TUI AG: Annual Financial Report - Part 2

2017. december 13., szerda, 08:00




TUI AG (TUI)


TUI AG: Annual Financial Report - Part 2

13-Dec-2017 / 08:00 CET/CEST


Dissemination of a Regulatory Announcement, transmitted by EQS Group.


The issuer is solely responsible for the content of this announcement.




Financial ­highlights































































































































































EUR million



2017



2016
restated



Var. %



Var. % at ­constant ­currency



Turnover



18,535.0



17,153.9



+ 8.1



+ 11.7



 



 



 



 



 



Underlying EBITA1



 



 



 



 



Hotels & Resorts



356.5



303.8



+ 17.3



+ 19.2



Cruises



255.6



190.9



+ 33.9



+ 38.0



Source Markets



526.5



554.3



- 5.0



- 4.0



Northern Region



345.8



383.1



- 9.7



- 8.4



Central Region



71.5



85.1



- 16.0



- 15.8



Western Region



109.2



86.1



+ 26.8



+ 27.0



Other Tourism



13.4



7.9



+ 69.6



+ 124.6



Tourism



1,152.0



1,056.9



+ 9.0



+ 11.2



All other segments



- 49.9



- 56.4



+ 11.5



+ 3.4



TUI Group



1,102.1



1,000.5



+ 10.2



+ 12.0



Discontinued operations



- 1.2



92.9



n. a.



 



Total



1,100.9



1,093.4



+ 0.7



 



 



 



 



 



 



EBITA2, 4



1,026.5



898.1



+ 14.3



 



 



 



 



 



 



Underlying EBITDA4



1,541.7



1,379.6



+ 11.7



 



 



 



 



 



 



EBITDA4



1,490.9



1,305.1



+ 14.2



 



 



 



 



 



 



Net profit for the period



910.9



464.9



+ 95.9



 



Earnings per share4EUR



1.36



0.61



+ 123.0



 



 



 



 



 



 



Equity ratio (30 Sept.)3%



24.9



22.5



+ 2.4



 



Net capex and investments (30 Sept.)



1,071.9



634.8



+ 68.9



 



Net cash (30 Sept.)4



583.0



31.8



n. a.



 



Net cash (30 Sept.) 5



-



318.0



n. a.



 



Employees (30 Sept.)



66,577



66,779



- 0.3



 


Differences may occur due to rounding



This Annual Report of the TUI Group was prepared for the financial year from 1 October 2016 to 30 September 2017. The terms for previous years were renamed accordingly.



Due to the following changes to segmental reporting the prior year"s reference figures were restated accordingly:



The main part of the Specialist Group (Travelopia), carried under discontinued operations in previous year, was sold June 2017. Prior to that Crystal Ski and Thomson Lakes & Mountains, previously part of the Specialist Group, were transferred to the ­segment Northern Region. Blue Diamond Hotels & Resorts lnc., former part of Northern Region was reclassified to the Hotels & Resorts segment. Marella Cruises (former Thomson Cruises, Northern Region) was transferred to the Cruises segment.



1 In order to explain and evaluate the operating performance by the segments, EBITA adjusted for one-off effects (underlying EBITA) is presented. Underlying EBITA has been adjusted for gains/losses on disposal of investments, restructuring costs ­according to IAS 37, ancillary acquisition costs and conditional purchase price payments under purchase price allocations and other expenses for and income from one-off items.



2 Our definition of EBITA is earnings before net interest result, income tax and impairment of goodwill and excluding the result from the measurement of interest hedges.



3 Equity divided by balance sheet total in %, variance is given in percentage points.



4 Continuing operations



5 Discontinuing operations



Letter to our 
Shareholders



Dear shareholders,



2017 was another very good year! We were able to continue our success story. With underlying EBITA up by 12 per cent, TUI Group increased its operating result by more than ten per cent for the third time in a row. We are keeping our promise. Above all, the strategic alignment for the new TUI is clearly correct. Our focus on hotels and our investment in cruise liners is reaping ­rewards. We owe the Group"s positive economic performance to our customers, to our 67,000 employees in over 100 countries and to your loyalty as shareholders of TUI AG. This year too, we want you to share 
in TUI"s success with a very attractive dividend. We have therefore proposed to the Annual General Meeting to increase the dividend to 65 cents per share for the completed ­financial year.



We operate in a growth industry. People want to travel, regardless of global political events. With the exception of 2009 at the peak of the financial crisis, our sector has grown faster than gross domestic product every year. These are favourable conditions for picking up further market share and continuing to build on our position as the world"s leading tourism group. That is our goal, and we are devoting our full energy to achieving it.



How are we framing this growth? In this financial year alone, we opened ten new hotels, while our cruise fleet acquired two more vessels to make 16. Our own hotels and cruise ships now account for 56 per cent of our earnings. Attaching greater weight to these operations in our earnings portfolio brings definite advantages. These businesses generates stronger margins and are is much less seasonal. Whereas the earnings contributions from our tour oper­ators are posted almost entirely in the last three months, the inflow from our hotel and cruise business is more evenly spread over the year and every quarter is positive. This trend has strengthened TUI and makes us more attractive to investors and the capital market.



We enhanced our leeway for growth even further during the last ­financial year by selling our specialist travel brands. The disposal of Travelopia to the private equity company KKR generated an enterprise value of around 370 million euros. We also spun off our remaining stake in Hapag-Lloyd AG. This final exit from container shipping and the sale of non-core businesses complete the transformation. TUI is now a pure play tourism group. Our vision "Think Travel. Think TUI." aptly reflects our aspirations. And our strategic positioning ensures that we can provide every module in the tourism value chain from advice and booking to travel, accommodation and destination services. The TUI brand symbolises quality and trust. Differentiated product is above all secured by our own hotels, clubs and ships. Brands like TUI Blue, Robinson, Riu and TUI Magic Life, Hapag-Lloyd Cruises with the MS Europa and TUI Cruises with the "Mein Schiff" fleet guarantee TUI quality for holidaymakers all over the world. We don"t just sell this travel experience; we are setting standards, because TUI is at once developer, investor and operator.



So we want to build on the success of our traditional markets and activities. And we want to expand our business into regions and countries of the globe where we do not yet have a presence. That includes a number of countries in Southern Europe. In Italy and Portugal, the TUI brand is familiar because they are important destinations and many of our customers travel there. As a holiday provider, however, we have so far had almost no market visibility. Emerging economies like Brazil and China are also shifting further into our focus. Their new middle classes are growing fast and ­increasingly discovering the joys of travel for themselves. We want to profit from that, but in those markets we do not intend to create a dense network of travel agencies. Instead, we will rely exclusively on our online presence and on strong local partners. Our goal is ambitious, but we believe in these markets. As part of our strategy programme "TUI 2022", the target for this expansion over the next five years is to win one million new customers and generate an additional one billion in turnover. This expansion entails big opportunities for our hotel investments in those parts of the world, because the demand for capacity will no longer come solely from Europe like now, but also from the surrounding region. The Caribbean has set a shining example: our hotels there enjoy excellent occupancy rates - thanks to long-haul tourists from Europe combined with guests from the United States and Canada. We can achieve the same in South-East Asia. For our new hotels and investments, the occupancy risk is tangibly reduced because our target groups are broader, more ­diverse and increasingly international.



I also believe there are major opportunities for TUI in our clear strategy for digitalisation. This digitalisation will not only help us tap into new markets like China. It is happening throughout the company. Data enable us to reach out to our customers in a better, more personal manner and to market new services. For me, more digital means more service - and better service - for the customer, and more efficiency for the company. TUI"s use of blockchain has attracted a lot of attention. Ever more so because we aren"t just talking about the potential, but actually began placing it in the service of our hotels in summer 2017. As an integrated tourism group, we accompany our customers right along the value chain, from the moment they seek advice and book a holiday to the services they require at the destination and their accommodation in the hotel or on board the liner. This teaches us about their likes and preferences, enabling us to offer personalised add-ons. Personalised means relevant - products and services that offer these customers genuine added value. In recent months, we have rolled out a centralised, efficient ITinfrastructure across the Group. It provides the technical basis for TUI to gain a single view of the customer and the customer experience. Our investments in IT are easily summed up: more service for our customers and more value for us as a company. It is my firm conviction that in this field we are setting the standards for our industry.



TUI is in bouncing good health, and TUI is ready for more growth. Those two factors will enable us to continue to outperform the market in the coming years. That is why we are so confident that we can increase underlying EBITA by at least 10 per cent a year until 2020. Those are bright prospects for you as shareholders. Thank you for your interest and support over the last year. Your trust and encouragement are important to us. Let"s take the next steps together.



Kind regards, 
 



Friedrich Joussen
CEO of TUI AG




































Key
Figures



Outlook 2017 1



Outlook
Achievement



Actual 2017



out-
look



2018



Turnover in EUR bn



 



 



in excess of



3 % 2, 4



19.2 + 11.7 % 2



approximately



+ 3 % 2, 3



EBITA (underlying) in EUR m



 



 



at least



+ 10 % 2



1,121 + 12.0 % 2



at least



+ 10 % 2



Adjustments in EUR m



 



 



100 4



costs



76



costs



~ 80



costs



Net capex and investments in EUR bn



 



1.0 5



0.9 5



~ 1.2 6



Net debt in EUR bn



 



 



broadly



neutral 4



0.6



net cash



slightly 
negative


1 As published on 8 December 2016, unless otherwise stated



2 Variance year-on-year assuming constant foreign exchange rates are applied to the result in the current and prior period and based on the ­current group structure



3 Excluding cost inflation relating to currency movements



4 Target adjusted



5 Excluding aircraft orderbook finance



6 Assuming acquisition of Mein Schiff 1 for Marella Cruises



Report of the 
Supervisory Board



Ladies and Gentlemen,



TUI AG has delivered on its promise! With the completion of financial year 2017, your Company has delivered the considerable year-on-year increase in earnings promised in the wake of the merger in 2014 for the third consecutive year. This success is the result of major, joint efforts by the Executive Board, employees and Supervisory Board - and we are proud of it! In a geopolitical situation characterised by continued uncertainty and risks, TUI AG has sent an important signal of reliability to you, its owners, but also to its employees. The trust you placed in the merger between TUI AG and TUI Travel PLC was justified.



Today, we can regard the merger and the integration of the two companies and cultures as completed. The Executive Board has fully delivered and in some key areas even outperformed the synergies promised in the wake of the merger. As the global employee survey carried out for the third consecutive year has shown, TUI"s executives and employees show far above-average engagement. They trust the work performed by the Executive Board and the strategy, which focuses on the transformation from a conventional trading company and tour operator to a vertically integrated content provider. We thus continue to be on track.



In financial year 2017, the Supervisory Board supported in particular the further development of key issues of relevance to the Company. We intensively discussed the Group"s future strategic orientation with the Executive Board. Apart from the influence of blockchain technology on today"s business model, the situation at TUI fly and the ultimately failed negotiations about a European aviation joint venture, we also discussed the Group"s strategy in Asia and held in-depth discussions about the impact of Brexit on the Company. In order to prepare the strategic debates of the Supervisory Board, the Strategy Committee formed in 2016 again proved to be a valuable, focused platform. The Committee also discussed, inter alia, TUI Group"s airline strategy and its platform strategy (e. g. IT, brand, marketing) and the associated Group-wide systems.



Corporate Governance issues were another focus of our work. Apart from features derived from the further development of the German and the UK Corporate Governance Codes, we also dealt with a review of the remuneration system for the Executive Board. Following the merger, we had deliberately placed the focus on continuity. We merely shifted the remuneration for Supervisory Board members to a system of purely fixed remuneration two years ago. Nevertheless, we recognise that our shareholders regard the remuneration system applied for a number of years as being in need of revision. Following careful review and analysis, we managed, taking into account and weighing up the interests of many stakeholders - including cross-border stakeholders - and following intense debates about numerous alternatives, we finally succeeded in adopting a remuneration system meeting all legal requirements and manifold recommendations. It will be applied with retroactive effect from 1 October 2017, as all Executive Board members have agreed. The new system will increase the transparency of the exercise of discretion by the Supervisory Board in individual performance assessment through alignment with a target system. Moreover, we have abandoned the possibility of paying discretionary bonuses for good. The payment hurdles for the variable remuneration have become significantly more ambitious following your legitimate comments, and they offer the Execu­tive Board new opportunities. My colleagues on the Supervisory Board and I are convinced that the new, unanimously adopted compensation system for the Executive Board members harmonises the sometimes diverging interests of shareholders, employees and Executive Board members in the best possible manner. Based on this conviction, we will submit the remuneration system, described concerning its major elements and amendments on page 116 of the Annual Report, to the Annual General Meeting 2018 for its approval.



We have also repeatedly dealt with the future composition of the Supervisory Board and its chair, after Peter Long announced that he was no longer seeking to assume the role as chairman of the Supervisory Board. Peter Long will remain Chairman of the Strategy Committee and successfully continue its work in cooperation with the members. The Supervisory Board also plans to elect Mr Long as its second Deputy Chairman when Sir Mike Hodgkinson leaves the Supervisory Board at the Annual General Meeting 2018.



Although I have been elected for a term of office that will expire at the Annual General Meeting 2021, I had already announced at my re-election in 2016 that I was going to exercise my functions for an appropriate period of time. I intend to step down from my offices as at 30 September 2018. Against this backdrop, my activities but also those of the Nomination Committee, Presiding Committee and Supervisory Board were devoted in part to the search for a successor. I am delighted that the Supervisory Board, at its meeting on 12 December 2017, proposed Dr Dieter Zetsche as a candidate for election by the Annual General Meeting 2018 and has announced its intention to elect Dr Zetsche as Chairman of the Supervisory Board upon my departure should he be elected by the shareholders. I am convinced that TUI AG has gained a high-calibre, experienced entrepreneur with extensive international experience and a far-reaching understanding of strategically important issues with Dr Zetsche.



Cooperation between the Executive Board and the Supervisory Board



In a stock corporation under German law, there is a mandatory strict separation of the executive board and the supervisory board. While the management of the company is the exclusive task of the executive board, the supervisory board is in charge of advising and overseeing the executive board. As the oversight body, the Supervisory Board provided on-going advice and supervision for the Executive Board in managing the Company in financial year 2017, as required by the law, the articles of association and our own terms of reference.



Its actions were guided by the principles of good and responsible corporate governance. Our monitoring activities essentially served to ensure that the management of business operations and the management of the Group were lawful, orderly, fit for purpose and commercially robust. The individual advisory and oversight tasks of the Supervisory Board are set out in terms of reference. Accordingly, the Supervisory Board is, for instance, closely involved in entrepreneurial planning processes and the discussion of strategic projects and issues. Moreover, there is a defined list of specific Executive Board decisions requiring the consent of the Supervisory Board, some of which call for detailed review in advance and require the analysis of complex facts and circumstances from a supervisory and consultant perspective (own business judgement).



TUI AG falls within the scope of the German Industrial Co-Determination Act (MitbestG). Its Supervisory Board is therefore composed of an equal number of shareholder representatives and employee representatives. Employee representatives within the meaning of the Act include a senior manager (section 5 (3) of the German Works Council Constitution Act) and three trade union representatives. All Supervisory Board members have the same rights and obligations and they all have one vote in voting processes. In the event of a tie, a second round of voting can take place according to the terms of reference for the Supervisory Board, in which case I as Chairman of the Supervisory Board have the casting vote.



In written and verbal reports, the Executive Board provided us with regular, timely and comprehensive information at our meetings and outside our meetings. The reports encompassed all relevant facts about strategic development, planning, business performance and the position of the Group in the course of the year, the risk situation, risk management and compliance, but also reports from the capital markets (e. g. from analysts), media reports and reports on current events (e. g. crises). The Executive Board discussed with us all key transactions of relevance to the Company and the further development of the Group. Any deviations in business performance from the approved plans were explained in detail. The Supervisory Board was involved in all decisions of fundamental relevance to the Company in good time. We fully discussed and adopted all resolutions in accordance with the law, the Articles of Association and our terms of reference. We were comprehensively and speedily informed about specific and particularly urgent plans and projects, including those arising between the regular meetings. As Chairman of the Supervisory Board, I was also regularly informed about current business developments and key transactions in the Company between Supervisory Board meetings.



Deliberations in the Supervisory Board and its Committees



Prior to Supervisory Board meetings, the shareholder representatives on the Supervisory Board and the employees" representatives met in separate meetings, which were regularly also attended by Executive Board members.



Apart from the full Supervisory Board, a total of five committees were in place in the completed financial year: the Presiding Committee, Audit Committee, Strategy Committee, Nomination Committee and Integration Committee. The Mediation Committee formed pursuant to section 27 (3) of the Co-Determination Act did not have to meet. The Chairman of each Committee provides regular and comprehensive reports about the work performed by the Committee at the ordinary Supervisory Board meetings.



In financial year 2017, we again recorded a gratifyingly high meeting attendance, as we have done for several years. Average attendance was 93.8 % (previous year 96.6 %) at plenary meetings and 97.6 % (previous year 90.7 %) at Committee meetings. No Supervisory Board member attended fewer than half of the Supervisory Board meetings in financial year 2017. Members unable to attend a meeting usually participated in the voting through proxies. Preparation of all Supervisory Board members was greatly facilitated by the practice of distributing documents in advance in the run-up to the meetings and largely dispensing with handouts at meetings.



Attendance at meetings of the Supervisory Board in financial year 2017













































































































































































Attendance at meetings of the Supervisory Board 2017



Name



Supervisory Board



Presiding ­Committee



Audit ­Committee



Nomination Committee



Strategy ­Committee



Integration ­Committee



Prof. Klaus Mangold (Chairman)



8 (8)



8 (8)1



8 (8)



2 (2)1



6 (6)



1 (1)1



Frank Jakobi (Deputy Chairman)



8 (8)



8 (8)



 



 



6 (6)



1 (1)



Sir Michael Hodgkinson (Deputy Chairman)



8 (8)



7 (8)



 



2 (2)



 



1 (1) 2



Andreas Barczewski



8 (8)



 



8 (8)



 



 



 



Peter Bremme



7 (8)



7 (8)



 



 



 



 



Prof. Edgar Ernst



8 (8)



 



8 (8)1



 



 



1 (1)



Wolfgang Flintermann



8 (8)



 



 



 



 



 



Angelika Gifford



7 (8)



 



 



 



6 (6)



 



Valerie Frances Gooding



7 (8)



 



 



 



5 (6)



1 (1)



Dr. Dierk Hirschel



7 (8)



 



8 (8)



 



 



 



Janis Carol Kong



8 (8)



 



7 (8)



 



 



 



Peter Long



7 (8)



 



 



 



6 (6)1



 



Coline Lucille McConville



7 (8)



 



7 (8)



 



 



1 (1)



Alexey A. Mordashov



6 (8)



6 (8)



 



2 (2)



6 (6)



 



Michael Pönipp



8 (8)



 



8 (8)



 



 



 



Carmen Riu Güell



7 (8)



8 (8)



 



2 (2)



 



 



Carola Schwirn



8 (8)



 



 



 



 



 



Anette Strempel



8 (8)



8 (8)



 



 



 



 



Ortwin Strubelt



8 (8)



8 (8)



8 (8)



 



 



 



Stefan Weinhofer



7 (8)



 



 



 



 



 



 



 



 



 



 



 



 



Attendance at meetings in %



93.8



93.8



96.9



100.0



97.2



100.0



Attendance at Committee meetings in %



97.6



 



 



 



 



 


(In brackets: number of meetings held)
1 Chairman of Committee



2 Deputy Chairman of Committee



Key topics discussed by the Supervisory Board



The Supervisory Board held nine meetings focusing on the following issues:



1. At its meeting on 26 October 2016, the Supervisory Board discussed the current business performance. The discussions also focused on strategic options for the German TUI fly. In that context, we intensively deliberated on a potential joint venture with Etihad. The debate also related to the stake in Hapag-Lloyd AG (HLAG) and the status of the divestment process for Specialist Group. The Supervisory Board furthermore approved the budget for financial year 2017 and the acquisition of a stake in Peakwork Software.



