dividends The Board is recommending a final dividend of 8.3p per share (2011: 8.0p). On 8 May 2012, the Board recommended an interim dividend of 3.4p per share (2011: 3.3p) resulting in a full year dividend of 11.7p per share, a 4% increase on the previous year (2011: 11.3p). The Group has a progressive dividend policy and will look to maintain underlying dividend cover at around two times. Dividend increase on % Board At the beginning of our financial year Johan Lundgren was appointed Deputy Chief Executive from 20 October 2011 with the responsibility for the Mainstream Sector. On 19 October 2011 Sir Michael Hodgkinson joined the Remuneration Committee and Clare Chapman, previously Non-Executive Director, resigned from her post. On 2 December 2011, Minnow Powell and Harold Sher were appointed to the Nomination Committee. Bill Dalton retired from the Board on 29 May 2012 while Janis Kong and Coline McConville were appointed Independent Non-Executive Director and Remuneration Committee Chairman respectively. Janis subsequently joined the Remuneration and Audit Committees on 26 July Post year end, Tony Campbell stepped down from the Remuneration and Audit Committee from 1 October Finally, I will be stepping down as Chairman of TUI Travel PLC from September Sustainable development Our vision is to make travel experiences special whilst minimising environmental impact, respecting culture and people, and bringing economic benefit to communities. During the year we launched our three-year Sustainable Holidays Plan highlighting our continued commitment to sustainable development. The plan highlights significant integration of environmental and social principles into the way we do business. Achieving our vision is critical to the future health of our own business, the wider industry, the customers we serve and the communities they visit. Colleagues The record performance that we have achieved this year comes down to one thing in particular, our colleagues. Across the world, 54,000 people strive to make our strategy come to life and it is their commitment, passion and ambition that results in the ultimate success of our business. We aim to make travel experiences special. A large number of our colleagues are customer facing and it is their service that makes the difference between a good holiday and a great one. The Board and I would like to personally thank each and every one of our colleagues for their continuing commitment and hard work. Dr Michael Frenzel Non-Executive Chairman

11 TUI Travel PLC Annual Report & Accounts Strategic overview Chief Executive s statement This has been a year of record success across the Group, proving that our strategy is delivering results. We have recorded our largest underlying profit figure to date, despite the negative foreign exchange translation of 36m. On a constant currency basis, our underlying profit increased 12% to 526m (2011: 471m). Underlying profit* +12% These are the results of a resilient and flexible business with the right strategy for the market and a large number of colleagues who care about our customers, are passionate about our leisure travel experiences and can plan, implement and deliver growth. Our return on invested capital has increased again this year, now standing at 12.2%. With our weighted average cost of capital at 10% we continue to generate returns in excess of our cost of capital. We are therefore well positioned to invest further in the business and accelerate our growth plans. Return on invested capital +12.2% Overall, the Group has expanded its unique holidays portfolio (this is our differentiated and exclusive products combined) which books earlier and provides higher margins for our businesses. The sales of these products have continued to increase contributing to the success of the Group this year. The feedback received from our customers experiencing these products has been incredibly positive. This helps lead to repeat bookings, often early in the booking cycle, which in turn helps us to manage capacity and therefore efficiency. We are always looking for opportunities to develop the portfolio of unique holidays across the Group and this will continue into 2013 and beyond. Our direct distribution channels are central to the Group s continued growth. We have room to expand these in all our markets which will lead to improved margins and better results. The core contribution of our direct distribution comes from online channels. At present we consider ourselves to be an online-driven Group, however, we can do more. The online drive continues across the Group from front-end customer interaction at the time of booking to back office functions. Technology is an integral part of the direction we are heading in and as such, in March 2012, we appointed Mittu Sridhawa as the Group s Chief Information Officer and member of the Group Management Board. We have been successful in implementing Group-wide cost efficiency and business improvement programmes as we have done over previous years. The total savings made this year of these activities equates to 42m. The drive for operational efficiency is Group-wide. The UK has had a great year delivering a record underlying operating profit, up 32% on the previous year, to 197m (2011: 149m). This has been achieved through the increase in sales of our unique holidays and continued focus on direct distribution, with online as the core contributor, as well as our operational efficiency