2. At its extraordinary meeting on 23 November 2016, the Supervisory Board intensively discussed the status of negotiations and approval for the conclusion of a (non-binding) memorandum of understanding to form a joint venture between TUI fly and Etihad. These extensive deliberations focused on essential framework parameters and the future alignment of the planned joint venture.



3. At the extraordinary Supervisory Board meting on 1 December 2016, held in the form of a conference call, we adopted the personal performance factors for the annual performance bonuses for members of the Executive Board for financial year 2016 after due deliberation. Following an in-depth review, we also established the appropriateness of the remuneration and pensions for Executive Board members.



4. At its meeting on 7 December 2016, the Supervisory Board discussed in detail the annual financial statements of TUI Group and TUI AG, each having received an unqualified audit opinion from the auditors, the combined management report for TUI Group and TUI AG, the Report by the Supervisory Board, the Corporate Governance Report and the Remuneration Report. The discussions were also attended by representatives of the auditors. Following comprehensive debate of these reports and its own review carried out on the previous day by the Audit Committee, the Supervisory Board endorsed the findings of the auditors and approved the financial statements prepared by the Executive Board and the combined management report for TUI AG and the Group. The annual financial statements for 2016 were thereby adopted. Moreover, the Supervisory Board approved the Report by the Supervisory Board, the Corporate Governance Report and the Remuneration Report. It also adopted the invitation to the ordinary AGM 2017 and the proposals for resolutions to be submitted to the AGM. The Supervisory Board discussed various options relating to aircraft funding and the future approach to be adopted by the Group. We also resolved the 2016 declaration of compliance with the German Corporate Governance Code and the Corporate Governance Declaration required by the UK"s Corporate Governance Code. We moreover decided to adjust our targets for the composition of the Supervisory Board (see Corporate Governance Report) and considered various reports, including a report on the results of our 2016 TUIgether employee survey, the implementation of the female and gender quotas in Germany, the IT strategy and security. In the framework of Executive Board matters, Frank Rosenberger was appointed as member of the Executive Board with effect from 1 January 2017 and a new business allocation plan reflecting the changes in the allocation of responsibilities to Board members was adopted. The Supervisory Board was also given a status report on l"tur and updates on the sales process for Travelopia and the joint venture between TUI fly and Etihad.



5. On 13 February 2017, the Supervisory Board mainly discussed TUI AG"s interim statement and report for the quarter ended 31 December 2016 and prepared the 2017 Annual General Meeting. The Supervisory Board also discussed the structure of Executive Board remuneration. We dealt with the sales process for Hotelbeds Group, the business performance and future strategy for source market Germany and approved the final initiation of the sales process for Travelopia. The Supervisory Board also discussed the expansion of capacity at TUI Cruises GmbH and was given reports about the activities of the TUI Foundation and TUI Care Foundation. We were given a comprehensive update on the status of negotiations regarding the planned joint venture between TUI fly and Etihad (e. g. economic framework, open issues). We also adopted resolutions on transactions requiring the Supervisory Board"s consent, including the issue of employee shares for financial year 2017 and the further sale of shares in HLAG. We were furthermore given a report on the status of the proceedings Erzberger versus TUI AG before the ECJ.



6. On 12 May 2017, we debated TUI AG"s interim report for the second quarter ended on 31 March 2017 and the half-year financial report. We also resolved to extend the appointment of Sebastian Ebel as an Executive Board member and his service contract by a further three years. The Supervisory Board moreover discussed the initial approaches for a reform of the Executive Board remuneration system and we were given another status report on the negoti­ations regarding the planned joint venture between TUI fly and Etihad. The Supervisory Board was then given another update on a potential capacity expansion at TUI Cruises GmbH and the status of the sale of shares in HLAG. We also discussed on-going activities to strengthen IT security and various aspects related to the internal and external security structure. The Supervisory Board considered various Corporate Governance issues and was given a report on the state of pay regarding TUI Group"s key litigation cases. The Supervisory Board was also informed about the current business per­formance and market in Turkey. We debated and deliberated on the impact of the Brexit referendum on the Group. Moreover, the Supervisory Board approved a number of transactions requiring its consent (including the issue of employee shares in financial year 2018, the extension of the revolving credit facility ahead of its due date and the sale of Travelopia subject to certain conditions).



7. At its extraordinary meeting on 29 June 2017, the Supervisory Board discussed the termination of the negotiations on the joint venture between TUI fly and Etihad and engaged in comprehensive and extensive debates with the Executive Board on the resulting options for a repositioning of TUI fly.



8. On 30 August 2017 (by written circulation), the Supervisory Board approved the increase in the Company"s capital stock for the issue of employee shares under the oneShare employee share programme for financial year 2017.



9. During a two-day strategy offsite meeting on 13 and 14 September 2017, we intensively debated the key challenges surrounding the business model, growth opportunities, IT trends (e. g. blockchain technology), the Group-wide customer value and customer relationship management platform, uniform branding (oneBrand) and the cruise strategy.



We then comprehensively debated the consolidated five-year plan. The discussions also focused on the insolvency of Air Berlin. We furthermore deliberated on Executive Board matters and adopted the fundamental structure of the new remuneration system for the Executive Board. We were also given reports on crisis management, the Security, Health & Safety structure and the security of our customers and employees. We heard a report on the effects of the Transparency of Remuneration Act and the implementation of the Act and dealt with succession planning for the Executive Board and professional development at the top management level. We also discussed the new CSR reporting (see Management Report) and adopted diversity concepts for the composition of the Executive Board and Supervisory Board. We moreover adopted the overall competence profile for the full Supervisory Board. We then adopted resolutions regarding transactions requiring our consent (including the granting of a guarantee as collateral for a loan).



Meetings of the Presiding Committee



The Presiding Committee takes the lead on various Executive Board issues (including succession planning, new appointments, terms and conditions of service contracts, proposals for the remuneration system). It also prepares the meetings of the Supervisory Board. In the period under review, the Presiding Committee held nine meetings.



Members of the Presiding Committee:







  • Prof. Klaus Mangold 
    (Chairman)

  • Peter Bremme

  • Carmen Riu Güell

  • Sir Michael Hodginson


  •  


  • Frank Jakobi

  • Alexey Mordashov

  • Anette Strempel

  • Ortwin Strubelt

1. At its extraordinary meeting on 12 October 2016, the Presiding Committee intensively discussed the business interruption of the German TUI fly against the background of efforts undertaken by the Executive Board to find cooperation partners for the airline, which had become public. The Presiding Committee was given a presentation on the measures initiated by the Executive Board and the status and timeframe of negotiations relating to the cooperation partner project.



2. At its meeting on 26 October 2016, the Presiding Committee discussed Executive Board issues, including deliberations on the creation of a new Executive Board function with a focus on IT and new markets. The Committee also discussed various topics relating to Executive Board remuneration for the completed financial year and the current financial year.



3. At its extraordinary meeting on 23 November 2016, the Presiding Committee discussed the status of the negotiations about the joint venture between TUI fly and Etihad. We also deliberated on various Executive Board issues and adopted resolutions regarding the variable annual remuneration for financial year 2016. We then reviewed the appropriateness of Executive Board remuneration and pensions and discussed the terms and conditions of the service contract for Frank Rosenberger.



4. At its meeting on 6 December 2016, after due deliberation, the Presiding Committee recommended the appointment of Frank Rosenberger as an Executive Board member to the Supervisory Board and discussed further Executive Board issues.



5. On 13 February 2017, the Presiding Committee again discussed the status of negotiations on the joint venture between TUI fly and Etihad as well as the Group"s major litigation cases and the divestment process for Travelopia. We then formulated approaches for a fundamental revision of the compensation system for the Executive Board.



6. At its meeting on 12 May 2017, the Presiding Committee discussed renewing the appointment of Sebastian Ebel and the status of the reform of the remuneration system for the Executive Board. Following the abolition of the Integration Committee in December 2016, we were given a report on the merger-related synergies and intercultural integration.



7. At an extraordinary meeting on 13 June 2017, by written circulation, the Presiding Committee granted approval to Friedrich Joussen to join the Supervisory Board of Sixt SE / Pullach.



8. At an extraordinary meeting on 30 August 2017, the Presiding Committee intensively discussed the status of the reform of the remuneration system for the Executive Board.



9. On 13 September 2017, we discussed Executive Board issues. We were also informed about the remuneration structure for the management level below the Executive Board as well as HR development topics.



Audit Committee



Members of the Audit Committee:







  • Prof. Edgar Ernst (Chairman)

  • Andreas Barczewski

  • Dr Dierk Hirschel

  • Janis Kong


  •  


  • Prof. Klaus Mangold

  • Coline McConville

  • Michael Pönipp

  • Ortwin Strubelt

The Audit Committee held eight ordinary meetings in the financial year under review. For the tasks and the advisory and resolution-related issues discussed by the Audit Committee, we refer to the comprehensive report on page 15.



Nomination Committee



The Nomination Committee proposes suitable shareholder candidates to the Supervisory Board for its election proposals to the Annual General Meeting or appointment by the district court.



Members of the Nomination Committee, which held two meetings:



  • Prof. Klaus Mangold (Chairman)

  • Carmen Riu Güell

  • Sir Michael Hodgkinson

  • Alexey Mordashov

1. At its meeting on 11 May 2017, the Nomination Committee discussed the future composition of the shareholder side of the Supervisory Board and its committees.



2. At its meeting on 12 September 2017, the Nomination Committee again discussed the future composition of the shareholder side of the Supervisory Board.



Strategy Committee



The Strategy Committee was established on 9 February 2016 by resolution of the Supervisory Board. Its task is to advise the Executive Board in developing and implementing the corporate strategy. The Committee met six times in the financial year under review. Apart from Committee members, the meetings of the Strategy Committee are regularly attended by Sir Michael Hodgkinson.



The members of the Strategy Committee, which met six times, are:







  • Peter Long (Chairman)

  • Angelika Gifford

  • Val Gooding


  •  


  • Frank Jakobi

  • Prof. Klaus Mangold

  • Alexey Mordashov

1. At its meeting on 25 October 2016, the Supervisory Board extensively dealt with the Group"s aviation strategy and the future positioning of TUI fly. We also discussed various aspects related to Customer Relationship Management (CRM) and IT investments.



2. At its meeting on 5 December 2016, the Committee discussed marketing topics, the divestment process for Travelopia and the aviation strategy.



3. On 17 February 2017, we deliberated on the growth of the Mein Schiff fleet and discussed the situation in source market Germany and the marketing strategy pursued in that market.



4. At its meeting on 11 May 2017, the Committee discussed the growth strategy for new markets with a special focus on Asia, in particular China. In that context, we intensively debated the expansion of cooperation schemes as well as TUI"s own initiatives.



5. At the meeting on 15 August 2017, we again comprehensively debated the aviation strategy following the termination of the talks with Etihad on the creation of a joint venture.



6. At its meeting on 12 September 2017, the Strategy Committee discussed the impact of the insolvency of Air Berlin on our current business and future implications for our aviation strategy.



Integration Committee



The Integration Committee was established by the Supervisory Board for a period of two years after the completion of the merger between TUI Travel PLC and TUI AG (until December 2016). Its task was to advise and oversee the Executive Board during the integration process required after the merger.



Members of the Integration Committee:







  • Prof. Klaus Mangold 
    (Chairman)

  • Sir Michael Hodgkinson 
    (Deputy Chairman)


  •  


  • Prof. Edgar Ernst

  • Valerie Gooding

  • Frank Jakobi

  • Coline McConville

At its only meeting in the period under review, which was also its last, held on 6 December 2016, the Committee discussed the final report on the integration process and the post-merger synergies. Overall, the Committee has rendered a valuable contribution to the delivery of the synergies and the success of cultural integration.



Corporate Governance



Due to the primary quotation of the TUI AG share on the London Stock Exchange and the constitution of the Company as a German stock corporation, the Supervisory Board naturally also regularly and comprehensively deals with the recommendations of German and British corporate governance. Apart from the mandatory observance of the rules of the German Stock Corporation Act (AktG), German Industrial Co-Determination Act (MitbestG), the Listing Rules and the Disclosure and Transparency Rules, TUI AG had announced in the framework of the merger that the Company was going to observe both the German Corporate Governance Code (DCGK) and - as far as practicable - the UK Corporate Governance Code (UK GCG).



For the DCGK - conceptually founded, inter alia, on the German Stock Corporation Act - we issued an unqualified declaration of compliance for 2017 pursuant to section 161 of the German Stock Corporation Act, together with the Executive Board. By contrast, there are some deviations from the UK CGC due for the most part to the different concepts underlying a one-tier management system for a public listed company in the UK (one-tier board) and the two-tier management system comprised of Executive Board and Supervisory Board in a stock corporation based on German law.



More detailed information on corporate governance, the declaration of compliance for 2017 pursuant to section 161 of the German Stock Corporation Act and the declaration on the UK CGC is provided in the Corporate Governance Report in the present Annual Report, prepared by the Executive Board and the Supervisory Board (page 99), as well as on TUI AG"s website.



Conflicts of interest



In the period under review, the Supervisory Board continuously monitored the occurrence of conflicts of interest. In the framework of the transactions requiring its consent, the Supervisory Board approved, at its meeting on 12 May 2017, the granting of a guarantee by TUI AG as third-party security for Togebi Holdings Limited ("TUI Russia") before a court in Turkey to initiate a lawsuit. TUI Russia is indirectly controlled by Alexey Mordashov. Mr Mordashov is a member of the Supervisory Board and abstained from voting in order to avoid a conflict of interest.



Audit of the annual and consolidated financial statements of TUI AG and the Group



Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Hanover, audited the annual financial statements of TUI AG prepared in accordance with the provisions of the German Commercial Code (HGB), as well as the joint management report of TUI AG and TUI Group, and the consolidatedfinancial statements for the 2017 financial year prepared in accordance with the provisions of the International Financial Reporting Standards (IFRS), and issued their unqualified audit certificate. The above documents, the Executive Board"s proposal for the use of the net profit available for distribution and the audit reports by the auditors had been submitted in good time to all members of the Supervisory Board. They were discussed in detail at the Audit Committee meeting of 11 December 2017 and the Supervisory Board meeting of 12 December 2017, convened to discuss the annual financial statements, where the Executive Board provided comprehensive explanations of these statements. At those meetings, the Chairman of the Audit Committee and the auditors reported on the audit findings, having determined the key audit areas for the financial year under review beforehand with the Audit Committee. Neither the auditors nor the Audit Committee identified any weaknesses in the early risk detection and internal control system. On the basis of our own review of the annual financial statements of TUI AG and TUI Group and the joint management report, we did not have any grounds for objections and therefore concur with the Executive Board"s evaluation of the situation of TUI AG and TUI Group. Upon the recommendation of the Audit Committee, we approve the annual financial statements for financial year 2017; the annual financial statements of TUI AG are thereby adopted. We comprehensively discussed the proposal for the appropriation of profits with the Executive Board and approved the proposal in the light of the current and expected future financial position of the Group.



Executive Board, Supervisory Board and 
committee membership



The composition of the Executive Board and Supervisory Board as at 30 September 2017 is presented in the tables on pages 100 - 101 for the Supervisory Board and page 102 for the Executive Board.



In financial year 2017, the composition of the boards did not change.



At the meeting on 7 December 2016, Frank Rosenberger was appointed to the Executive Board with effect from 1 January 2017 for a period of three years.



At the meeting on 12 May 2017, the appointment of Sebastian Ebel as an Executive Board member was extended by three years to 30 November 2020.



In addition, the Supervisory Board extended the appointments of David Burling and Dr Elke Eller. After the extensions became effective on 12 December 2017, David Burling is now appointed until 31 May 2021 and Dr Elke Eller is appointed until 14 October 2021.



Word of thanks



The Supervisory Board warmly thanks the Executive Board, the managers and all employees for their contribution to the very successful financial year 2017.



Hanover, 12 December 2017



On behalf of the Supervisory Board



Prof. Klaus Mangold



Chairman of the Supervisory Board



Audit Committee Report



Dear Shareholders,



as the Audit Committee, it is our job to assist the Supervisory Board in carrying out its monitoring function during the financial year, particularly in relation to accounting and financial reporting for the TUI Group, as required by legal provisions, the German Corporate Governance Code and the Supervisory Board Terms of Reference.



In addition to these core functions, we are responsible in particular for monitoring the effectiveness and proper functioning of internal controls, the risk management system, the Group Auditing department and the legal compliance system.



Furthermore, the Audit Committee is responsible for selecting external auditors. The selected auditors are then required to be put forward by the Supervisory Board to the Annual General Meeting for appointment. Following the appointment by the Annual General Meeting, the Supervisory Board formally commissions the external auditors with the task of auditing the annual financial statements and consolidated financial statements and reviewing the quarterly interim reports.



The Audit Committee was elected by the Supervisory Board directly after the Annual General Meeting 2016 and consists currently of the following eight Supervisory Board members:







  • Prof. Edgar Ernst (­Chairman)

  • Andreas Barczewski

  • Dr Dierk Hirschel

  • Janis Kong


  •  


  • Prof. Klaus Mangold

  • Coline McConville

  • Michael Pönipp

  • Ortwin Strubelt

The membership of the Audit Committee members corresponds to the duration of their appointment to the Supervisory Board. There are no personnel changes to report in the composition of this committee since the last election.



Both the Chairman of the Audit Committee and the remaining members of the Audit Committee are seen by the Supervisory Board as meeting the criterion of being independent. In addition to the Chairman of the Audit Committee, at least one other member is required to have expertise in the field of accounting and experience in the use of accounting principles and internal control systems.



The Audit Committee has six regular meetings a year, and additional topic-specific meetings may also be convened. From this financial year onwards, these topic-specific meetings have included two meetings in which the Executive Board explains to the Audit Committee the key content of the pre-close trading updates published shortly before the reporting date of the annual and six-monthly financial statements. The remaining meeting dates and agendas are geared in particular towards the Group"s reporting cycle and the agendas of the Supervisory Board.



The Chairman of the Audit Committee reports on the work of the Audit Committee and the proposals it has to make in the Supervisory Board meeting that follows each Audit Committee meeting.



Apart from the Audit Committee members, the meetings have been attended by the Chairman of the Executive Board, the CFO and the following management members, based on the topics covered:



  • Director of Group Financial Accounting

  • Director of Group Audit

  • Director of Group Compliance & Risk

  • Director of Group Treasury & Insurance

The external auditors have also been invited to meetings on relevant topics. Wherever required, additional members of TUI Group senior management and operational management have been asked to attend Audit Committee meetings, as have external consultants.



Where it was deemed necessary to go into further detail on specific topics or cases, the Chairman of the Audit Committee held - in addition to Audit Committee meetings - individual meetings with the relevant Executive Board, senior management or auditor representatives. The Chairman of the Audit Committee reported on the key findings and conclusions from these meetings in the next Audit Committee meeting.



The members took part in the Audit Committee meetings as shown in the table on page 10.



Transfer of the audit mandate for TUI AG 
and the TUI Group



By way of a resolution of the Annual General Meeting of TUI AG dated 14 February 2017, Deloitte GmbH Wirtschaftsprüfungsgesellschaft (Deloitte) was elected as the auditor of TUI AG and the TUI Group. We were regularly notified about the transfer process of the audit mandate to Deloitte at our meetings during the financial year.



Up to the point of the Annual General Meeting, the mandate was granted to PriceWaterhouseCoopers AG, who were thus responsible for the audit of the first quarterly financial statements. This responsibility passed to Deloitte from the second quarter onwards.



The transfer process proceeded professionally and smoothly during the financial year. The experience gathered thus far with Deloitte as an auditor also confirms that we have gained a reliable partner for the audit in Deloitte.



Reliability of financial reporting and monitoring of accounting process



The Executive Board of a German stock corporation (Aktiengesellschaft) is solely responsible for preparing its Annual Report & Accounts (ARA). Section 243(2) of the German Commercial Code (HGB) requires the ARA to be clearly structured and to give a realistic overview of the company"s financial situation. This is equivalent to the requirement of the UK Code for the ARA to be fair, balanced and understandable. Even though the evaluation of this requirement has not been transferred to the Audit Committee, the Executive Board is comfortable that the submitted ARA satisfies the requirements of both legal systems.



In order to be sure ourselves of the reliability of both the annual financial statements and interim (quarterly) reporting, we have requested that the Executive Board inform us in detail about the Group"s business performance and its financial situation. This was done in the four Audit Committee meetings that took place directly before the financial statements in question were published. In these meetings, the relevant reports were discussed and the auditors also reported in detail on key aspects of the financial statements and on the findings of their audit or review.



In order to monitor accounting, we examined individual aspects in great detail. In addition, the accounting treatment of key balance sheet items were reviewed, in particular goodwill, advance payments for tourism services and other provisions. In consultation with the auditors, we made certain that the assumptions and estimates underlying the balance sheet were appropriate. In addition, any material legal disputes and key accounting issues arising from the operating businesses were assessed by the Audit Committee.



In the period under review, we concerned ourselves above all with the following individual subjects:



Owing to the existing geopolitical risks, we stipulated that each of the quarterly financial statements be accompanied by a report on the effects on earnings, the risks from guarantee and advance payment mechanisms related to Group and third-party hotels in Turkey and North Africa and about the countermeasures being undertaken.



The potential exit of the United Kingdom from the European Union was repeatedly an agenda item at our meetings. In particular, we listened to reports about the risks connected to the exit. For instance, effects are expected on the British airlines regarding flight rights within the European Union, not to mention the impact of a sustained weakness of sterling on the cost structure of the British tour operators.



After the announcement of the plan to set up a European charter airline with the involvement of TUI fly, huge flight cancellations resulted due to sickness notifications from pilots and cabin staff. We obtained extensive information on the reasons and above all the economic effects of this incident.



Similarly, we gathered information about the large corporate transactions of the financial year. This included not only the acquisition of the French Transat Group but also the sale of the Travelopia Group and the shares in Hapag-Lloyd AG. Furthermore, we also examined TUI"s investing activity in the following areas: Airlines, Hotels & Resorts, Cruises and IT. We had the key investments within the Group divisions and the contributions to earnings from these investments explained to us.



The Audit Committee also discussed the going concern and viability statement analysis prepared by the company to support the statements made in the half-year report and the ARA.



Starting with financial year 2018, the management report must contain information on corporate social responsibility (CSR). The management decided to publish the respective information already for this financial year. We had the management tell us about the state of implementation and the content of the report as the responsibility for the review of the content lies with the Supervisory Board.



In addition, the consistency of the reconciliation from profit before tax to the key figure "underlying earnings" and the material adjustments were discussed for all quarterly reports and for the annual financial statements.



Our evaluation of all discussed aspects of accounting and financial reporting has been in line with that of both management and the Group auditors.



Effectiveness of internal controls and the risk ­management system



The Audit Committee recognises that a robust and effective system of internal control is critical to achieving reliable and consistent business performance. To fulfil its legal obligation to examine the effectiveness of internal controls and the risk management system, the Audit Committee is informed regularly about their current status and also about the further development of them.



The Group has continued to evolve its internal control framework which is underpinned by the COSO concept. Regular testing by management of the key financial controls is now a matter of routine in the larger businesses, and in our two largest Source Markets (UK and Germany) more widespread testing of internal controls is conducted.



Within the Group, the compliance function is further broken down into three areas: Finance, Legal and IT. These teams play a crucial role in improving controls across the Group and identifying areas where more focus is required. The Group auditors also report to us on any weaknesses they find in the internal control system of individual Group companies, and management tracks these items to ensure that they are addressed on a timely basis.



As stated on page 30 of the risk report, the Audit Committee receives regular reports on the performance and effectiveness of the risk management system. The Risk Oversight Committee is an important management committee within the Group and we are satisfied that there is appropriate, active management of risk throughout the Group.



The Group Audit department ensures the independent monitoring of implemented processes and systems as well as of core projects and reports directly to the Audit Committee in each regular meeting. In the period under review, the Audit Committee was not provided with any audit findings indicating material weaknesses in internal controls or the risk management system. As well as this, talks are held regularly between the Chairman of the Audit Committee and the Director of Group Audit for the purposes of closer consultation.



The audits planned by the Group Audit department for the following year were presented to the Audit Committee in detail, discussed and approved. The Audit Committee feels that the effectiveness of the Group Audit department is ensured through this regular consultation.



The legal compliance system was examined by third-party experts which confirmed the suitability of the compliance approach. The Groupwide, uniformly implemented system was presented to us and we received a report about the conducted risk analysis and the measures derived from it. In addition to the core elements of the internal control and risk management system, the Group"s hedging policy was part of the reporting to us during the year.



Whistleblower systems for employees in the event of compliance breaches



Whistleblower systems have been set up across the Group to enable employees to draw attention to potential breaches of compliance guidelines.



Reporting on the legal compliance system included information about the groupwide standardisation of these whistleblower systems and we were also shown the main findings during the current financial year from this system.



Examination of auditor independence and objectivity



After finalisation of the tender process in the financial year 2016, the Audit Committee recommended to the Supervisory Board that it propose Deloitte to the Annual General Meeting as auditors for financial year 2017 as well. Following the commissioning of Deloitte as auditors by the Annual General Meeting in February 2017, the Supervisory Board appointed Deloitte with the task of auditing the 2017 annual financial statements and reviewing the half-year financial statements as per 31 March 2017.



The Chairman of the Audit Committee discussed with Deloitte in advance the audit plan for the annual financial statements as at 30 September 2017, including the key areas of focus for the audit and the main companies to be audited from the Group"s perspective. Based on this, the Audit Committee firmly believes that the audit has taken into account the main financial risks to an appropriate degree and is satisfied that the auditors are independent and objective in how they conduct their work.



The audit fees were explained in the context of this selection process and we are convinced that the amount of these costs is reasonable. Based on the regular reporting by the auditors, we have every confidence in the effectiveness of the external audit.



In order to ensure the independence of the auditors, any non-audit services to be performed by the auditors must be submitted to the Audit Committee for approval before commissioning. Depending on the amount involved, the Audit Committee makes use of the option of delegating the approval to the company. The Audit Committee Chairman is only involved in the decision once a specified cost limit has been reached. Insofar as the auditor has performed services that do not fall under the Group audit, the nature and extent of these have been explained to the Audit Committee. This process complies with the company"s existing guideline regarding the approval of non-audit services and it takes into account the requirements from the AReG regulations on prohibited non-audit services and on limitations of the scope of non-audit services. In financial year 2017, these non-audit services accounted for 7 % of the auditor"s overall fee of EUR 9.1 million.



I would like to take this opportunity to thank the Audit Committee members, the auditors and the management for their hard work over the past financial year.



Hanover, 11 December 2017



Prof. Edgar Ernst



Chairman of the Audit Committee



Business model
and strategy



Our Business Model



TUI is the world"s leading tourism group - an integrated business that operates in all stages of the customer"s holiday journey.



We deliver the full customer experience from inspiration and booking through the travel journey to the experience in the destination. We fulfil this through our own hotel and cruise brands, third party committed and non-committed accommodation as well as destination services, such as transfers and excursions. Hence, we set ourselves apart from component-only players as we are able to enhance the customer experience throughout the holiday.



Our integrated model allows us to leverage the distribution power of our source markets and to optimise customer volumes for our own assets. At the same time, offering differentiated and controlled products, we drive demand in our source markets and create entry barriers. Thus, we maximise yields while minimising risk with our integrated approach.



Our Segment Strategy



Sales & Marketing: Market demand, ­digitalisation and diversification



Across three regions (Northern, Central and Western) we use our distribution and fulfilment power to serve 20 m customers. Our business model allows our source markets to act with maximum flexibility, allowing them to create personalised packages for our customers while optimising yield and minimising risks through combining both owned as well as 3rd party aviation, hotel and cruise capacity.



Our in-house aviation with around 150 aircraft allows us to utilise own flight capacity in conjunction with own hotel capacity in order to build high profile destinations, such as Cape Verde. In these destinations, we provide unique experiences to our customers and create high barriers of entry by managing both hotel capacity and flight availability. In addition, our airline allows for flexibility in destination planning, as we are in the position to shift capacities and change routes according to our business needs.



Destination Services, our own incoming agency, provides fulfilment services to our customers such as hotel transfers but also offers experiences in the destinations such as excursions.



Our Sales and Marketing business is well positioned to benefit from continued tourism market growth. In 2017 we have accelerated our digitalisation efforts and inter alia launched two important IT-­initiatives: One CRM and One Inventory Base & One Purchasing.



Customer knowledge is key to provide outstanding holiday experiences that result in satisfied and loyal customers. One CRM, building on a shared customer data base drives our knowledge of our customers and therefore enables us to build direct and personalised relationships. Using automated machine learning and analytical capabilities, we share our customer insights with the wider business and enable personalised marketing, sales and services. We are now able to provide individualised experiences, which in turn are expected to lead to cross- and up-selling opportunities. Last but not least, we develop retention propositions based on our enhanced knowledge, thereby driving emotional loyalty and engagement with our brand.



Building on the Blockchain technology, we are striving to centralise our inventory on one database, namely, One Inventory / One Purchasing. Own and third party hotel bed capacity is being incorporated in the data base, which is accessible for all source markets. An Artificial Intelligence system creates suggestions on the respective bed capacity allocation and / or bed swap to the source markets based on customer demand, allowing TUI to optimise yields. Blockchain as an underlying technology ensures transparency and trust as well as an immutable tracking of ownership. Suppliers can be on-boarded easily, including new partners from all over the world.



Holiday experiences: Grow and diversify 
in the hotel and cruise business



TUI"s hotel portfolio entails 380 hotels, operating under a concept, ownership, lease, management or franchise model. We differentiate with our own brands Robinson, TUI Magic Life and TUI Blue, as well as with our successful joint venture brands, such as Riu. TUI branded hotels show high customer satisfaction and revenue per customer, signalling the attractiveness to our customers.



Since the merger we concluded three non-core business disposals, namely Travelopia, Hotelbeds and the shareholding in Hapag-Lloyd AG. We intend to reinvest the disposal proceeds mainly into our hotel and cruise business, thereby further growing and diversifying our portfolio and pursuing on average a target ROIC of 15 % for new investments. Redeploying capital to our holiday experience businesses will enhance our capital return and will reduce the cyclicality of our cash flow profile.



On the hotel side, in line with our existing portfolio, we intend to grow predominantly our low capital intensity share, i. e. through management contracts or through Joint Verntures. In unique destinations or in destinations with an all-year round business, we perceive ownership to be a superior strategy. 



Further, we focus on diversifying our portfolio geographically by growing our Caribbean and Asian destinations, while strengthening our core destinations in Europe.



In our cruise segment, we operate a fleet of 16 cruise ships under three cruise lines, namely our TUI Cruises Joint Venture, Marella Cruises and Hapag-Lloyd Cruises. Each cruise business is dedicated to a specific audience and tailors its concept accordingly, with TUI Cruises and Marella Cruises focusing on local mainstream customers and Hapag-Lloyd offering luxury and expedition experiences.



The demand in our distinct market segments relevant for our target customers remains very strong. Despite capacity growth, occupancy of our cruise ships remains at above 100 % in the mainstream market at stable prices, allowing us to further enhance capacity by expanding our fleet. 



Summary



Three years after the merger, we are a stronger, integrated and stra­tegically better positioned business. The merger synergies are fully delivered.



Looking ahead we continue to expect to deliver double digit annual earnings growth with less seasonality, strong cash conversion1 and strong ROIC performance. This will be driven by market demand, digitalisation benefits and disciplined expansion of own hotel and cruise content.



We therefore expect to deliver at least 10 % growth in underlying EBITA in financial year 20182 and extend our previous guidance of at least 10 % underlying EBITA CAGR to financial year 20201.



The Executive Board and the Supervisory Board are recommending a dividend of 65 cents per share in respect of the financial year 2017. Subject to approval at the Annual General Meeting on 13 February 2018, shareholders who held relevant shares at close of business on 13 February 2018 will receive the dividend on 16 February 2018.



Further financial targets are achieving a leverage ratio 3.00 to 2.25 times and an interest coverage 5.75 to 6.75 times.



Our Employees



Qualified and committed employees are a major prerequisite for TUI"s long-term success. One of the key elements of our global HR strategy, therefore, is to attract and promote people with talent and to retain them by ­offering attractive employment conditions.



It is our staff who breathe life into our corporate values "Trusted", "Unique" and "Inspiring". Alongside our vision and our customer promise, they form the basis for our attitudes and actions.



Our employee survey TUIgether, which was carried out in in the period under review is a crucial yardstick, showing us our strengths and areas for potential improvements, so that we can improve the corporate performance and make TUI an even more attractive employer. The survey measures the Engagement Index of TUI Group, which is 77 in this year"s cycle.



Further information about our employees and our sustainability strategy can be found on page 81.



1 We define our cash conversion as the Group"s EBITDA less our long-term gross capex target in relation to the Group"s EBITDA.



2 Assuming constant foreign exchange rates are applied to the result in the current and prior period and based on the current Group structure.



Corporate profile



How we do it - Group structure


















 



Sales & Marketing



 



Holiday Experiences



 



Other



 



 



 



  • Northern ­Region

  • Central Region

  • Western ­Region


 



  • Hotels & Resorts

  • Cruises

 



 



  • Other Tourism

  • All other segments

 


TUI AG parent company



TUI AG is TUI Group"s parent company headquartered in Hanover and Berlin. It holds direct or, via its affiliates, indirect interests in the principal Group companies conducting the Group"s operating business in individual countries. Overall, TUI AG"s group of consolidated companies comprised 259 direct and indirect subsidiaries at the balance sheet date. A further 13 affiliated companies and 28 joint ventures were included in TUI AG"s consolidated financial statements on the basis of at equity measurement.



For further details on principles and methods of consolidation and TUI Group shareholdings see pages 143 and 233.



Organisation and management



TUI AG is a stock corporation under German law, whose basic principle is dual management by two boards, the Executive Board and the Supervisory Board. The Executive and Supervisory Boards cooperate closely in governing and monitoring the Company. The Executive Board is responsible for the overall management of the Company.



The appointment and removal of Board members is based on sections 84 et seq. of the German Stock Corporation Act in combination with section 31 of the German Co-Determination Act. Amendments to the Articles of Association are effected on the basis of the provisions of sections 179 et seq. of the German Stock Corporation Act in combination with section 24 of TUI AG"s Articles of Association.



Executive Board and Group Executive Committee



At the balance sheet date, the Executive Board of TUI AG consisted of the CEO and five other Board members.



For details on Executive Board members see page 102



A Group Executive Committee was set up in order to manage TUI Group strategically and operationally. As at 30 September 2017, the Committee consisted of twelve members who meet under the chairmanship of CEO Friedrich Joussen.



TUI Group structure



TUI Group"s core businesses, Sales & Marketing and Holiday Experiences, are clustered into the segments Northern, Central and Western Region, Hotels & Resorts and Cruises. TUI Group also comprises Other Tourism and All other segments.



Sales & Marketing



With our three regions Northern, Central and Western Region, we have well positioned sales and marketing structures providing more than 20 million customers a year with exceptional holiday experiences. Our sales activities are based on online and offline channels that also benefit from TUI"s strong market position. The travel agencies include Group-owned agencies as well as joint ventures and agencies operated by third parties. Thanks to our direct customer access, we are able to build close relationships with our guests, and in future this will allow us to gear their entire holiday experience even more closely to their personal wishes and preferences, giving us a crucial advantage over our competitors. In order to offer our customers a wide choice of hotels, our Sales & Marketing organisations have access to the exclusive portfolio of TUIhotels. They also have access to third-party bed capacity, some of which have been contractually committed.



Our own flight capacity continues to play a key role in our integrated business model. A combination of owned and third-party flying capacity enables us to offer tailor-made travel programmes for each individual source market region and to respond flexibly to changes in customer preferences. Thanks to the balanced management of flight and hotel capacity, we are able to develop high-profile destinations and optimise the margins of both service providers. In financial year 2017, we continued to deliver our internal efficiency enhancement programme at one Aviation, delivering further economies of scale. This has secured the continued competitiveness of our airlines despite challenging market conditions. With our fleet of around 150 aircraft, we rank among the top 10 European airlines in terms of size and are by far the largest charter company. By introducing 737MAX aircraft in 2018, we will continue our strategy of operating a modern, fuel-efficient fleet, which began with the 787 Dreamliner.



Northern Region



The Northern Region segment comprises Sales & Marketing activities and airlines in the UK, Ireland and the Nordics. In addition, the Canadian strategic venture Sunwing and the joint venture TUI Russia have been included within this segment. In the period under review, the hotel operator Blue Diamond Hotels and Resorts Inc., St. Michael, Barbados, previously carried under Northern Region, was integrated into our hotel business and is now carried in Hotels & Resorts. Moreover, the British cruise business Marella Cruises (operated under the brand Thomson Cruises until October 2017), previously also carried under Northern Region, was reclassified to the Cruises segment.



Central Region



The Central Region segment comprises the sales and marketing activities and airlines in Germany and the Sales & Marketing activities in Austria, Switzerland and Poland.



Western Region



The sales and marketing activities and airlines in Belgium, the Netherlands and the Sales & Marketing activities in France are included within the segment Western Region.



Holiday Experiences



Holiday Experiences comprise our hotel and cruises activities.



Hotels & Resorts



The Hotels & Resorts segment comprises TUI Group"s diversified portfolio of Group hotel brands and hotel companies. The segment includes ownership in hotels, joint ventures with local partners, stakes in companies giving TUI a significant influence, and hotels operated under management contracts.