programmes. Our strategy has evolved over the year. It now stems from two very prominent customer demands in the leisure travel market individualisation and commoditisation. We see these trends as central to our future growth and have developed two strong business models (see How we do it: Business models section) that satisfy these customer demands. One model addresses the Tour Operator segment of the market, satisfying the individualisation demands of our customers. In practice, this means offering unique holidays to customers through our Mainstream Sector, such as Sensatori in the UK, Sensimar in Germany and Blue Village in the Nordics, and also includes our Specialist & Activity Sector offering, focused on tailor-made holidays, including private jet tours, polar expeditions and sailing experiences among many others. The other model addresses the Online Accommodation segment of the market, satisfying the commoditisation demands of our customers. We are able to take advantage of our scale and technological developments to offer our customers a wide variety of choice at very competitive prices. We have the market-leading position in Accommodation Wholesale and continue to invest in our own Accommodation Online Travel Agent (OTA) business. We have had a good start to the new financial year with strong Winter 2012/13 trading. For the two markets on sale for Summer 2013 we have increased capacity, showing our confidence in the market and our ability to deliver growth. Our Mainstream Sector has begun reporting from 1 October 2012 in its new structure which has been developed to accelerate more rapidly the move to modern mainstream. We could not do any of this without our fantastic colleagues, all 54,000 of them. I am hugely proud of every single one of them and would like to personally thank them all for their consistent effort, determination and successes in a challenging macro-economic environment. Peter Long Chief Executive Strategic overview *On a constant currency basis

12 10 TUI Travel PLC Annual Report & Accounts 2012 Strategic overview TUI Travel at a glance What we do Make travel experiences special Why we do it Market overview Leisure Travel market: Directly worth USD$2 trillion to global GDP in 2012 Directly supports 98 million jobs worldwide Average growth rate of 4% since 1995 and set to continue 2012 will be the first year where international arrivals break the one billion mark Two sides to the market, customers demanding individualisation and those who demand commoditisation We have strategies that address both, explained in the How we do it section We are well positioned to benefit from the market s size and growth. FOR MORE SEE Page 12

13 TUI Travel PLC Annual Report & Accounts Strategic overview How we do it How we measure it What are the risks? Strategic framework, Business models and Strategy Our Strategy Through our global brand portfolio and travel expertise we are focused on delivering leisure travel experiences designed for our customers ever changing needs Two strong business models addressing the different customer demands within the market. The demand for individualisation is addressed through our Tour Operating model and the demand for commoditisation is addressed through our Online Accommodation model Our Strategic Drivers Content, Brands & Distribution, Technology, Growth & Scale and People Our Values Customer Driven, Playing to Win, Responsible Leadership and Value Driven Our KPIs Return on invested capital % vs % Cash conversion 1 % % vs % 1) Free cash flow adjusted for net pre-delivery payments of 53m (2011: 34m) Unique holidays mix as a proportion of total Mainstream Sector holidays % vs % Direct distribution mix, as a proportion of total Mainstream Sector holidays % vs % Online distribution mix, as a proportion of total Mainstream Sector holidays % vs % Turnaround and cost savings delivered m Total Transaction Value in the Online Accommodation business Principal risks Strategic risks Consumer preferences and desires Business improvement opportunities Emerging markets, acquisitions and investments Operational risks Global financial factors Economic environment Talent management Political volatility, natural catastrophes and outbreaks Compliance risk Regulatory environment Strategic overview 1.8bn, an increase of 10% over the prior year Carbon efficiency, measured through TUI Travel airlines average carbon emissions per revenue passenger kilometre (CO 2 /RPK): g CO 2 /RPK vs g CO 2 /RPK FOR MORE SEE Page 14 FOR MORE SEE Page 18 FOR MORE SEE Page 20

14 12 TUI Travel PLC Annual Report & Accounts 2012 Strategic overview Why we do it Market overview The Market The economic environment The global economic recovery has slowed down over the past six months. In addition to the Eurozone crisis and the unrest in the Middle East and North Africa, growth in a number of major emerging market economies has been lower than previously forecast. The IMF projects real GDP growth worldwide at 3.5% for Growth is expected to be driven by emerging and developing economies which are forecast to expand by 5.6% in In comparison, advanced economies are expected to grow by only 1.4%. Our two largest source markets, the UK and Germany, are expected to grow by 0.2% and 1% respectively in Within the Eurozone, the unemployment rate currently stands at 11.4%, up 120 percentage points from last year. Compared to other Eurozone countries, both Germany and the UK have withstood the