In financial year 2017, Hotels & Resorts comprised a total of 327 hotels with 238,775 beds. TUI Group also comprised 53 concept hotels operated by third-parties under the TUI concepts TUI Sensatori, TUI Sensimar and TUI Family Life.



Riu



Riu is the largest hotel company in the portfolio of Hotels & Resorts. The Majorca-based company has a high proportion of regular customers and stands out for its professionalism, proven quality and excellent service. Most of the hotels are in the premium and comfort segments and they are predominantly located in Spain, Mexico and the Caribbean.



Robinson



Robinson, the leading provider in the German-speaking premium club holiday segment, is characterised by its professional sport, entertainment and event portfolio. Moreover, the clubs offer high-quality hotel amenities, excellent service and spacious architecture. Most of the hotels are located in Spain, Greece, Turkey, the Maledives and Austria. The facilities are also aspirational in terms of promoting sustainable development and signing up to specific environmental standards.



Blue Diamond



In the period under review the hotel operator Blue Diamond Hotels and Resorts Inc., St. Michael, Barbados, has been integrated into the Hotel & Resorts segment. It was previously carried under Northern Region. Blue Diamond is a fast growing resort chain in the Caribbean with a unique approach of tailoring hotels to meet the highest expectations.



Other hotel companies and concept hotels



Other hotel companies include in particular the Group"s other core brands TUI Blue and TUI Magic Life, the hotels of the Grupotel and Iberotel brands as well as our exclusive hotel concepts TUI Sensimar, TUI Sensatori and TUI Family Life. They provide holidays in top locations in our destin­ations and meet high performance, quality and environmental standards.



Cruises



The Cruises segment consists of Hapag-Lloyd Cruises and the joint venture TUI Cruises. In the period under review, the British cruise business Thomson Cruises, previously managed within Northern Region, was reclassified to the Cruises segment. In October 2017 Thomson Cruises was rebranded to Marella Cruises. With their combined fleet of 16 vessels, the three cruise lines offer different service concepts to serve different target groups.

























Cruise Fleet By Ownership Structure



 



Owned



Finance Lease



Operating Lease



Total



TUI Cruises (JV)



6



-



-



6



Marella Cruises*



1



3



2



6



Hapag-Lloyd Cruises



3



-



1



4


As at 30 September 2017



* Previously operated under the brand Thomson Cruises



TUI Cruises



Hamburg-based TUI Cruises is a joint venture formed in 2008 between TUI AG and the US shipping company Royal Caribbean Cruises Ltd., in which each partner holds a 50 % stake. With six ships, TUI Cruises is top-ranked in the German-speaking high-volume premium market for cruises. The Berlitz Cruise Guide rated Mein Schiff 3, Mein Schiff 4, Mein Schiff 5 and Mein Schiff 6 among the world"s five best liners in the category "Large Ships".



Marella Cruises



Marella Cruises, previously operated under the brand Thomson Cruises, offers voyages for different segments in the British market. Its fleet includes the Marella Discovery, named in June 2016, and the Marella Discovery 2, launched in May 2017.



Hapag-Lloyd Cruises



Hapag-Lloyd Cruises is based in Hamburg, and it holds a position of leadership in the German-language market with its fleet of four liners in the luxury and expedition cruise segments. Its flagships are the vessels Europa and Europa 2, which were again awarded the five-star-pluscategory by the Berlitz Cruise Guide and are the world"s only ships to be recognised in this way. The expedition vessels include the Hanseatic and the Bremen.



Other Tourism



Other Tourism comprises central functions such as IT, one Aviation and the French airline Corsair. This segment also includes destination services, catering to the needs of around 12 million customers in about 115 destinations around the world.



All other segments



The category "All other segments" includes our business activities for the new markets, the corporate centre functions of TUI AG and the interim holdings, as well as the Group"s real estate companies.



The final remaining stake in Hapag-Lloyd AG, container shipping was disposed on 10 July 2017 after some stakes had already been sold in the market.



Discontinued operations



In financial year 2017, Specialist Group carried under discontinued operations in previous year, comprised the tour operator activities pooled under Travelopia, above all providing expedition trips, luxury travel, trips to sports events, student travel and sailing trips. The language travel segment had already been sold in the prior financial year. Crystal Ski and Thomson Lakes & Mountains, which had previously also formed part of Specialist Group, were reclassified to Northern Region and integrated into TUI UK"s business at the beginning of financial year 2017, as they have strong synergies and deliver exciting travel experiences.



The sale of Specialist Group (Travelopia) to Kohlberg Kravis Roberts (KKR) was completed on 15 June 2017.



Research and development



As a tourism service provider, the TUI Group does not engage in research and development activities comparable with manufacturing companies. This sub-report is therefore not prepared.



How we measure it - value-oriented Group management



Management system and Key Performance 
Indicators



As the world"s leading tourism group with one global brand, an attractive hotel portfolio, a growing cruise business, a modern and efficient aircraft fleet and direct access to 20 million customers, we aim to secure our vertically integrated business model by means of profitable growth and achieve a sustainable increase in the value of the TUI Group.



A standardised management system has been created to implement value-driven management across the Group as a whole and in its individual business segments. The value-oriented management system is an integral part of consistent Group-wide planning and controlling processes.



Key management variables used for regular value analysis are Return On Invested Capital (ROIC) and Economic Value Added. ROIC is compared with the segment-specific cost of capital. ROIC is calculated as the ratio of underlying earnings before interest, taxes and amortisation of goodwill (underlying EBITA) to average invested interest-bearing invested capital (invested capital) for the segment.



Our definition of EBITA is earnings before interest, income tax and impairment of goodwill and excluding the result from the measurement of interest hedges.



In order to explain and measure TUI Group"s operating performance, we use underlying EBITA. The underlying EBITA has been adjusted for gains on disposal of financial investments, expenses in connection with restructuring measures according to IAS 37, all effects of purchase price allocations, ancillary acquisition cost and conditional purchase price payments and other expenses for and income from one-off items. The one-off items carried as adjustments are income and expense items impacting or distorting the assessment of the operating profitability of the segments and the Group due to their level and frequency. These one-off items include major restructuring and integration expenses not meeting the criteria of IAS 37, major expenses for litigation, profit and loss from the sale of aircraft and other material business transactions of a one-off nature.



In the framework of our growth strategy, we aim to achieve an underlying EBITA CAGR of at least 10 % over the years to financial year 2020 (on a constant currency basis).



In order to follow the development of the business performance of our segments in the course of the year, we monitor the financial indicators turnover and EBITA, but also key non-financial performance indicators, such as customer numbers in our Sales & Marketing, and capacity or passenger days, occupancy and average prices in Hotels & Resorts and Cruises. In the framework of our sustainability reporting, we have also defined a target indicator for specific CO2 emissions per passenger kilometre for our airlines. We measure achievement of that indicator on an annual basis.



Information on operating performance indicators is provided in the sections on "Segmental performance"and "Non-financial declaration" and in the Report on Expected Developments



Cost of capital































































































Cost of capital (WACC)



 



Hotels



Cruises



Sales & ­Marketing



TUI Group



%



2017



2017



2017



2017



Risk-free interest rate



1.25



1.25



1.25



1.25



Risk adjustment



6.23



5.44



5.41



5.64



Market risk premium



6.50



6.50



6.50



6.50



Beta factor 1



0.9590



0.8373



0.8320



0.8672



Cost of equity after taxes



7.48



6.69



6.66



6.89



Cost of debt capital before taxes



2.09



2.09



3.52



2.95



Tax shield



0.52



0.04



0.81



0.62



Cost of debt capital after taxes



1.57



2.05



2.71



2.33



Share of equity 2



84.70



64.80



63.56



69.46



Share of debt capital 2



15.30



35.20



36.44



30.54



WACC after taxes 3



6.50



5.00



5.25



5.50



Cost of equity before taxes



9.59



6.80



8.12



8.36



Cost of debt capital before taxes



2.09



2.09



3.52



2.95



Share of equity 2



84.70



64.80



63.56



69.46



Share of debt capital 2



15.30



35.20



36.44



30.54



WACC before taxes 3



8.50



5.25



6.50



6.75


1 Segment beta based on peer group, group beta based on weighted segment betas



2 Segment share based on peer group, group share based on weighted segment shares



3 Rounded to 1/4 percentage points



The cost of capital is calculated as the weighted average cost of equity and debt capital (WACC). While the cost of equity reflects the return expected by investors from TUI shares, the cost of debt capital is based on the average borrowing costs of the TUI Group. The cost of capital always shows pre-tax costs, i.e. costs before corporate and investor taxes. The expected return determined in this way corresponds to the same tax level as the underlying earnings included in ROIC.



ROIC and Economic Value Added



ROIC is calculated as the ratio of underlying earnings before interest, taxes and amortisation of goodwill (underlying EBITA) to the average for invested interest-bearing capital (invested capital) for the relevant segment or sector. Given its definition, this performance indicator is not influenced by any tax or financial factors and has been adjusted for one-off effects. From a Group perspective, invested capital is derived from liabilities, comprising equity (including non-controlling interests) and the balance of interest-bearing liabilities and interest-bearing assets. The cumulative amortisations of purchase price allocations are then added to the invested capital.



Apart from ROIC as a relative performance indicator, economic value added is used as an absolute value-oriented performance indicator. Economic Value Added is calculated as the product of ROIC less associated capital costs multiplied by interest-bearing invested capital.









































































































ROIC and Value added TUI Group



EUR million



Notes



2017



2016



Equity



 



3,533.7



3,248.2



Subscribed capital



(24)



1,501.6



1,500.7



Capital reserves



(25)



4,195.0



4,192.2



Revenue reserves



(26)



- 2,756.9



- 3,017.8



Non-controlling interest



(28)



594.0



573.1



plus interest bearing financial liability items



 



3,328.1



3,769.1



Pension provisions and similar obigations



(29)



1,127.4



1,450.9



Non-current financial liabilities



(31), (38)



1,761.2



1,503.4



Current financial liabilities



(31), (38)



171.9



537.7



Derivative financial instruments



(38)



267.6



277.1



less financial assets



 



3,024.7



3,137.2



Financial assets available for sale



(17), (38)



69.5



316.2



Derivative financial instruments



(38)



295.3



671.4



Cash and cash equivalents



(22), (38)



2,516.1



2,072.9



Other financial assets



 



143.8



76.7



plus purchase price allocation



 



317.5



300.5



Invested Capital



 



4,154.7



4,180.6



Invested Capital Prior year



 



4,180.6



3,968.1



Seasonal adjustment1



 



500.0



500.0



Ø Invested capital2



 



4,667.7



4,574.4



Underlying EBITA



 



1,102.1



1,000.5



ROIC



 



23.61



21.87



Weighted average cost of capital (WACC)



 



6.75



7.50



Value added



 



787.0



657.4


1 Adjustment to net debt to reflect a seasonal average cash balance



2 Average value based on balance at beginning and year-end, incl. seasonal adjustment.



For TUI Group, ROIC was 23.6 %, up by 1.7 percentage points compared to the previous year. With the cost of capital of 6.75 %, this meant positive Economic Value Added of EUR 787.0 m (previous year EUR 657.4 m).



Risk report



Successful management of existing and emerging risks is critical to the long-term success of our business and to the achievement of our strategic objectives. In order to seize market opportunities and leverage the potential for success, risk must be accepted to a reasonable degree. Risk management is therefore an integral component of the Group"s Corporate Governance.



The current financial year has seen further maturity of the risk management framework with testing of key controls now occurring in our two largest source markets and regular testing of key financial controls occurring across all of our larger businesses. Our risk governance framework is set out below.



Risk Governance Framework



Strategic direction and risk appetite



The Executive Board, with oversight by the Supervisory Board, determines the strategic direction of the TUI Group and agrees the nature and extent of the risks it is willing to take to achieve its strategic objectives.



To ensure that the strategic direction chosen by the business represents the best of the strategic options open to it, the Executive Board is supported by the Group Strategy function. This function exists to facilitate and inform the Executive Board"s assessment of the risk landscape and development of potential strategies by which it can drive long-term shareholder value. On an annual basis the Group Strategy function develops an in-depth fact base in a consistent format which outlines the market attractiveness, competitive position and financial performance by division and source market. These are then used to facilitate debate as to the level and type of risk that the Executive Board finds appropriate in the pursuit of its strategic objectives. The strategy, once fully defined, considered and approved by the Executive Board, is then incorporated into the Group"s three-year roadmap and helps to communicate the risk appetite and expectations of the organisation both internally and externally.



Ultimate responsibility for the Group"s risk management rests with the Executive Board. Having determined and communicated the appropriate level of risk for the business, the Executive Board has established and maintains a risk management system to identify, assess, manage and monitor risks which could threaten the existence of the company or have a significant impact on the achievement of its strategic objectives: these are referred to as the principal risks of the Group. This risk management system includes an internally-published risk management policy which helps to reinforce the tone set from the top on risk, by instilling an appropriate risk culture in the organisation whereby employees are expected to be risk aware, control minded and "do the right thing". The policy provides a formal structure for risk management to embed it in the fabric of the business. Each principal risk has assigned to it a member of the Executive Committee as overall risk sponsor to ensure that there is clarity of responsibility and to ensure that each of the principal risks are understood fully and managed effectively.



The Executive Board regularly reports to the Audit Committee of the Supervisory Board on the overall risk position of the Group, on the individual principal risks and their management, and on the performance and effectiveness of the risk management system as a whole.



The Risk Oversight Committee ("ROC") ensures on behalf of the Execu­tive Board that business risks are identified, assessed, managed and monitored across the businesses and functions of the Group. Meeting on at least a quarterly basis, the ROC"s responsibilities include consider­ing the principal risks to the Group"s strategy and the risk appetite for each of those risks, assessing the operational effectiveness of the controls in place to manage those risks and any action plans to further improve controls, and reviewing the bottom-up risk reporting from the businesses themselves to assess whether there are any heightened areas of concern. The ROC helps to ensure that risk management is embedded into the planning cycle of the Group and has oversight of the stress-testing of cash flow forecasts.



Senior executives from the Group"s major businesses are required to attend the ROC on a rotational basis and present on the risk and control framework in their business, so that the members of the ROC can ask questions on the processes in place, the risks present in each business and any new or evolving risks which may be on their horizon, and also to seek confirmation that the appropriate risk culture continues to be in place in each of the major businesses.



Chaired by the Chief Financial Officer, other members of the Committee include the Group Director Controlling and Finance Director Tourism, the directors of Compliance & Risk, Financial Accounting, Treasury & Insurance, Group Reporting & Analysis, Assurance, M & A, Investor Relations and representatives from the IT and Legal Compliance functions and Group HR. The director of Group Audit attends without having voting rights to maintain the independence of their function. The ROC reports quarterly to the Executive Board to ensure that it is kept abreast of changes in the risk landscape and developments in the management of principal risks, and to facilitate regular quality discussions on risks and risk management at the Executive Board.



The Executive Board has also established a Group Risk team to ensure that the risk management system functions effectively and that the risk management policy is implemented appropriately across the Group. The Group Risk team supports the risk management process by providingguidance, support and challenge to management whilst acting as the central point for coordinating, monitoring and reporting on risk across the Group. The Group Risk team is responsible for the administration and operation of the risk and control software which underpins the Group"s risk reporting and risk management process.



Each division and source market within the Group is required to adopt the Group Risk Management policy. In order to do this, each either has their own Risk Committee or includes risk as a regular agenda item at their Board meetings to ensure that it receives the appropriate senior management attention within their business. In addition, the divisions and source markets each appoint a Risk Champion, who promotes the risk management policy within their business and ensures its effective application. The Risk Champions are necessarily in close contact with the Group Risk team and they are critical both in ensuring that the risk management system functions effectively and in implementing a culture of continuous improvement in risk management and reporting.



Risk Management Process



The Group Risk team applies a consistent risk methodology across all key areas of the business. This is underpinned by risk and control software which reinforces clarity of language, visibility of risks, controls and actions and accountability of ownership. Although the process of risk identification, assessment and response is continuous and embedded within the day-to-day operations of the divisions and source markets, it is consolidated, reported and reviewed at varying levels throughout the Group on at least a quarterly basis.



Risk Identification: On a quarterly basis, line management closest to the risks identify the risks relevant to the pursuit of the strategy within their business area in the context of four types of risk:



  • longer-term strategic and emerging threats;

  • medium-term challenges associated with business change programmes;

  • short-term risks triggered by changes in the external and regulatory environment; and

  • short-term risks in relation to internal operations and control.

A risk owner is assigned to each risk, who has the accountability and authority for ensuring that the risk is appropriately managed.



Risk Descriptions: The nature of the risk is articulated, stating the underlying concern the risk gives arise to, identifying the possible causal factors that may result in the risk materialising and outlining the potential consequences should the risk crystallise. This allows the divisions / 
source markets and the Group to assess the interaction of risks and potential triggering events and / or aggregated impacts before developing appropriate mitigation strategies to target causes and / or consequences.



Risk Assessment: The methodology used is to initially assess the gross risk. The gross risk is essentially the worst case scenario, being the product of the impact together with the likelihood of the risk materialising if there were no controls in place to manage, mitigate or monitor the risk. The key benefit of assessing the gross risk is that it highlights the potential risk exposure if controls were to fail completely or not be in place at all. Both impact and likelihood are scored on a rating of 1 to 5 using the criteria outlined below.



The next step in the process is to assess the controls which are currently in place and which help to reduce the likelihood of the risk materialising and / or its impact if it does. The details of the controls including the control owners are documented. Consideration of the controls in place then enables the current or net risk score to be assessed, which is essentially the reasonably foreseeable scenario. This measures the impact and likelihood of the risk with the current controls identified in operation. The key benefit of assessing the current risk score is that it provides an understanding of the current level of risk faced today and the reliance placed on the controls currently in operation.

















































Impact Assessment



 



 



insignificant



 



minor



 



moderate



 



major



 



catastrophic



quantitative



 



< 3 % EBITA*
(< EUR 30 m)



 



3 - < 5 % EBITA*



( 30 - < EUR 50 m)



 



5 - < 10 % EBITA*



(50 - < EUR 105 m)



 



10 - < 15 % EBITA*



(105 - < EUR 160 m)



 



>= 15 % EBITA*



( >= EUR 160 m)



Qualitative



 



Minimal impact on



 



Limited impact on



 



Short term impact on



 



Medium term impact on



 



Detrimental impact on




 



 



  • Global reputation

  • Programme delivery

  • Technology reliability

  • Health & Safety ­standards


  •  


  • Global reputation

  • Programme delivery

  • Technology reliability

  • Health & Safety ­standards


  •  


  • Global reputation

  • Programme delivery

  • Technology reliability

  • Health & Safety ­standards


  •  


  • Global reputation

  • Programme delivery

  • Technology reliability

  • Health & Safety ­standards


  •  


  • Global reputation

  • Programme delivery

  • Technology reliability

  • Health & Safety ­standards

* Budgeted underlying EBITA for the financial year ended 30 September 2017
















Likelihood Assessment



 



 



rare



< 10 % Chance



 



unlikely



10 - < 30 % Chance



 



possible



30 - < 60 % Chance



 



likely



60 - < 80 % Chance



 



almost certain



>= 80 % Chance


Risk Response: If management are comfortable with the current risk score, then the risk is accepted and therefore no further action is required. The controls in place continue to be operated and management monitor the risk, the controls and the risk landscape to ensure that the risk score stays stable and in line with management"s tolerance of the risk.



If, however, management assesses that the current risk score is too high, then an action plan will be drawn up with the objective of introducing new or stronger controls which will reduce the impact and / or likelihood of the risk to an acceptable, tolerable and justifiable level. This is known as the target risk score and is the parameter by which management can ensure the risk is being managed in line with the Group"s overall risk appetite. The risk owner will normally be the individual tasked with ensuring that this action plan is implemented within an agreed timetable.



Each division / source market will continue to review their risk register on an ongoing basis through the mechanism appropriate for their business e. g. local Risk Committee. The risk owner will be held to account if action plans are not implemented within the agreed delivery timescales.



This bottom-up risk reporting is considered by the ROC alongside the Group"s principal risks. New risks are added to the Group"s principal risk register if deemed to be of a significant nature so that the ongoing status and the progression of key action plans can be managed in line with the Group"s targets and expectations.



Ad hoc risk reporting



Whilst there is a formal process in place aligned to reporting on risks and risk management on a quarterly basis, the process of risk identification, assessment and response is continuous and therefore if required risks can be reported to the Executive Board outside of the quarterly process if events dictate that this is necessary and appropriate. Ideally such ad hoc reporting is performed by the business or function which is closest to the risk, but it can be performed by the Group Risk team if necessary. The best example of ad hoc risk reporting in the year was an assessment of the risks posed by the insolvency of Air Berlin.



Risk maturity & culture



During the current financial year, the Risk Champions and the Group Risk team have continued to work together on risk management actions plans for the businesses as part of the culture of continuous improvement. Periodically we ask the businesses to formally assess the risk maturity and culture of their business, primarily through the Risk Champions completing self-assessment questionnaires, validating this with their local boards and then discussing their responses with the Group Risk team.



We regularly conduct a Group-wide employee survey, and the feedback received from our employees often leads to a number of initiatives being taken. The survey is a key yardstick for us, indicating where we stand and facilitating the reinforcement of our vision and values into ourcorporate culture.



Entity scoping



A robust exercise is conducted each year to determine the specific entities in the Group which need to be included within the risk and control software and therefore be subject to the full rigour of the risk management process. The scoping exercise starts with the entities included within the Group"s consolidation system, and applies materiality thresholds to a combination of revenue, profit and asset benchmarks. From the entities this identifies, the common business management level at which those entities are managed is identified to dictate the entities which need to be set in the risk and control software itself to facilitate completeness of bottom-up risk reporting across the Group. This ensures that the risks and controls are able to be captured appropriately at the level at which the risks are being managed.



Effectiveness of risk management system



The Executive Board regularly reports to the Audit Committee of the Supervisory Board on the performance and effectiveness of the risk management system, supported by the ROC and the Group Risk team. The results of control testing in the UK&I and German businesses and the financial control testing undertaken across a number of our larger businesses forms a key part of the effectiveness oversight. Additionally, the Audit Committee receives assurance from Internal Audit through its programme of audits over a selection of principal risks and business transformation initiatives most critical to the Group"s continued success.



The conclusion from all of the above assurance work is that the risk management system has functioned effectively throughout the year and there have been no significant failings or weaknesses identified. Of course there is always room for improvement and as noted earlier, the Risk Champions and the Group Risk team have continued to work together on risk management actions plans for the businesses. Broadly this concerns ensuring consistency of approach in assessing risk scores, clearer identification of controls currently in place as well as any action plans to introduce further controls, and ensuring that risk identification has considered the four risk categories.



Finally, in accordance with Section 317 (4) HGB (German Commercial Code), the auditor of TUI AG has reviewed the Group"s early detection system for risks in place as required by Section 91 (2) AktG (German Stock Corporation Act) to conclude, if the system can fulfill its duties.



Principal Risks



There are some principal risks which are inherent to the tourism sector and necessarily face all businesses in the sector. For these inherent risks we have controls, processes and procedures in place as a matter of course which serve to mitigate each risk to either minimise the likelihood of the event occurring and / or minimise the impact if it does occur. These risks are on our risk radar and we regularly monitor the risk, the controls and the risk landscape to ensure that the risk score stays stable and in line with our risk appetite in each case.



Furthermore, the tourism industry is fast-paced and competitive, with the emergence of new market participants operating new business models, combined with consumer tastes and preferences evolving all the time. As a result as a business we always have to adapt to the changing environment, and it is this process of constant change which generally gives rise to a number of principal risks which we have to actively manage in order to bring the risk into line with our overall risk appetite. We have action plans in place to increase controls around each of these risks and reduce the current net risk score to the target level indicated in the heat map overleaf.



In the heat map the assessment criteria used are shown on page 33. Note that the quantitative impact assessment is based on the budgeted underlying EBITA for the financial year ended 30 September 2017.



If the risk detail in the subsequent tables does not suggest otherwise, the risks shown below relate to all segments of the Group. The risks listed are the principal risks to which we are exposed and are not exhaustive. They will necessarily evolve over time due to the dynamic nature of our business.



Principal risks - Inherent to the sector



Nature of Risk



DESTINATION DISRUPTION



Providers of holiday and travel services are exposed to the inherent risk of incidents affecting some countries or destinations within their operations. This can include natural catastrophes such as hurricanes or tsunamis; outbreaks of disease such as Ebola; political volatility as has been seen in Egypt and Greece in recent years; the implications of war in countries close to our source markets and destinations; and terrorist events such as the tragic incident in Tunisia last year.



There is the risk that if such an event occurs which impacts on one or more of our destinations that we could potentially suffer significant operational disruption and costs in our businesses. We may possibly be required to repatriate our customers and / or the event could lead to a significant decline in demand for holidays to the affected destinations over an extended period of time.



Mitigating Factors



  • Whilst we are unable to prevent such events from occurring, we have well defined crisis management procedures and emergency response plans which are implemented when an event of this nature occurs, with the focus being on the welfare of our customers.

  • Where the appropriate course of action is to bring customers home immediately, our significant fleet of aircraft allows us to do this smoothly and efficiently.

  • Our policy is to follow foreign office advice in each of our source markets with regards to non-essential travel. This serves to minimise the exposure of our customers to turbulent regions.

  • Due to our presence in all key holiday regions, when a specific destination has been impacted by an external event, we are able to offer alternative destinations to our customers and to remix our destination portfolio away from the affected area in future seasons if necessary.

  • We always assume some level of destination disruption each year when setting financial plans and targets, so that we are able to cope with a "normal" level of disruption without it jeopardising achievement of our targets.

Nature of Risk



MACROECONOMIC RISKS



Spending on travel and tourism is discretionary and price sensitive. The economic outlook remains uncertain with different source markets at different points in the economic cycle. Furthermore, terrorist incidents in source markets can influence the overall demand for overseas travel in those markets. Consumers are also waiting longer to book their trips in order to assess their financial situation.



There is the risk that fluctuations in macroeconomic conditions in our source markets will impact on the spending power of our customers which could impact on our short-term growth rates and lead to margin erosion.



Furthermore, changes in macroeconomic conditions can have an impact on exchange rates which, particularly for the £ / EUR rate, has a direct impact on the translation of non-euro source market results into euros, the reporting currency of our Group.



Mitigating Factors



  • Many consumers prioritise their spending on holidays above other discretionary items.

  • Creating unique and differentiated holiday products which match the needs of our customers.

  • Leveraging our scale to keep costs down and prices competitive.

  • Having a range of source markets so that we are not over exposed to one particular economic cycle.

  • Expressing our key profit growth target in constant currency terms so that short term performance can be assessed without the distortion caused by exchange rate fluctuations.

  • Promoting the benefits of travelling with a recognised and leading tour operator to increase consumer confidence and peace of mind.

Nature of Risk



COMPETITION & CONSUMER PREFERENCES



The tourism industry is fast-paced and competitive with the emergence of new market participants operating new business models, combined with consumer tastes and preferences evolving all the time.



In recent years there has been an emergence of successful substitute business models such as web-based travel and hotel portals which allow end users to combine the individual elements of a holiday trip on their own and book them separately.



Consumer tastes and preferences have evolved in recent years as well, with more consumers booking their holidays online and via mobiles and tablets, and booking closer to the time of travel.



There is the risk that if we do not respond adequately to such business model disruption or if our products and services fail to meet changing customer demands and preferences, that our turnover, market share and profitability will suffer as a result.



Mitigating Factors



  • Our outstanding market position as a leading tourism group, the strength of our brands and our integrated business model enables us to respond robustly to competitive threats.

  • The TUI Group is characterised by the continuous development of unique and exclusive holidays, developing new concepts and services which match the needs and preferences of our customers.

  • Our integrated business model offers end-to-end customer services, from consultation and booking of holidays via flights with the Group"s own airlines through to Group-owned or operated hotels, resorts and cruise ships. Integration thus facilitates the development and marketing of individual, tailored holiday offerings for customers which it is difficult for competitors to replicate.

  • Building strong and lasting relationships with our key hotel partners, which further reinforces our ability to develop new concepts exclusive to the TUI Group which competitors struggle to match.

  • Focusing on being online throughout the whole of the customer journey - from inspiration, to booking, to the holiday itself, as well as returning and sharing experiences through social media.

Nature of Risk



INPUT COST VOLATILITY



A significant proportion of operating expenses are in non-local currency and / or relate to aircraft fuel which therefore exposes the business to changes in both exchange rates and fuel prices.



There is the risk that if we do not manage adequately the volatility of exchange rates, fuel prices and other input costs, then this could result in increased costs and lead to margin erosion, impacting on our ability to achieve profit targets.



There is also the risk that if our hedging policy is too rigid, we may find ourselves unable to respond to competitive pricing pressures during the season without it having a direct detrimental impact on our market position and / or profitability.



Mitigating Factors



  • Ensuring that the appropriate derivative financial instruments are used to provide hedging cover for the underlying transactions involving fuel and foreign currency.

  • Maintaining an appropriate hedging policy to ensure that this hedging cover is taken out ahead of source market customer booking profiles. This provides a degree of certainty over input costs when planning pricing and capacity, whilst also allowing some flexibility in prices so as to be able to respond to competitive pressures if necessary.

  • Tracking the foreign exchange and fuel markets to ensure the most up-to-date market intelligence and the ongoing appropriateness of our hedging policies.

  • Detailed information on currency and fuel hedges can be found in the Notes to the consolidated financial statements in section Financial instruments.

Nature of Risk



SEASONAL CASH FLOW PROFILE



Tourism is an inherently seasonal business with the majority of profits earned in the European summer months. Cash flows are similarly seasonal with the cash high occurring in the summer as advance payments and final balances are received from customers, with the cash low occurring in the winter as liabilities have to be settled with many suppliers after the end of the summer season.



There is the risk that if we do not adequately manage cash balances through the winter low period this could impact on the Group"s liquidity and ability to settle liabilities as they fall due whilst ensuring that financial covenants are maintained.



Mitigating Factors



  • As our business is spread across a number of source markets within the Tourism division there are some counter-cyclical features e. g. winter is a more important season for the Nordic and Canadian source markets. Some brands, such as the UK ski brand Crystal, have a different seasonality profile which helps to temper the overall profile.

  • Our content-focussed strategy is also helping to reduce the seasonality risk, as hotels and cruises have a more evenly distributed profit and cash profile across the year. This is highlighted by the fact that in the current financial year, the Group made an underlying operating profit for the first time over the nine months to 30 June.

  • The business produces regularly both short term and long term cash forecasts during the year which the Treasury team use to manage cash resources effectively.

  • We have implemented a financial policy which has led to an improvement in our credit rating and makes it easier to maintain financing facilities at suitable levels.

  • Existing financing facilities are considered to be more than sufficient for our requirements and provide ample headroom.

  • We continue to maintain high-quality relationships with the Group"s key financiers and monitor compliance with the covenants contained within our financing facilities.

  • Raising additional finance from the Capital Markets, should it be required, remains an option.

Nature of Risk



LEGAL & REGULATORY COMPLIANCE



Most providers of holiday and travel services operate across a number of economies and jurisdictions which therefore exposes them to a range of legal, tax and other regulatory laws which must be complied with.



As the TUI Group is the world"s leading tourism business operating from multiple source markets and providing holidays in more than 100 destin­ations, we are exposed to a range of laws and regulations with which we must comply or else risk incurring fines or other sanctions from regulatory bodies.



Mitigating Factors



  • Communication and strong tone from the top concerning compliance with laws and regulations.

  • Legal Compliance Committee established to ensure appropriate oversight, monitoring and action plans and to further drive the compliance culture across the Group.

  • Embedded legal and tax expertise in all major businesses responsible for maintaining high quality relationships with the relevant regulators and authorities.

  • Ongoing review conducted by the Group Legal Compliance team to centrally monitor compliance with regulations and provide expert advice to local teams on specific areas.

Nature of Risk



HEALTH & SAFETY



For all providers of holiday and travel services, ensuring the health and safety of customers is of paramount importance. This is especially so for TUI as we are the world"s leading tourism group selling holidays to over 20 million customers per annum.



There is the risk of accidents or incidents occurring causing illness, injury or death to customers or colleagues whilst on a TUI holiday. This could result in reputational damage to the business and / or financial liabilities through legal action being taken by the affected parties.



Mitigating Factors



  • Health and safety functions are established in all businesses in order to ensure there is appropriate focus on health and safety processes as part of the normal course of business.

  • Ongoing monitoring is conducted by the Group Security, Health & Safety function to ensure compliance with minimum standards.

  • Appropriate insurance policies are in place for when incidents do occur.

Nature of Risk



SUPPLY CHAIN RISK



Providers of holiday and travel services are exposed to the inherent risk of failure in their key suppliers, particularly hotels. This is further heightened by the industry convention of paying in advance ("prepayment") to secure a level of room allocation for the season.



There is the risk that we do not adequately manage our financial exposure should demand drop either for individual hotels and / or for the destin­ation in which the hotels are located and to which the tour operator still has a level of prepayment outstanding which could result in financial losses.



Mitigating Factors



  • Owned and joint venture partner hotels form a substantial part of our programme which reduces our inherent risk in this area.

  • Established and embedded a robust prepayment authorisation process to both limit the level of prepayments made and ensure that they are only paid to trusted, credit-worthy counterparties.

  • Where prepayments are made to external hoteliers this is to secure access to unique and differentiated product for which demand is inherently higher and more resilient to external events than for commodity product.

  • Prepayments are monitored on a timely and sufficiently granular basis to manage our financial exposure to justifiable levels.

Nature of Risk



JOINT VENTURE PARTNERSHIPS



It is common for tourism groups to use joint venture partnerships in some of their operations in order to reduce the risk of new ventures or to gain access to additional expertise. TUI has three significant joint ventures - Riu, TUI Cruises and Sunwing.



There is the risk that if we do not maintain good relations with our key partners that the ventures" objectives may not remain consistent with that of the Group which could lead to operational difficulties and jeopardise the achievement of financial targets.



Mitigating Factors



  • Good working relationships exist with all of our main joint venture partners and they are fully aligned with and committed to the growth strategy of TUI Group.

Actively managed principal risks - Strategic and emerging and business change



Nature of Risk



IT DEVELOPMENT & STRATEGY



Our focus is on enhancing customer experience by providing engaging, intuitive, seamless and continuous customer service through delivery of leading digital solutions, core platform capabilities, underlying technical infrastructure and IT services required to support the Group"s overall strategy for driving profitable top-line growth.



There is a risk that we fail to keep up with or outpace the market and evolving consumer preferences, we do not concentrate our activities on the correct areas for overall business success, do not address legacy inefficiencies and complexities of our existing infrastructure, do not ensure continuity of service for critical IT systems and / or do not ­execute our strategy and developments in line with expectations.



If we are ineffective in our strategy or technology development this could impact on our ability to provide leading technology solutions in our markets thereby impacting on our competitiveness, our ability to provide a superior customer experience and associated impact on quality and operational efficiency. This would ultimately impact on our customer numbers, revenue and profitability.



Mitigating Factors



  • Developed and communicated (in conjunction with Executives, Business & IT Leadership Teams) the Group"s IT Strategy which is clearly aligned to our overall business objectives and considers external factors such as the pace of technology change and internal factors such as the underlying quality required throughout IT.

  • Continuing to implement our online platform in order to enhance customer experience and drive higher conversion rates.

  • Implementing a SAP-based central customer platform to collate all information on our customers across their journey to provide a single view of the customer alongside an eCRM platform which will support strategic marketing.

  • Placing increased focus on ensuring continuity plans for critical IT systems are in place and regularly tested.

  • Cascaded clear technology standards and associated delivery roadmaps which are linked to Group wide and source market objectives

  • Adopting API, Big Data and Cloud architecture to drive improved speed, productivity and efficiency.

  • Experimenting with Blockchain technology to be ahead of the competition.

Nature of Risk



BRAND CHANGE



Our strategy is to migrate our many local tour operating brands in to one global brand, with the aim of strengthening and enhancing our competitive positon, particularly in the online world. We are aiming to capitalise on the strength of the TUI brand on a global scale whilst ensuring we maintain local roots.



There is an inherent risk when executing such a large scale global brand strategy that we may not be able to maintain the benefits of local brand equity throughout the process and we recognise that such a large programme should take place with respect for the interests of all our stakeholders and existing contractual obligations.



If we do not successfully deliver against our strategy this could result in a decline in brand awareness and loyalty with associated decline in customer demand or it could impact on our ability to maximise on the opportunities facilitated by having one brand on a global scale.



Mitigating Factors



  • Undertaken detailed market research in each source market to assess current brand positioning and likely impact of the brand change.

  • Approved incremental marketing spend to raise the profile of the TUI brand locally in order to promote the benefits and to manage the expectations of our customers in relation to the future of our ­enhanced products and services.

  • Established a "One Brand" programme team responsible for coord­inating and monitoring the brand change activity across all source markets, with KPIs identified and tracked on a regular basis by both local and group colleagues and prompt corrective action taken to address issues as they arise.

  • Taking a phased and focussed approach to the brand change by implementing in one source market at a time. This minimises the risk at a given point in time and allows us to gain learnings from the source markets undergoing transition and implement those learnings in the next source market. Our first brand transition successfully occurred in the Netherlands in the prior financial year 2016, with Nordics and Belgium source markets successfully transitioned in financial year 2017. The major brand transition in the UK&I of ­Thomson to TUI is now well underway in financial year 2018.

  • Communicating both internally and externally across multiple media channels to drive brand awareness, with increased awareness through consistent marketing in key destination airports and changing of the livery on our aircraft in order to support greater awareness of the TUIBrand.

Nature of Risk



GROWTH STRATEGY



We have set ourselves a medium-term target of achieving at least 10 % growth in underlying EBITA at constant currency rates (see page 48). This will be driven by growth in own hotel and cruises content, and top line and efficiency improvements.



Additionally we have broadened our offering to customers by introducing extra flexibility into our packages, and expanded our long-haul offering by taking advantage of the capabilities of the 787s which we have and are due to receive via our order book. Note that availability of aircraft finance is a key assumption of our business model.



Whilst managing this expansion, we must continue to adapt to changes in consumer tastes and booking profiles, and we must continue to match our capacity to consumer demand. Asset utilisation - of aircraft, cruise ships and hotels - is critical to our financial success particularly when in a growth phase.