economic crisis in the Eurozone with unemployment at just 5.5% in Germany and 8.1% in the UK. The economic outlook for 2013 seems more positive with real GDP growth worldwide projected at 3.9% driven by the expansion of both advanced and emerging markets. While advanced economies are forecast to grow at 1.9%, emerging and developing economies are projected to expand by 5.9%. The leisure travel market Demand for international tourism remained strong in 2011 with international arrivals growing by 4.6% compared to The percentage increase was slightly below 2010 (7%), driven primarily by economic factors coupled with unrest in the Middle East and North Africa, which were the only regions to record a decline in arrivals, -8% and -9% respectively (UNWTO). Europe, home to the majority of our core markets and accounting for over half of all international arrivals worldwide, together with Asia, were the fastest growing regions globally. The travel and tourism market continues to experience a clear polarisation of demand. On one hand, we have customers who demand individualisation, i.e. unique holidays with bespoke services. On the other hand, we have customers who are increasingly moving towards commoditisation, i.e. flights in combination with hotels with minimal levels of differentiation. Both segments are being driven by high growth in online bookings and, while the uncertain economic environment has had an effect on consumer travel spending habits, demand for leisure travel remains strong. Our business models (see How we do it: Business models section) aims to cater to these trends individualisation and commoditisation to best serve the changing needs of our customers. We consider individualisation to be the Tour Operator market and commoditisation as the Online Accommodation market. The sustainability challenge Travel and tourism accounts for 9% of global GDP*. The industry will continue to be one of the world s fastest growing sectors, with emerging economies in particular seen as engines of such growth and the UNWTO expecting international tourist arrivals to exceed 1 billion in Travel and tourism today is responsible for 9% of global employment* but also for 5% of global carbon dioxide emissions**. From a sustainable development perspective this poses a challenge the growth of an industry highly dependent on fossil fuels and biodiversity in a world of finite natural resources. Our businesses have been facing up to this challenge for over a decade. For TUI Travel, responding to these issues means bringing sustainability centre stage, to build on the efficiency and resilience of our business and the services it provides. Our Sustainable Holidays Plan is a major step forward for TUI Travel in our journey towards providing special travel experiences whilst minimising environmental impact, respecting the culture and people in destinations and bringing real economic benefit to local communities. See our Sustainable Development section for more information. Reference *World Travel and Tourism Council s Economic Impact Report **United Nations World Tourism Organisation (UNWTO), United Nations Environment Programme (UNEP) and World Meteorological Organisation (WMO) October 2007 Climate Change and Tourism: Responding to Global Challenges. The political climate As a global organisation, we feel the impact of government regulation in all of the markets in which we operate. Some of our activities, such as those undertaken by our airline, are heavily regulated. Many of our lawmakers, particularly in Europe, are becoming increasingly focused upon measures to protect customers. The policy of our political and regulatory affairs team is to seek to engage with legislators at an early stage in relation to all of those areas of regulation that might have a material impact upon the way we do business. Our focus is always to work with governments to bring forward legislation that is fit for purpose, is no more burdensome on industry than it needs to be and does not discriminate between different business models. Our engagement with the European institutions has been particularly important over the last 12 months as we seek to achieve a proper balance between the aviation industry and the customer in the area of passenger rights. This will also remain an area of focus in the coming 12 months. The work of the European institutions in relation to the revision of the European Directive on Package Travel also continues. We are confident that the European institutions are convinced of the need for reform and will bring forward a proposal in the first quarter of Over the last 12 months, Eurozone countries have had to come to grips with austerity measures placed on them by national governments, some more severe than others. We continue to monitor the developments across the region and do not expect this to have a major impact on our business. The good relationships we have with our suppliers and the flexibility in our business model means we are well positioned to deal with any eventuality. Aviation taxation also remains on the agenda as governments across the world look for ways to increase revenue. Our role is to remind them of the importance of the travel and tourism industry as a driver for growth. In the UK, the debate on airport capacity continues. We will take a full part in that debate as it develops in order to ensure that the specific requirements of leisure airlines and passengers are fully understood.