There is a risk that we could be unsuccessful in maximising opportunities to execute our expansion strategy. This could mean that we fail to achieve some of the initiatives we have embarked upon, which could result in us falling short against the overall growth targets we have set for the business.



Mitigating Factors



  • The Executive Board is very focussed on the strategy and mindful of the risks, so there is strong direction and commitment from the top.

  • The Group Tourism Board plays an important role in coordinating, executing and monitoring the various growth initiatives.

  • There are a number of initiatives underway to achieve growth which reduces the risk through diversification.

  • Each of the business teams tasked with achieving an element of the growth strategy are still required to maintain sound financial discipline. The Group"s investment criteria and authorisation processes must still be adhered to as we are not prepared to be reckless in the pursuit of growth.

  • We continue to maintain strong relationships with the providers of aircraft finance.

  • Monitoring of overall market conditions continues to occur so that plans can be adapted or contingency plans invoked if required.

Nature of Risk



INTEGRATION & RESTRUCTURING OPPORTUNITIES



Our key strategic rationale for TUI Group is to act "as one" wherever it makes sense to do so, whilst maintaining local differences where the benefit of that differentiation is greater than that of harmonisation.



There are a number of restructuring projects underway across the Group as a result to enable us to achieve these opportunities. Furthermore our continuous review of our own businesses and competitors means that we do have an active programme of business disposals (e. g. Travelopia in financial year 2017) and acquisitions with associated integration projects.



There is an inherent risk with any large restructuring or integration programme that we face challenges in managing the complexities associated with further integrating our business, and reducing overlapping activities in order to develop a more lean and streamlined operating model.



If we are not successful in leveraging and optimising the identified opportunities this could have a significant impact on our ability to deliver the identified benefits in line with expectations and enhance shareholder value.



Mitigating Factors



  • Strong project management structures exist for all of the major restructuring and disposal programmes which are underway to ensure that they are managed effectively.

  • Project reporting tool ensures enhanced visibility of the progress of major projects as a matter of routine.

  • Regular reporting by the major projects to the Executive Board to ensure swift resolution of any issues or to enhance coordination across the Group where required.

Nature of Risk



CORPORATE & SOCIAL RESPONSIBILITY



For TUI Group, economic, environmental and social sustainability is a fundamental management principle and a cornerstone of our strategy for continually enhancing the value of our Company. This is the way we create the conditions for long-term economic success and assumeresponsibility for sustainable development in the tourism sector.



Our focus is to reduce the environmental impact of our holidays and promote responsible social policies and outcomes both directly through our own business and indirectly via our influence over our supply chain partners, thereby creating positive change for people and communities and being a pioneer of sustainable tourism across the world.



There is a risk that we are not successful in driving forecast social and environmental improvements across our operations, that our suppliers do not uphold our corporate and social responsibility standards and we fail to influence destinations to manage tourism more sustainably.



If we do not maximise our positive impact on destinations and minimise the negative impact to the extent that our stakeholders expect, this could result in a decline in stakeholder confidence, reputational damage, reduction in demand for our products and services and loss of competitiveadvantage.



Furthermore, if TUI Group falls short of achieving its sustainable development targets and at the same time the objectives of the UN Paris Climate Change Agreement (December 2015) are not met, this could lead to sustained long-term damage to certain of the TUI Group"s current and future destinations, which could also have a material adverse effect on demand for our products and services.



Mitigating Factors



  • Early adoption of EU Directive 2014/95/EU requiring increased disclosure of Corporate and Social Responsibility initiatives.

  • Developed and launched in 2015 the "Better Holidays, Better World" 2020 sustainability strategy framework which includes specific targets for key sustainability indicators.

  • Established a dedicated sustainability team to work closely with the business and other stakeholders to implement the sustainability strategy.

  • Operating the most carbon efficient airlines in Europe with continued investment in new, more efficient aircraft (e. g. Boeing 787 Dreamliner & 737 MAX) and cruise ships (e. g. the new Mein Schiff 1 & 2).

  • Implemented an environmental management system with five of our airlines having achieved ISO 14001 certification.

  • Increased measures to influence accommodation suppliers to achieve third party sustainability certification recognised by the Global Sustainable Tourism Council (GSTC).

  • TUI Care Foundation expanded to focus on the achievement of 2020 target for charitable donations and sustainability projects, with particular emphasis on sustainable tourism, environmental protection and the welfare of children.

Nature of Risk



INFORMATION SECURITY



Our responsibility is to protect the confidentiality, integrity and avail­ability of the data we have and the services we provide to our customers, our employees, our suppliers and service delivery teams.



This is a dynamic risk due to increased global cyber-crime activity and new regulations. At the same time our consolidation under the TUI brand and our increasing dependence on online sales and customer care channels (web / mobile) increases our exposure and susceptibility to cyber-attacks and hacks.



If we do not ensure we have the appropriate level of security controls in place across the Group, this could have a significant negative impact on our key stakeholders, associated reputational damage and potential for financial implications.



Mitigating Factors



  • Continued commitment from the Executive Board in support of key initiatives to ensure all existing and future IT systems are secure by design, that exposure to vulnerability is managed effectively, user access is sufficiently controlled and colleagues are made aware of information security risks through appropriate training.

  • Launch of a company-wide Information Security awareness campaign to promote secure behaviours amongst our colleagues. Overall goal is to make information security part of everyone"s job.

  • Continuous review and testing of all external devices and ongoing monitoring of logs in order to identify any potential threats as and when they arise.

  • Continuous improvement through lessons learned from real or simulated cyber incidents.

Nature of Risk



BREXIT



With the UK government formally triggering Article 50 of the Treaty on European Union of Lisbon on 29th March 2017, Brexit has become an active principal risk facing TUI Group. Brexit has an impact both on ­existing principal risks (e. g. Macroeconomic risks and Input Cost Volatility, through the uncertainty it has introduced to prospects for future growth rates in the UK economy and the sustained depreciation of sterling since the referendum result in 2016) as well as introducing a new class of principal risk due to the direct potential impact it could have on specific areas of our business model.



Our main concern is whether or not all of our airlines would continue to have access to EU airspace as now. If we were unable to continue to fly intra-EU routes, such as from Germany to Spain, this would have a significant operational and financial impact on TUI Group. Other areas of uncertainty include the status of our UK employees working in the EU and vice versa, and the potential for customer visa requirements for holidays from the UK to the EU.



Mitigating Factors



  • The Group has established a Brexit Steering Committee to monitor developments as the political negotiations take place, assess any impacts on TUI Group"s business model and devise suitable mitigation strategies.

  • In addition we continue to lobby relevant UK and EU ministers, officials and regulators to stress the continued importance of a liberalised and deregulated aviation market across Europe to protect consumer choice in both regions.

Risks with no impact on underlying EBITA



Impairment risk related to the investment in container shipping (Hapag-Lloyd AG). During the current financial year, TUI Group disposed of all of its investment in the container shipping company, Hapag-Lloyd AG, and therefore this risk no longer exists.



German trade tax risk. As noted in prior years, the German tax authorities have issued guidance on how certain items of expenditure should be treated for the purposes of German trade tax. The Group continues to disagree with the German tax authorities" interpretation of this matter and it is possible that the issue will have to be litigated through the German tax courts which could take a considerable amount of time to bring it to a resolution. There was no change to this risk during the ­financial year 2017, however the provision on the balance sheet at 30 September 2017 was increased to EUR 50 m (2016: EUR 44 m), primarily due to the interest effects.



Overall risk assessment



With the UK government formally triggering Article 50 of the Treaty on European Union of Lisbon on 29th March 2017, Brexit has become an active principal risk facing TUI Group. Brexit has an impact both on existing principal risks (e. g. Macroeconomic risks and Input Cost Volatility, through the uncertainty it has introduced to prospects for future growth rates in the UK economy and the sustained depreciation of sterling since the referendum result in 2016) as well as introducing a new class of principal risk due to the direct potential impact it could have on specific areas of our business model.



Our main concern is whether or not all of our airlines would continue to have access to EU airspace as now. Other areas of uncertainty include the status of our UK employees working in the EU and vice versa, and the potential for customer visa requirements for holidays from the UK to the EU. If we were unable to continue to fly intra-EU routes, such as from Germany to Spain, this would have a significant operational and financial impact on TUI Group. It is for this reason that we currently give Brexit the highest possible risk score using the impact and likelihood assessment criteria detailed on page 33, with the expectation that this score will decline over time as either political negotiations lead to confirmation of continued access to EU airspace, or as our mitigation strategies begin to be implemented.



Macroeconomic risk we view as being materially unchanged compared to last year, with Brexit and the UK election result in June continuing to create some degree of uncertainty over prospects for future growth rates in the UK economy. The sustained depreciation of sterling since last year"s UK Brexit referendum has a cost impact through making foreign denominated input costs in the UK business more expensive in sterling terms. Whilst the standard hedging policy we follow meant that the UK Source Market had already hedged a significant proportion of its foreign currency requirements for the current financial year ahead of the Brexit referendum, the unhedged portion resulted in higher costs which impacted the UK business in the second half of this year. Assuming the Pound Sterling does not strengthen, this will remain the case through to the Summer 2018 season. Normal business practice is to increase holiday prices to offset these higher input costs and protect margins, however competitive pressures may prevent prices from rising to the full extent required. Whilst the business continues to focus strongly on efficiency, which assists to offset against this we view the input cost volatility risk as having increased compared to last year.



The other risk we see as having increased over the course of the current year is Information Security, of which cyber security is a major component, due to increased global cyber-crime activity as highlighted by well-publicised events such as the Wannacry incident. To address this increasing risk we have launched a Group-wide Information Secur­ity awareness campaign to promote secure behaviours amongst our colleagues. The overall goal is to make information security part of everyone"s job.



Destination disruption is an inherent risk to which all providers of holiday and travel services are exposed. This disruption can take place in many forms such as natural catastrophes (e. g. recent hurricane activity in the Caribbean), outbreaks of diseases, social unrest, terrorist attacks and the implications of war in countries close to our source markets and destinations. General customer concerns over safety and security in eastern Mediterranean destinations (particularly Turkey) has continued to depress demand across all our source markets for these destinations, although there has been some improvement in demand compared to last year. Due to our geographic reach, we are able to offer our customers alternative destinations such as Spain, Canary Islands, Cape Verde etc. Despite this continued shift in demand, Turkey remains an important destination for our Group. Our general policy in respect of destinations remains to follow foreign office advice in each of our source markets relating to non-essential travel to specific destinations. Overall, we consider this risk to be materially unchanged compared to the prior year.



Our brand change programme has seen further successful brand changes in the current financial year in our Nordic and Belgian businesses and the major brand transition in the UK&I of Thomson to TUI is now well underway in financial year 2018. Overall therefore we see this risk as having declined over the year. Similarly the progress made with our sustainable development initiatives leads us to view the Corporate & Social Responsibility risk as having declined compared to last year.



Two risks have dropped out of our Principal Risk register compared to last year. Achievement of our merger synergy targets means that this programme has now ceased and therefore the Corporate Streamlining risk drops out of our risk register completely. Similarly, we have successfully navigated our way through the initial period of post-merger concern with regards to retaining key talent and we now have standardised processes in place for managing key talent in the Group, and therefore Talent Management risk is viewed as now being a "Business As Usual" risk which is overseen by the Group HR team.



Finally, during the current financial year TUI Group disposed of all of its investment in the container shipping company, Hapag-Lloyd AG, and therefore the impairment risk highlighted in previous years no longer exists.



Other than the items noted above, the Executive Board is of the opinion that there has been no other significant change to the risk landscape of the Group.



Viability statement



In accordance with provision C2.2 of the 2014 revision of the UK Corporate Governance Code, the Executive Board has assessed the prospect of the Company over a longer period than the twelve months required by the "Going Concern" provision. The Executive Board considers annually and on a rolling-basis a three year strategic plan for the business as outlined earlier in the "Strategic direction and risk appetite" section. The latest three year plan was approved in October 2017 and covers the period to 30 September 2020. A three year horizon is considered appropriate for a fast-moving competitive environment such as tourism, and it is noted that the Group"s current EUR 1,535.0 m revolving credit limit, which is used to manage the seasonality of the Group"s cash flows and liquidity, matures in July 2022 which is beyond the timeframe of the three year horizon. The three year plan considers cash flows as well as the financial covenants which the credit facility requires compliance with. Key assumptions underpinning the three year plan and the associated cash flow forecast is that aircraft and cruise ship finance will continue to be readily available, and that the terms of the UK leaving the EU are such that all of our airlines continue to have access to EU airspace as now.



The Executive Board has conducted a robust assessment of the principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity. Sensitivity analysis is applied to the cash flow to model the potential effects should certain principal risks actually occur, individually or in unison. This includes modelling the effects on the cash flow of significant disruption to a major destination in the summer season.



Taking account of the company"s current position, principal risks and the aforementioned sensitivity analysis, the Executive Board has a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the three year period of the assessment.



Key features of the internal control and risk 
management system in relation to the (Group) 
accounting process (sections 289 (5) and 315 (2) 
no 5 of the German Commercial Code HGB)



1. Definition and elements of the internal control and risk management system in the TUI Group



The TUI Group"s internal control system comprises all the principles, processes and measures that are applied to secure effective, efficient and accurate accounting which is compliant with the necessary legal requirements.



In the completed financial year, the TUI Group"s existing internal control system was further developed, drawing on the internationally recognised framework of COSO (Committee of Sponsoring Organizations of the Treadway Commission), which forms the conceptual basis for the internal control system.



The TUI Group"s internal control system consists of internal controls and the internal monitoring system. The Executive Board of TUI AG, in exercising its function of managing business operations, has entrusted responsibility for the internal control system in the TUI Group to specificGroup functions.



The elements of the internal monitoring system in the TUI Group comprise both measures integrated into processes and measures performed independently. Besides manual process controls, e. g. the "four-eyes principle", another key element of the process-related measures are automated IT process controls. Process-related monitoring is also secured by bodies such as the Risk Oversight Committee of TUI AG and by specific Group functions.



The Supervisory Board of TUI AG, in particular its Audit Committee, as well as the Group Auditing department at TUI AG are incorporated into the TUI Group"s internal monitoring system through their audit activities performed independently from business processes. On the basis of section 107 (3) of the German Stock Corporation Act, the Audit Committee of TUI AG deals primarily with the auditing of the annual financial statements, monitoring the accounting process and the effectiveness of the internal control and risk management system. In the Audit Committee Report the reliability of the financial reporting and the monitoring of the financial accounting process as well as the effectiveness of the internal control and risk management system are described.



Audit Committee Report see from page 15



The Group"s auditors have oversight of the TUI Group"s control environment. The audit of the consolidated financial statements by the Group auditor and the audit of the individual financial statements of Group companies included in the consolidated financial statements, in particular,constitute a key non-­process-related monitoring measure with regard to Group accounting.



In relation to Group accounting, the risk management system, introduced as an Enterprise Risk Management System (ERM System) as a component of the internal control system, also addresses the risk of misstatements in Group bookkeeping and external reporting. Apart from operational risk management, which includes the transfer of risks to insurance companies by creating cover for damage and liability risks and also hedging transactions to limit foreign currency and fuel price risks, the TUI Group"s risk management system embraces the systematic early detection, management and monitoring of risks across the Group. A more detailed explanation of the risk management system is provided in the section on the Risk Governance Framework in the Risk Report.



2. Use of IT systems



Bookkeeping transactions are captured in the individual financial statements of TUI AG and of the subsidiaries of TUI AG, through local accounting systems such as SAP or Oracle. As part of the process of preparing their individual financial statements, subsidiaries complete standardized reporting packages in the Group"s Oracle Hyperion Financial Management 11.1.2.4 (HFM) reporting system. HFM is used as the uniform reporting and consolidation system throughout the Group so that no add­itional interfaces exist for the preparation of the consolidated financial statements.



All consolidation processes used to prepare the consolidated financial statements of TUI AG, e. g. capital consolidation, assets and liabilities consolidation and expenses and income elimination including at equity measurement, are generated and fully documented in HFM. All elementsof TUI AG"s consolidated financial statements, including the disclosures in the Notes, are developed from the HFM consolidation system. HFM also provides various modules for evaluation purposes in order to prepare complementary information to explain TUI AG"s consolidated financial statements.



The HFM reporting and consolidation system has an in-built workflow process whereby when businesses promote their data within the system, to signal that their reporting package is complete, they are then locked out from making any further changes to that data. This ensures data integrity within the system and also facilitates a strong audit trail enabling changes to a reporting package to be identified. This feature of the HFM system has been checked and validated by the TUI AG Group Audit department on several occasions since the system was introduced.



At their own discretion, TUI AG"s Group auditors select certain individual financial statements from the financial statements entered in the HFM reporting and consolidation system by the Group companies, which are then reviewed for the purposes of auditing the consolidated financial statements.



3. Specific risks related to Group Accounting



Specific risks related to Group accounting may arise, for example, from unusual or complex business transactions, in particular at critical times towards the end of the financial year. Business transactions not routinely processed also entail special risks. The discretion necessarily granted to employees for the recognition and measurement of assets and liabilities may result in further Group accounting-related risks. The outsourcing and transfer of accounting-specific tasks to service com­panies may also give rise to specific risks. Accounting-related risks from derivative financial instruments are outlined in the Notes to the consoli­dated financial statements.



4. Key regulation and control activities to ensure proper and reliable (Group) Accounting



The internal control measures aimed at securing proper and reliable Group accounting ensure that business transactions are fully recorded in a timely manner in accordance with legal requirements and the Articles of Association. This also ensures that assets and liabilities are properly recognised, measured and presented in the consolidated ­financial statements. The control operations also ensure that bookkeeping records provide reliable and comprehensive information.



Controls implemented to secure proper and reliable accounting include, for instance, analysis of facts and developments on the basis of specific indicators. Separation of administrative, execution, settlement and authorization functions and the implementation of these functions by different persons reduces the potential for fraudulent operations. Organisational measures also aim to capture any corporate or Group-wide restructuring or changes in sector business operations rapidly and appropriately in Group accounting. They also ensure, for instance, that bookkeeping transactions are correctly recognised in the period in which they occur in the event of changes in the IT systems used by the accounting departments of Group companies. The internal control system likewise ensures that changes in the TUI Group"s economic or legal environment are mapped and that new or amended accounting standards are correctly applied.



The TUI Group"s accounting policies together with the International Financial Reporting Standards (IFRS) in compliance with EU legislation, govern the uniform accounting and measurement principles for the German and foreign companies included in TUI"s consolidated financial statements. They include general accounting principles and methods, policies concerning the statement of financial position, income statement, notes, management report, cash flow statement and segment reporting.



The TUI Group"s accounting policies also govern specific formal requirements for the consolidated financial statements. Besides defining the group of consolidated companies, they include detailed guidance on the reporting of financial information by those companies via the group reporting system HFM on a monthly, quarterly and year end basis. TUI"s accounting policies also include, for instance, specific instructions on the initiating, reconciling, accounting for and settlement of transactions between group companies or determination of the fair value of certain assets, especially goodwill.



At Group level, specific controls to ensure proper and reliable Group accounting include the analysis and, where necessary, correction of the individual financial statements submitted by the Group companies, taking account of the reports prepared by the auditors and meetings to discussthe financial statements which involve both the auditors and local management. Any further content that requires adjusting can be isolated and processed downstream.



The control mechanisms already established in the HFM consolidation system minimize the risk of processing erroneous financial statements. Certain parameters are determined at Group level and have to be applied by Group companies. This includes parameters applicable to the measurement of pension provisions or other provisions and the interest rates to be applied when cash flow models are used to calculate the fair value of certain assets. The central implementation of impairment tests for goodwill recognized in the financial statements secures the application of uniform and standardized evaluation criteria.



5. Disclaimer



With the organisational, control and monitoring structures established by the TUI Group, the internal control and risk management system enables company-specific facts to be captured, processed and recognized in full and properly presented in the Group"s accounts.



However, it lies in the very nature of the matter that discretionary decision-making, faulty checks, criminal acts and other circumstances, in particular, cannot be ruled out and will restrict the efficiency and reliability of the internal control and risk management systems, so that even Group-wide application of the systems cannot guarantee with absolute certainty the accurate, complete and timely recording of facts in the Group"s accounts.



Any statements made relate exclusively to TUI AG and to subsidiaries according to IFRS 10 included in TUI AG"s consolidated financial statements.



Overall assessment by the Executive Board and report on expected developments



Actual business performance 2017 compared with our forecast



In the third financial year following the merger, TUI Group"s per­­form­ance again exceeded our original forecast, despite a challenging ­geopolitical framework. TUI Group"s underlying EBITA rose by 10.2 % to EUR 1,102.1 m in financial year 2017. On a constant currency basis for the reporting period and the prior year reference period, this equates to an improvement of 12.0 %. In financial year 2017 we have thus met our guidance, which envisaged an increase in our operating result of at least 10 % on a constant currency basis (financial year 2016).



Due to our sound operating performance and lower net one-off adjustments, the Group also delivered growth in its EBITA from continuing operations, which climbed 14.3 % to EUR 1,026.5 m.



Turnover by TUI Group likewise outperformed expectations, up 11.7 % on the previous year on a constant currency basis. The Group"s net cash capex and financial investments (excluding down payment on aircraft orders) fell slightly below the target of EUR 1 bn euros at EUR 0.9 bn. The net cash of EUR 0.6 bn reported as at year-end 2017 surpassed our last guidance, taking account of the cash inflows from the sale of Travelopia and the remaining stake in Hapag-Lloyd AG. This was primarily due to a positive development in working capital in Q4 of the period under review, which typically delivers strong turnover.



Expected changes in the economic framework






































Expected development of gross domestic product



Var. %



2018



2017



World



3.7



3.6



Eurozone



1.9



2.1



Germany



1.8



2.0



France



1.8



1.6



UK



1.5



1.7



US



2.3



2.2



Russia



1.6



1.8



Japan



0.7



1.5



China



6.5



6.8



India



7.4



6.7


Source: International Monetary Fund (IMF), World Economic Outlook, October 2017



Macroeconomic situation



In the course of calendar year 2017, the growth trend of the global economy continued to consolidate and is expected to remain strong for the foreseeable future. The International Monetary Fund (IMF, World Economic Outlook, October 2017) expects gross domestic product to grow by 3.6 % in 2017. For 2018, the IMF expects the global economy to grow by 3.7 %. For the first time in a long while, the economy is gaining momentum across almost all major economies but will gradually slow down in the course of the next two years.



Market trend in tourism



UNWTO expects international tourism to continue growing globally in this decade. For the next few years, average weighted growth of around 3 % per annum has been forecast (source: UNWTO, Tourism Highlights, 2017 edition). In the first six months of 2017, international arrivals grew by 6.4 %. UNWTO expects growth of 3 % to 4 % for the full calendar year 2017 (source: UNWTO, World Tourism Barometer, August 2017).



Effects on TUI Group



As the world"s leading tourism group, TUI Group depends on the development of consumer demand in the large source markets in which we operate with our sales and marketing activities and hotel and cruises brands. Our budget is based on the assumptions used as a basis by the IMFto predict the future development of the global economy.



Apart from the development of consumer sentiment, political stability in the destinations is a further crucial factor affecting demand for holiday products. In our view, our business model is sufficiently flexible to compensate for the currently identifiable challenges.



The expected turnover growth assumed for our Source Markets in our budget for financial year 2018 is in line with UNWTO"s long-term forecast. Our strategic focus is to create unified branding for our Sales & Marketing activities, broaden our portfolio of Group hotels and expand our cruise business.



Expected development of Group turnover and earnings



TUI Group



The translation of the income statements of foreign subsidiaries in our consolidated financial statements is based on average monthly exchange rates. TUI Group generates a considerable proportion of consolidated turnover and large earnings and cash flow contributions in non-euro currencies, in particular £, $ and SEK. Taking account of the seasonality in tourism, the development of these currencies against the euro in the course of the year therefore strongly impacts the financial indicators carried in TUI Group"s consolidated financial statements. The comments on the expected development of our Group in financial year 2018 provided below are based on the assumption of constant currencies for the completed financial year 2017.



















Expected development of Group turnover, underlying EBITA and adjustments



 



Expected development vs. PY



EUR million



2017



2018*



Turnover



18,535



around 3 % growth



Underlying EBITA



1,102



at least 10 % growth



Adjustments



76



approx. EUR 80 m cost


* Variance year-on-year assuming constant foreign exchange rates are applied to the result in the current and prior period and based on the current group structure; guidance relates to continuing operations



Turnover



We expect turnover to grow by around 3 % in financial year 2018 at constant currency, excluding cost inflation relating to currency movements. Further growth may result from passing on higher input costs to our customers.



Underlying EBITA



TUI Group"s underlying EBITA in financial year 2018 is expected to grow by at least 10 % at constant currency as we deliver our growth roadmap. Risks relate to the development of customer numbers against various social and political effects, which impact our customers" booking behaviour as well as demand for Group hotels and cruise ships.



See Business Model and strategy section from page 20 
See Risk Report from page 30



Adjustments



For financial year 2018, we expect purchase price allocations and net one-off costs of around EUR 80 m, to be carried as adjustments.



ROIC and Economic Value Added



Due to the enhanced operating result, we expect ROIC to improve slightly in financial year 2018; depending on the development of TUI Group"s capital costs, this is also expected to result in an increase in economic value added.



Development in the segments in 
financial year 2018



The expected development outlined below is based on current trading, our growth roadmap and the relative performance of our segments during financial year 2017. Future development depends on demand in our source markets and customer segments, input cost curves, as well as the potential impact of exogenous events beyond our control such as terrorism. Whilst these may influence the mix of segmental results compared with the outlook below, in our view, our balanced portfolio of markets and destinations still leave us well placed to deliver underlying EBITAgrowth of at least 10 % for TUI Group as a whole (at constant currency rates and based on the current Group structure).



Hotels & Resorts



Based on our expectations for the development of our hotel portfolio (including new hotels opening in the coming financial year and the annualisation of profits from hotels which opened in financial year 2017) as well as the continued overall strong performance of our existing hotel portfolio, we expect underlying EBITA growth of more than 10 % in financial year 2018.



Cruises



Based on the two planned cruise launches financial year 2018 (for TUI Cruises and Marella Cruises) and continued overall strong perform­ance of the existing fleet, we expect underlying EBITA growth of more than 10 % in financial year 2018.



Source Markets



We have strong market leading positions in our Source Markets, and expect a good portfolio result in financial year 2018 as a result of the combination of further top line (market driven) growth and operational efficiency. Based on these factors and current trading, we therefore expect the Source Markets to deliver a performance broadly in line with Group underlying EBITA guidance.



Expected development of financial position
















Expected development of Group financial position



 



Expected development vs. PY



EUR million



2017



2018



Net cash capex and investments



1,071.9



around EUR 1.2 bn



Net cash / net debt



583.0



slightly negative


Net capex and investments



In the light of investment decisions already taken and projects in the pipeline, we expect TUI Group"s net funding requirements to be around EUR 1.2 bn for financial year 2018. This includes expected down payments on aircraft orders and proceeds from the sale of fixed assets. Capex mainly relates to the launch of new production and booking systems for our Sales & Marketing, maintenance and expansion of our hotel portfolio and the acquisition of a cruise ship.



Net financial position



At the balance sheet date, the Group"s net cash amounted to EUR 583.0 m. Due to the planned increase in net investments, we expect TUI Group"s net debt to be slightly negative at financial year-end 2018.



Sustainable development



Climate protection and emissions



Greenhouse gas emissions and the impact of these emissions on climate change pose one of the major global challenges for the tourism sector. The goals we set ourselves in our sustainability strategy "Better Holidays, Better World", launched in September 2015, include operating Europe"s most carbon-efficient airline by 2020 and defending this top position. Specific carbon emissions (g CO2 / PKM) are to be reduced by 10 % by 2020. We also aim to reduce the carbon intensity of our global oper­ations by 10 % by 2020 (against the baseline of 2014).



Overall Executive Board assessment of 
TUI Group"s current situation and expected 
development



At the date of preparation of the Management Report (11 December 2017), we uphold our positive assessment of TUI Group"s economic situation and outlook for financial year 2018. With its finance profile, strong brand and services portfolio, TUI Group is well positioned in the market. In the first few weeks of the new financial year 2018, the overall business performance has matched expectations.



As against the prior year reference period, we expect TUI Group"s underlying operating result to grow by at least 10 % year-on-year on a constant currency basis, driven by improved operating performance in the segments.



In the light of our growth roadmap, we have updated our medium-term guidance, aiming to deliver at least 10 % underlying EBITA CAGR in the next three financial years to 2020. Our long-term target for TUI Group"s gross capex remains at 3 to 3.5 % of consolidated turnover.



Outlook for TUI AG



The future business performance of TUI AG is essentially subject to the same factors as those impacting TUI Group. Due to the business ties between TUI AG and its Group companies, the outlook, opportunities and risks presented for TUI Group largely reflect the expectations regarding TUI AG. The comments made for TUI Group therefore also apply to TUI AG.



Opportunity Report



TUI Group"s opportunity management follows the Group strategy for core business Tourism. Responsibility for systematically identifying and taking up opportunities rests with the operational management of the source markets and the TUI Hotels & Resorts and Cruises segments. Market scenarios and critical success factors for the individual sectors are analysed and assessed in the framework of the Group-wide planning and control process. The core task of the Group"s Executive Board is to secure profitable growth for TUI Group by optimising the shareholding portfolio and developing the Group structure over the long term.



Overall, TUI Group is well positioned to benefit from opportunities resulting from the main trends in its markets.



Opportunities from the development of the overall framework



Should the economy perform better than expected, TUI Group and its segments would benefit from the resulting increase in demand in the travel market. Moreover, changes in the competitive environment could create opportunities for TUI Group in individual markets.



Corporate strategy



We see opportunities for further organic growth in particular by expanding our hotel portfolio and cruise business. As market leader, we also intend to benefit in the long term from demographic change and the resulting expected increase in demand for high-quality travel at an attract­iveprice / performance ratio.



Operational opportunities



We intend to improve our competitive position further by offering unique product and further expanding controlled distribution in the source markets, in particular online distribution.



Business review



Why we do it - macroeconomic industry and market framework



Macroeconomic development






































Development of gross domestic product



Var. %



2017



2016



World



3.6



3.2



Eurozone



2.1



1.8



Germany



2.0



1.9



France



1.6



1.2



UK



1.7



1.8



US



2.2



1.5



Russia



1.8



- 0.2



Japan



1.5



1.0



China



6.8



6.7



India



6.7



7.1


Source: International Monetary Fund (IMF), World Economic Outlook, October 2017



In calendar year 2017, the global upswing in economic activity gathered strength. In its outlook (IMF, World Economic Outlook, October 2017), the International Monetary Fund projects global growth to rise to 3.6 % in 2017. In advanced economies, the growth pick-up was broad-based, with indicators suggesting a persistently positive baseline outlook. In the Eurozone, the recovery gained momentum: higher employment, growing order books and the positive business sentiment suggest that the momentum will remain intact.



Key exchange rates and commodity prices



TUI Group companies operate on a worldwide scale. This presents financial risks for TUI Group, arising from changes in exchange rates and commodity prices. The essential financial transaction risks from operations relate to euros and US dollars. They mainly result from foreign exchange items in the individual Group companies, for instance aircraft fuel and bunker oil invoices, ship handling costs or products and services sourced by hotels. The parity of sterling against the euro is of relevance for the translation of results generated in the UK market in TUI"s consolidated financial statements. Following the UK vote for Brexit, the currency fluctuations continued. They impacted the translation of results from our UK business.



The average exchange rate of sterling against the euro fell considerably in the course of the financial year under review but returned to 0.88 £ / EUR, i.e. roughly the level recorded at the beginning of the year, as at 30 September 2017. In financial year 2017, the average exchange rate of the US dollar against the euro declined by around 5.4 % from 1.12 $ / EUR to 1.18 $ / EUR. Changes in commodity prices above all affect TUI Group when procuring fuels such as aircraft fuel and bunker oil. The price of Brent oil stood at $ 57.54 per barrel as at 30 September 2017, up by around 13.1 % year-on-year.



In tourism, most risks relating to changes in exchange rates and price risks from fuel sourcing are hedged by derivatives. Information on hedging strategies and risk management as well as financial transactions and the scope of such transactions at the balance sheet date is provided in the sections Financial Position and Risk Report in the Management Report and the section Financial Instruments in the Notes to the consolidated financial statements.



Financial Position see from page 66, Risk Report see from page 30, Financial Instruments see Notes page 209



Market environment and competition in Tourism



Since the merger between TUI AG and TUI Travel PLC in December 2014, TUI Group has been the world"s leading tourism group. The development of the international leisure tourism market impacts all businesses in TUI Group.



Tourism remains stable growth sector



According to the United Nations World Tourism Organization (UNWTO), tourism comprises the activities of persons travelling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes. The key tourism indicators to measure market size are the number of international tourist arrivals, and international tourism receipts. With international tourism receipts amounting to $ 1,220 bn and international arrivals amounting to 1.24 bn in 2016, the tourism industry remains one of the most important sectors in the global economy, outpacing the growth of world trade in the past five years. Over the past six decades, tourism has experienced continued expansion and diversification to become one of the largest and fastest-­growing economic sectors in the world. International tourist arrivals worldwide are expected to increase by around 3 % a year between 2010 and 2030, reaching 1.8 bn per annum by 2030 (UNWTO Tourism Highlights 2017 Edition).


























Change of international tourist arrivals vs. prior year



Var. %



2017*



2016



World



+ 6.4



+ 3.9



Europe



+ 7.7



+ 2.1



Asia and the Pacific



+ 5.7



+ 8.6



Americas



+ 3.0



+ 3.6



Afrika



+ 7.6



+ 8.0



Middle East



+ 8.9



- 3.4


Source: UNWTO World Tourism Barometer, August 2017
* Period January till June



In the first half of calendar year 2017, the growth trend continued, with international tourist arrivals growing by 6.4 % during that period. This was the strongest H1 increase in seven years. Travel for holidays, recreation and other forms of leisure accounted for just over half of all international tourist arrivals (UNWTO, Tourism Highlights, 2017 Edition).



At plus 6.3 %, TUI Group customer numbers matched this growth trend in financial year 2017, with all source markets reporting growth.



Business performance in the source markets see page 61



Europe remained the largest and most mature tourism market in the world, accounting for 49.9 % of international tourist arrivals and 36.7 % of tourism receipts in 2016. Five European countries (France, Spain, Italy, the United Kingdom and Germany) figured in the top ten inter­national tourism destinations in 2016. Three of our main source markets - Germany, UK and France - were in the top five of all source markets worldwide measured by international tourism spending.



 



Germany continues to be the third largest source market in the world with international tourism expenditure of approximately $ 79.8 bn in 2016, after China ($ 261.1 bn) and the US ($ 123.6 bn). In terms of expenditure per capita, Germany ranks fourth globally, with approximately $ 946 spent by the average German tourist in 2016 (Source: UNWTO, Tourism Highlights, 2017 Edition). Key operators in the German tourism market are TUI Deutschland, Thomas Cook, DER Touristik, FTI and Aida Cruises (FVW, Dossier, Deutsche Veranstalter, December 2016).



The United Kingdom is the fourth largest source market in the world, with approximately $ 63.6 bn spent on tourism activities in 2016 and on average $ 970 spent per capita over the same period (source: UNWTO, Tourism Highlights, 2017 Edition). The British tourism market is characterised by a high degree of concentration around two key operators: TUI Group and Thomas Cook.



France was the fifth largest source market in 2016, with international tourism expenditure of approximately $ 40.5 bn (source: UNWTO, Tourism Highlights, 2017 Edition). Thanks to the recent buying of Transat France, TUI is now the leader on the French tourism market with its main tour operator brands: Club Marmara and Club Lookea on the French Club market, and Circuits Nouvelles Frontieres and Vacances Transat on the packaged tours market. This buying is to enable TUI France to achieve robust profitability. The French tourism market has been highly fragmented in the past but has undergone a slow consolidation in recent months. TUI France will continue to expand its market position and market shares, while growing TUI brand awareness among French people. In 2016, France remained the world"s top destination with 82.6 million arrivals, despite a decline in international tourist arrivals of 2.2 %.



Hotel market



Global hotel value sales reached EUR 470 bn at fixed exchange rate in 2016. Over the period 2016 - 2022, hotel value sales are expected to register a CAGR of 2.8 % at constant 2017 prices, according to Euromonitor International Travel 2018 edition. The hotel market is divided between business and leisure travel. A number of characteristics differentiate leisure travel hotels from business hotels, including longer average lengths of stay for guests in leisure hotels. Locations, amenities and service requirements also differ. From a demand perspective, the leisure hotel market in Europe is divided into several smaller submarkets which cater to the individual needs and demands of tourists. These submarkets include premium, comfort, budget, family / apartment, and club or resort-style hotels. Hotel companies may offer a variety of hotels for different submarkets, often defined by price range, star ratings, exclusivity, or available facilities.



Hotel operations can generally be divided into the following models: asset owners whose primary business is to own real estate assets; brand owners and operators who typically manage hotel assets themselves or enter into franchising arrangements with independent operators who, in turn, manage the hotel property assets; and independent operators combining the roles of asset owners, brand owners and operators by managing diverse assets under different brands, often through franchise agreements.



The upper end of the leisure hotel market is characterised by a high degree of sophistication and specialisation, with the assets managed by large international companies and investors. There are also many small, often family-run businesses, particularly in Europe, not quite so upscale and with fewer financial resources. Most family-owned and operated businesses are not branded. Given the variety of models for owning and operating leisure hotels and the fragmented competition landscape which, at least in Europe, is not dominated by large hotel chains, conditions differ greatly between locations.



Cruise market



The global cruise industry generated an estimated revenue of around $ 39.6 bn in 2016 (Cruise Market Watch website, www.cruisemarketwatch.com/market-share, September 2016). Overall, an estimated 24.7 million guests undertook an ocean cruise worldwide in calendar year 2016. For 2017, their number is expected to total 25.8 million (CLIA, Year in Review 2016, CLIA, Cruises Industry Outlook 2017). The North American market is by far the largest and most mature cruise market in the world, with a strong penetration rate of 3.6 % of the total population taking a cruise in 2016 (Cruise Industry Source Market Report, CLIA 2016).