15 TUI Travel PLC Annual Report & Accounts Strategic overview Tour Operator Market (individualisation) Online Accommodation Market (commoditisation) Our Footprint Strategic overview Market Size & Coverage Our 10 core markets, including the UK, Sweden, Germany, France, Belgium, the Netherlands, Austria, Poland, Switzerland and Canada, account for 405bn of global travel spend (Euromonitor). Our four largest source markets of the UK & Ireland, Germany, France and Sweden make up 70% of this spend. Due to the niche nature of Specialist & Activity businesses, it is hard to quantify total worldwide spend on these holidays but their geographical reach and popularity continues to rise. The total Online Accommodation market accounts for 82bn of global travel spend. The Accommodation Wholesaler market accounts for 15bn of this spend with the Accommodation Online Travel Agent (OTA) market accounting for the remaining 67bn. Our Group s addressable market in the Accommodation OTA segment (including UK and Asia-Pacific focus markets) makes up 7.5bn of the total OTA market. Market Growth Our core markets are projected to grow at a 3% CAGR over the next five years. The mainstream holiday market remains resilient and has actually seen resurgence in a tough economic environment. Online Accommodation is the fastest growing segment of the travel market and is expected to grow at a CAGR of 7.5% over the next five years. Our Positioning We are the number one tour operator in Europe with strong positions in each of our core markets. In addition, we have market-leading positions in a number of specialist segments with a portfolio of unique holidays, unrivalled product knowledge and superb customer experience. Our Accommodation Wholesaler business (Hotelbeds and Bedsonline) is the market leader in the B2B space. With our Accommodation OTA business we are positioned strongly in the UK (LateRooms.com) and Asia-Pacific (AsiaRooms.com) and have recently established ourselves in the Latin American market through the acquisition of MalaPronta.com, Brazil s fourth largest online accommodation OTA. Key Trends & Future Outlook Customers are increasingly moving towards online channels to fulfil their travel needs and we expect this trend to continue into 2013 and beyond. We, therefore, remain focused on improving our online presence, increasing our participation in social media and moving towards an online-driven company culture. Demand for unique holiday experiences continues to see strong growth and with a diverse range of experiences on offer, TUI Travel remains well placed. Online Accommodation has seen tremendous growth over the last few years fuelled by the growth in online bookings and supplemented by strong demand from the emerging markets. Online Accommodation, therefore, remains a key area of focus for TUI Travel where we look to consolidate our leadership position within the Accommodation Wholesaler market and build on our strong position in the Accommodation OTA segment.

16 14 TUI Travel PLC Annual Report & Accounts 2012 Strategic overview How we do it Strategic framework & Business models Strategic framework Our Strategic Framework underpins everything we do and comprises of our Vision, Strategy, Strategic Drivers and the Values that are innate within our business culture. Vision Making travel experiences special Strategy Through our global brand portfolio & travel expertise we are focused on delivering leisure travel experiences designed for our customers ever changing needs Strategic Drivers Content Brands & Distribution Technology Growth & Scale People Values Customer Driven Playing to Win Responsible Leadership Value Driven Customer Driven We respect our customers and never forget that they choose to spend their leisure time with us. We share a duty to maintain their loyalty and trust. We anticipate customer desires and everything we do is with them in mind. We believe there is no such thing as a mass market but a huge market of individuals. Playing to Win We are passionate about being the best and about winning with integrity. We seek the ideas and trends that change leisure-time markets for the better and move quickly to action them. We thrive on teamwork. We are not afraid of making brave decisions. We want to do something new every day and we love what we do. Value Driven We share an infectious entrepreneurial streak and a clear focus on the need for profitability. We look for opportunities that have a commercial advantage for us and add value to our customers experiences. We predict, translate and bring to market new leisure-time products based on their genuine appeal to customers. Responsible Leadership We are committed to sustainable development and to making a positive impact on society. We know leadership has to be earned and we never take it for granted. We communicate openly and easily and help each other develop and grow. We celebrate local differences and actively seek to contribute to a better world.

17 TUI Travel PLC Annual Report & Accounts Strategic overview Business models We have refined our business model to focus on the two key areas of long-term growth within the market. The Tour Operator model addresses the individualisation needs of the customer while the Online Accommodation model addresses the commoditisation needs. The strategic drivers of both areas are ingrained in our Strategic Framework with a clear focus on Content, Brands & Distribution, Technology, Growth & Scale and People. Strategic overview Tour Operator Online Accommodation Unique, inclusive holidays Tailor-made holidays Content Range and diversity of hotel stock Global destination and source market coverage Market-leading brands Trusted brands safety & security High levels of controlled distribution focus on online Brands & Distribution Well known Accommodation Wholesaler and Accommodation OTA brands Online Flexible technological platforms to support growth Technology Market-leading technology Leveraging scale Growth & Scale Leveraging scale Knowledge & expertise Driving innovation People Knowledge & expertise Driving innovation Online Driven + Cost Efficiency

18 16 TUI Travel PLC Annual Report & Accounts 2012 Strategic overview How we do it Strategy Content Brands & Distribution Tour Operator Unique holidays Why is it important? Puts the customer s needs first and foremost. Provides value added services and features which command a margin premium over commodity products. Leads to higher customer loyalty and an increase in repeat bookings. Books early when compared to commodity products enabling us to manage our capacity and yield more effectively. What are we doing about it? Unique holidays form the backbone of our Tour Operator strategy. Our specialist businesses, through their unique holiday portfolio, provide tailor-made holidays to cater to a wide range of customer needs. In the Mainstream Sector, the levels of unique holidays have continued to grow. In 2012, they represented 65% of total holidays booked, compared to 62% in We have clear targets and plans to grow the proportion of unique holidays across all markets in 2013 and beyond. Brands & Distribution Why is it important? Online-driven Increased online distribution improves our proportion of direct distribution, reduces reliance on third party distributors and reduces our distribution costs. Online-driven The higher the proportion of direct distribution, the better we understand our customers and their needs. It provides us with tangible and useful information about customer preference. In that sense, online-driven also contributes to the success of our unique holidays. The more we understand our customer, the better and more tailored the products we can offer and directly market to them. Brands Having multiple touch points with our customers enables us to build stronger brand and product loyalty whilst ensuring that customers come back to TUI Travel for another unique holiday experience. Strong brands also increase organic traffic to our websites which has a higher conversion rate. What are we doing about it? TUI Travel is focusing on being an online-driven business providing customers with an easy and inspiring online experience. We have widened the traditional definition of online as a distribution channel to being online-driven which encompasses the entire customer journey; dreaming, planning, booking, pre-departure, experiencing and sharing. Over the past year we have increased our online sales by three percentage points across the Mainstream Sector (from 30% in 2011 to 33% in 2012) and have clear strategic plans and targets in place to drive online sales further in all source markets. Our Specialist businesses leverage a strong brand portfolio offering everything from adventure holidays to sailing holidays and private jet tours. We are investing in our online platforms to enhance booking and search functionality and provide our customers with inspirational content to showcase our products. Online Accommodation Content Diversity Why is it important? Customers have an ever-increasing choice of destinations to fly to. It is only logical that we keep pace and provide our customers with an ever-increasing range of hotels to complement their flights. Geographical diversity and reach of our content will be the key growth driver within the Online Accommodation space. What are we doing about it? Increasing the range and diversity of our hotel stock is core to our strategy within the Online Accommodation space. We want to be able to offer our customers a one-stop-shop for their accommodation needs. From FY11 to FY12, our Accommodation Wholesaler business has seen a 20% increase in hotel inventory. In the same time period, our Accommodation OTA business has seen a 32% rise in hotels on offer. TUI Travel has a clear strategy of continuing to increase its hotel offering even further in the coming years with a strong focus on emerging markets. Brands & Distribution Why is it important? Brand awareness To be the first place that customers turn to for their accommodation needs. Reduces online advertising spend and attracts customers directly to our websites. Distribution Being an online-only business it is critical that we provide our customers with an effective and easy-to-use search and booking experience. What are we doing about it? Our Accommodation Wholesaler business is the market leader operating in over 100 countries with a global distribution presence. The current five year plan focuses on leveraging our existing distribution network, maintaining growth across Europe and expanding further into the Americas and Asia. In Accommodation OTA our focus is to build on our strong brand positioning of LateRooms.com in the UK and expand in the emerging markets through AsiaRooms.com across Asia and in Brazil with the recent acquisition of MalaPronta.com. Following the launch of five language sites, AsiaRooms.com launched a pan-regional brand development campaign to drive sales and increase brand awareness. The campaign, entitled The Right Room for You, focused on the uniqueness of each traveller and their travel preferences delivering good results. Traffic growth from Singapore and Malaysia grew over 49% and 132% respectively in 2012.

19 TUI Travel PLC Annual Report & Accounts Strategic overview Through our global brand portfolio and travel expertise we are focused on delivering leisure travel experiences designed for our customers ever changing needs. We have two strong business models that share the same strategic drivers. Our strategy differs depending upon whether we are talking about the Tour Operator or Online Accommodation model. We have, therefore, set out below why our strategic drivers are important for each and what we are doing about them to ensure the long-term growth of our business. Technology Growth & Scale People Technology Why is it important? Online-driven Critical support structure for seamless front-end interaction with the customer. Robust finance and reservation systems to support business operations but also to provide reliable and actionable management information. Flexible technological platforms which can adapt to changing customer demands. Growth & Scale Why is it important? Growth Consolidating our market-leading positions and seizing new growth opportunities will be the key driver of success going forward. Scale Leveraging our scale and driving further cost efficiencies will provide added value to customers. People Why are they important? People are a key differentiator at TUI Travel. It is their unrivalled knowledge and expertise that is the driving force of our successful business. Our people are the face of our company. It is their ability to delight our customers which ensures high customer satisfaction scores and repeat bookings. What are we doing about it? Within Mainstream, we are in the process of upgrading our web front-end reservation and finance systems across all source markets. These technology upgrades will provide our websites with new search functionalities, improved personalisation and richer content as well as enhanced mobile capability as our customers increasingly research and book their holidays on mobile devices. Our specialist businesses have made good progress in consolidating their finance and reservation systems to leverage our scale across multiple brands and continue on their journey of standardisation while balancing the varied requirements of the different holiday experiences they offer. What are we doing about it? As Europe s largest tour operator we are leveraging our scale across all source markets to consolidate our market-leading position and grow the number of customers travelling with us. Growth in new markets is an important area of focus for TUI Travel. Our Russian tour operator business has given us a position in this market and a platform for further growth. Our customers demand value for money for their travel spend and we are constantly reviewing areas where we can optimise our operations and be as cost efficient as possible without compromising on customer experience. What are we doing about it? Investing in training and development of our people to ensure that they have the right skills and expertise to provide us with a competitive advantage. Making sure that we work closely with our people to drive high levels of pride and engagement within the Company. Our International Graduate Leadership Programme continues to attract high quality talent from across the world and is considered among the best in the industry. Bi-annual talent reviews ensure that we monitor the talent and capabilities within our organisation and have clear succession plans in place for business critical roles. Established Centres of Excellence which enable best practice sharing across the Group and make sure that good ideas are not limited to one source market but flow through the entire organisation. Strategic overview Technology Why is it important? Online-driven Provide market-leading technological platforms to support seamless front-end interaction with the customer. Robust finance and reservation systems support business operations but also provide reliable and actionable management information. Flexible technological platforms which can adapt to changing customer demands. Growth & Scale Why is it important? Scale is a critical success factor for any online accommodation business. In a price-driven, lower-margin business it is imperative for us to achieve high volumes which can be leveraged to gain competitive advantage. People Why are they important? People are the key driver of any online business where agility, speed and innovation are essential elements of success. Talent retention and acquisition are increasingly gaining priority in a market characterised by rapid changes and high competition for top talent. What are we doing about it? Both Accommodation Wholesaler and Accommodation OTA businesses are supported by effective and efficient IT platforms. Accommodation Wholesaler operational systems are being upgraded and updated in order to be able to continue improving its service delivery to global customers. In our Accommodation OTA business we have been investing in a new platform to support our growth strategy. What are we doing about it? TUI Travel is a firm market leader in the Accommodation Wholesaler market. We have a clear strategy of consolidating our market-leading position even further by continuing to grow our existing destinations whilst accelerating our expansion into new markets with particular focus on Asia, Latin America and Africa. Within the Accommodation OTA space we are concentrating our growth strategy in attractive emerging markets which exhibit the highest growth potential in this segment. AsiaRooms is now an established and growing brand in the Asia-Pacific region. The acquisition of MalaPronta.com, Brazil s fourth largest accommodation-only OTA, gives TUI Travel a foothold into the fast-growing and lucrative Latin American market. LateRooms is now ranked as the number two accommodation-only OTA in the UK market. We aim to continue delivering superior growth by developing new distribution channels and new customer segments in this market. What are we doing about it? Building a strong brand proposition to attract and retain the best online talent. Identifying knowledge gaps within the organisation and providing colleagues with the necessary tools and skills to succeed in the online world. Developing an online-driven culture where employees are encouraged to keep abreast of latest trends whilst providing an environment which fosters new ideas and innovation. The international nature of our business necessitates that we look beyond European boundaries when it comes to sourcing talent. TUI Travel continues to tap into the vast talent pool of markets like Brazil and South East Asia to fuel its global growth ambitions.