The European cruise markets recorded approximately 6.7 million European passengers in 2016, with penetration rates varying significantly from country to country, but considerably lower overall (Mintel, Cruises - International, June 2016; CLIA Statistics & Markets, March 2017). In 2015, the global cruise market grew by around 2.4 %.



Germany, the United Kingdom & Ireland and France are among the five largest cruise markets in Europe (CLIA Statistics & Markets, March 2017). Germany is Europe"s largest cruise market, with 2.0 million passengers in 2016. Germany has thus witnessed average passenger growth of 8.3 % over the period from 2011 to 2015. At 2.5 % in 2016, its penetration rate was lower than in the United Kingdom & Ireland. The United Kingdom & Ireland is the second largest cruise market in Europe, with approximately 1.9 million cruise passengers in 2016. The market thus grew by 2.1 % on average over the period from 2011 to 2015. It shows the strongest penetration rate in Europe: in 2016, 3.0 % of the total British population took a cruise. (Mintel, Cruises - International, June 2016; Cruise Industry Source Market Report, CLIA 2016).



The European cruise market is divided into submarkets that cater to a variety of customers: budget, discovery / expedition, premium and luxury. Cruise operators utilise different cruise formats to target these submarkets and the specific demands of their customers. In addition to traditional formats, operators offer club ship cruises and also more contemporary-style cruises in the premium submarket. As a cruise ship is often perceived as a destination in itself, cruise companies, especially in the luxury and premium cruise submarkets, compete with other destinations such as leading hotels and resorts.



Brand



Strong TUI brand



Our brand with the "smile" - the smiling logo formed by the three letters of our brand name TUI - stands for a consistent customer experience, digital presence and competitive strength. In 2017, TUI and the previous local power brand Thomson in the UK were among the best-known travel brands in core European countries with a brand awareness rate of almost 90 %. The red "TUI smile" is a clear recognition feature and plays in the Champions League of international brands in almost all markets.



We are aiming to create one global branding and a consistent brand experience in order to further leverage the appeal and strength of our core brands and tap the associated growth potential. To achieve that goal, our core brand TUI is being rolled out in our European source markets to replace the big local tour operator brands. Following the successful rollout of the TUI brand in the Netherlands in 2016, the local brands in Belgium and the Nordics were replaced by the TUI brand in 2017, where TUI has also rapidly become one of the strongest travel brands in terms of brand awareness and preference. In financial year 2017, the TUI brand was also rolled out in France. Brand migration in the UK followed in October 2017.



In Germany, travel products have been offered under the TUI brand for more than 45 years. In a survey carried out in 2017, TUI was again rated as Germany"s most trusted travel brand (Source: Reader"s Digest Trusted Brands 2017).



Changes in the legal framework



In financial year 2017, there were no changes in the legal framework with material impacts on TUI Group"s business performance.



Group earnings



Comments on the consolidated income statement



Financial year 2017 brought a markedly positive development in the TUI Group"s earnings position. The operating result (underlying EBITA) of TUI Group"s continuing operations improved by 10.2 % to EUR 1,102.1 m in the period under review, or by 12.0 % year-on-year on a constant currency basis. This growth was driven in particular by the continued good performance in the segments Hotels & Resorts and Cruises.









































































Income Statement of the TUI Group for the period from 1 Oct 2016 to 30 Sep 2017



EUR million



2017



2016



Var. %



Turnover



18,535.0



17,153.9



+ 8.1



Cost of sales



16,535.5



15,247.4



+ 8.4



Gross profit



1,999.5



1,906.5



+ 4.9



Administrative expenses



1,255.8



1,216.9



+ 3.2



Other income



12.5



36.3



- 65.6



Other expenses



1.9



7.4



- 74.3



Financial income



229.3



58.5



+ 292.0



Financial expenses



156.2



345.9



- 54.8



Share of result of joint ventures and associates



252.3



187.2



+ 34.8



Earnings before income taxes



1,079.7



618.3



+ 74.6



Income taxes



168.8



153.4



+ 10.0



Result from continuing operations



910.9



464.9



+ 95.9



Result from discontinued operations



- 149.5



687.3



n. a.



Group profit for the year



761.4



1,152.2



- 33.9



Group profit for the year attributable to shareholders of TUI AG



644.8



1,037.4



- 37.8



Group profit for the year attributable to non-controlling interest



116.6



114.8



+ 1.6


Turnover and cost of sales





























































Turnover



EUR million



2017



2016
restated



Var. %



Hotels & Resorts



679.0



618.6



+ 9.8



Cruises



815.0



703.1



+ 15.9



Source Markets



16,143.2



14,997.2



+ 7.6



Northern Region



6,601.5



6,564.4



+ 0.6



Central Region



6,039.5



5,562.9



+ 8.6



Western Region



3,502.2



2,869.9



+ 22.0



Other Tourism



677.0



669.3



+ 1.2



Tourism



18,314.2



16,988.2



+ 7.8



All other segments



220.8



165.7



+ 33.3



TUI Group



18,535.0



17,153.9



+ 8.1



TUI Group at constant currency



19,156.5



17,153.9



+ 11.7



Discontinued operations



829.0



2,321.6



- 64.3



Total



19,364.0



19,475.5



- 0.6


In financial year 2017, turnover of TUI Group climbed by 8.1 % to EUR 18.5 bn. On a constant currency basis, turnover grew by 11.7 % on a year-on-year increase in customer numbers of 6.3 % in the source markets. Turnover is presented alongside the cost of sales, which was up 8.4 % in the period under review.



Gross profit



Gross profit, i.e. the difference between turnover and the cost of sales, increased by 4.9 % to around EUR 2.0 bn in financial year 2017.



Administrative expenses



Administrative expenses rose by EUR 38.9 m year-on-year to EUR 1,255.8 m.



Financial result



The financial result improved by EUR 360.5 m to EUR 73.1 m. The increase was essentially due to the profit generated in the financial year under review from the disposal of the remaining stake in Hapag-Lloyd AG.



Share of results of joint ventures and associates



The result from joint ventures and associates comprises the proportionate net profit for the year of the companies measured at equity and where appropriate impairments of goodwill for these companies. In the period under review, the at equity result totalled EUR 252.3 m. The significant increase of EUR 65.1 m partly resulted from the improvement in the 

operating performance of Riu hotels and a higher profit contribution by TUI Cruises.



Result from continuing operations



The result from continuing operations improved by EUR 446.0 m to EUR 910.9 m in financial year 2017.



Result from discontinued operation



The result from discontinued operation shows the after-tax result of Travelopia, classified as a discontinued operation, until it was sold. In the prior year, this item also included in particular the gain on disposal from the sale of Hotelbeds Group.



Group profit



Group profit decreased by EUR 390.8 m year-on-year to EUR 761.4 m in financial year 2017.



Share in Group profit attributable to TUI AG ­shareholders



The share in Group profit attributable to the TUI AG shareholders declined from EUR 1,037.4 m in the prior year to EUR 644.8 m in financial year 2017. On a sound operating performance, the decline is attributable to the gain on disposal from the sale of Hotelbeds Group included in the prior year"s result.



Non-controlling interests



Non-controlling interests in Group profit for the year totalled EUR 116.6 m. They mainly related to RIUSA II Group.



Earnings per share



The interest in Group profit for the year attributable to TUI AG shareholders after deduction of non-controlling interests totalled EUR 644.8 m (previous year EUR 1,037.4 m) in 2017. Basic earnings per share therefore amounted to EUR 1.10 (previous year EUR 1.78) in financial year 2017.



EBITA, underlying EBITA und underlying earnings per share



Key indicators used to manage the TUI Group are EBITA and underlying EBITA. We consider EBITA to be the most suitable performance indicator for explaining the development of the TUI Group"s operating performance. Our definition of EBITA is earnings before net interest result, income tax and impairment of goodwill excluding the result from the measurement of interest hedges.





















































Reconciliation to underlying EBITA



EUR million



2017



2016



Var. %



Earnings before income taxes



1,079.7



618.3



+ 74.6



plus: Profit on sale of financial investment in Container Shipping



- 172.4



-



n. a.



plus: Loss on measurement of financial investment in Container Shipping



-



100.3



n. a.



plus: Net Interest expense and expense from the measurement of interest hedges



119.2



179.5



- 33.6



EBITA



1,026.5



898.1



+ 14.3



Adjustments:



 



 



 



less: Gain on disposals



- 2.2



0.8



n. a.



plus: Restructuring expense



23.1



12.0



+ 92.5



plus: Expense from purchase price allocation



29.2



41.9



- 30.3



plus: Expense from other one-off items



25.5



47.7



- 46.5



Underlying EBITA



1,102.1



1,000.5



+ 10.2


Reported earnings (EBITA) of TUI Group rose by EUR 128.4 m to EUR 1,026.5 m due to a strong operating performance in financial year 2017.

























































EBITA



EUR million



2017



2016
restated



Var. %



Hotels & Resorts



353.7



301.5



+ 17.3



Cruises



255.6



190.9



+ 33.9



Source Markets



456.3



498.8



- 8.5



Northern Region



309.6



362.7



- 14.6



Central Region



67.3



64.0



+ 5.2



Western Region



79.4



72.1



+ 10.1



Other Tourism



15.7



- 2.9



n. a.



Tourism



1,081.3



988.3



+ 9.4



All other segments



- 54.8



- 90.2



+ 39.2



TUI Group



1,026.5



898.1



+ 14.3



Discontinued operations



- 22.1



14.7



n. a.



Total



1,004.4



912.8



+ 10.0


In order to explain and evaluate the operating performance of the segments, earnings adjusted for special one-off effects (underlying EBITA) are presented below. Underlying EBITA has been adjusted for gains on disposal of financial investments, restructuring expenses according to IAS 37, all effects from purchase price allocations, ancillary acquisition costs and conditional purchase price payments and other expenses for and income from one-off items.



One-off items carried here include adjustments for income and expense items that reflect amounts and frequencies of occurrence rendering an evaluation of the operating profitability of the segments and the Group more difficult or causing distortions. These items include in particular major restructuring and integration expenses not meeting the criteria of IAS 37, material expenses for litigation, gains and losses from the sale of aircraft and other material business transactions with a one-off character.



TUI Group"s underlying EBITA rose by EUR 101.6 m to EUR 1,102.1 m in financial year 2017.





























































Underlying EBITA



EUR million



2017



2016



Var. %



Hotels & Resorts



356.5



303.8



+ 17.3



Cruises



255.6



190.9



+ 33.9



Source Markets



526.5



554.3



- 5.0



Northern Region



345.8



383.1



- 9.7



Central Region



71.5



85.1



- 16.0



Western Region



109.2



86.1



+ 26.8



Other Tourism



13.4



7.9



+ 69.6



Tourism



1,152.0



1,056.9



+ 9.0



All other segments



- 49.9



- 56.4



+ 11.5



TUI Group



1,102.1



1,000.5



+ 10.2



TUI Group at constant currency



1,120.7



1,000.5



+ 12.0



Discontinued operations



- 1.2



92.9



n. a.



Total



1,100.9



1,093.4



+ 0.7


In financial year 2017, adjustments worth EUR 25.8 m were carried for income, compared with adjustments on underlying expenses amounting to EUR 72.2 m, without taking account of the expenses for purchase price allocations. They mainly related to the following items and circumstances:



Gains on disposal



In financial year 2017, gains on disposal worth EUR 2.2 m had to be adjusted for. They related in particular to disposals of subsidiaries.



Restructuring costs



In financial year 2017, restructuring costs of EUR 23.1 m had to be adjusted for. They included an amount of around EUR 24 m for the merger of TUI"s French tour operators following the acquisition of Transat. Adjustments also included expenses worth around EUR 4 m for the merger of the Nordic and UK airlines. Income resulted from the release of a restructuring provision no longer required in Central Region.



Expenses for purchase price allocations



In financial year 2017, expenses for purchase price allocations worth EUR 29.2 m were adjusted for; they related in particular to scheduled amort­isation of intangible assets from acquisitions made in previous years.



One-off items



Net expenses for one-off items of EUR 25.5 m included in particular an amount of EUR 18 m relating to IT projects in Northern Region and around EUR 8 m for the merger of the Nordic and UK airlines. Further expenses of EUR 17 m related to reorganisation schemes in the regions and destination agencies. An opposite effect resulted from the adjustment of EUR 13 m for the release of a provision at Corsair no longer required in the financial year under review.



Pro forma underlying earnings per share



The table below presents TUI Group"s pro forma earnings per share to provide a basis for comparison. The calculation is based on the issued share capital at the balance sheet date. It therefore adjusts for the impact of conversions of stock option plans during the year.



































Pro forma underlying earnings per share TUI Group



EUR million



2017



2016



EBITA (underlying)



1,102.1



1,000.5



less: Net interest expense



- 119.2



- 179.5



Underlying profit before tax



982.9



821.1



Income taxes (underlying)



196.6



205.3



Underlying Group profit



786.3



615.8



Minority interest



116.6



111.5



Underlying Group profit attributable to 
TUI shareholders of TUI AG



669.7



504.3



Number of shares (pro forma)No. million



587.0



587.0



Pro forma underlying earnings per share



1.14



0.86


 





















Reconciliation to EBITDA



EUR million



2017



2016



Var. %



EBITA



1,026.5



898.1



+ 14.3



Amortisation (+) / write-
backs (-) of other ­intangible assets and depreciation (+) /
write-backs (-) of property, plant and equipment and ­current assets



464.4



407.0



+ 14.1



EBITDA



1,490.9



1,305.1



+ 14.2


 



































































































EBITDA and underlying EBITDA



 



EBITDA



Underlying EBITDA



EUR million



2017



2016
restated



Var. %



2017



2016
restated



Var. %



Hotels & Resorts



484.5



396.5



+ 22.2



485.2



394.4



+ 23.0



Cruises



312.9



236.8



+ 32.1



312.9



236.8



+ 32.1



Source Markets



568.2



614.4



- 7.5



619.3



650.9



- 4.9



Northern Region



378.6



430.3



- 12.0



402.7



437.3



- 7.9



Central Region



87.6



86.3



+ 1.5



89.8



105.3



- 14.7



Western Region



102.0



97.9



+ 4.2



126.8



108.3



+ 17.1



Other Tourism



102.3



58.2



+ 75.8



100.0



69.0



+ 44.9



Tourism



1,467.9



1,306.0



+ 12.4



1,517.4



1,351.1



+ 12.3



All other segments



23.0



- 0.9



n. a.



24.3



28.5



- 14.7



TUI Group



1,490.9



1,305.1



+ 14.2



1,541.7



1,379.6



+ 11.7



Discontinued operations



- 22.1



85.6



n. a.



- 1.2



139.2



n. a.



Total



1,468.8



1,390.7



+ 5.6



1,540.5



1,518.8



+ 1.4


Segmental performance



Current and future trading in Tourism



In Tourism, travel products are booked on a seasonal basis with different lead times. The release of bookings for individual seasons takes place at different points in time, depending on the design of the booking and re­ser­vation systems in each source market. Moreover, load factor management ensures that the tour operator capacity available for bookings is seasonally adjusted to actual and expected demand.



At the end of financial year 2017, current trading by source market for Winter 2017 / 18 compared as follows with the previous year:






























































Current Trading*



 



Winter 2017 / 18



Var. %



Revenue



Total 
customers



Total 
ASP



Programme sold



Northern Region



+ 6



-



+ 6



+ 63



UK & I



+ 3



- 4



+ 8



+ 57



Memo: UK & I incl. Cruise



+ 7



- 3



+ 10



+ 59



Nordics



+ 10



+ 7



+ 3



+ 74



Central Region



+ 7



+ 8



- 1



+ 64



Germany



+ 9



+ 9



+ 1



+ 63



Western Region



+ 3



-



+ 3



+ 65



Benelux



+ 4



+ 2



+ 2



+ 65



Total Source Markets



+ 6



+ 3



+ 3



+ 63



Memo: Total Source Markets incl. UK Cruise



+ 7



+ 3



+ 3



+ 64


* These statistics are up to 3 December 2017, shown on a constant currency basis and relate to all customers whether risk or non-risk



For the 2018 Summer season, as usual for this point in the booking cycle, only the UK is more than 20 % booked. UK booked revenue (excluding Marella Cruises) is up 2 % and average selling prices up 4 % (November 2017).



Trading by the Hotels & Resorts segment largely mirrors customer volumes in the source markets, as a high proportion of the Group-owned hotel beds are taken up by TUI tour operators. In the Cruises segment, advance bookings were up year-on-year at the balance sheet date with sound demand levels, primarily due to continued fleet expansion and modernisation by TUI Cruises and Marella Cruises in the period under review.



Disclosures on current trading are regularly published on TUI"s website in the framework of TUI Group"s quarterly reporting.



See www.tuigroup.com/en-en/investors



Hotels & Resorts









































































Hotels & Resorts



EUR million



2017



2016 
restated



Var. %



Total turnover



1,366.2



1,278.4



+ 6.9



Turnover



679.0



618.6



+ 9.8



Underlying EBITA



356.5



303.8



+ 17.3



Underlying EBITA at constant currency



362.0



303.8



+ 19.2



Capacity hotels total 1, 4 in "000



39,163



37,306



+ 5.0



Riu



17,942



17,396



+ 3.1



Robinson



3,115



3,081



+ 1.1



Blue Diamond



2,859



2,275



+ 25.6



Occupancy rate hotels total 2 
in %, variance in % points



79



78



+ 1



Riu



90



90



-



Robinson



66



67



- 1



Blue Diamond



83



85



- 3



Average revenue per bed 
hotels total 3 in EUR



63



60



+ 5.5



Riu



64



60



+ 6.0



Robinson



91



90



+ 0.8



Blue Diamond



112



92



+ 22.5


Turnover includes fully consolidated companies, all other KPI"s incl. companies measured at equity



1 Group owned or leased hotel beds multiplied by opening days per year



2 Occupied beds divided by capacity



3 Arrangement revenue divided by occupied beds



4 Previous year"s KPIs restated



Hotels & Resorts delivered a significant increase in underlying EBITA this year, driven by new hotel openings and a strong underlying trading performance, with an increase in occupancy rate to 79 % and 6 % increase in average revenue per bed. Financial year 2017 also marks the fourth consecutive year of increasing ROIC for Hotels & Resorts, to 13.2 % (versus WACC 8.5 %). This demonstrates the attractiveness of our portfolio of hotel and club brands, the strength of our distribution capabilities, and our disciplined approach to investment.



  • Overall, the increase in Hotels & Resorts earnings was driven by strong performances in the Western Mediterranean and Caribbean, as well as an improvement in earnings in Turkey and North Africa where demand in general has been recovering. This includes the removal of travel restrictions for Russian customers on travel to Turkey, as well as improved Source Market demand for Egypt. The high level of hurricane activity in the Caribbean at the end of Financial year 2017 resulted in damage to some hotels. However, taking into account our insurance coverage, the hurricanes did not result in a significant impact on the Hotels & Resorts result.

  • The continued high occupancy rate demonstrates the strength of our portfolio of brands and destinations, as well as the success of the integrated model as a significant proportion of rooms are sold is via our Source Markets. This also provides a significant de-risk when introducing new hotels.

  • In line with our strategy of disciplined growth in own hotel content, ten new hotels were opened this year, bringing the total since the merger to 28. Hotels were opened in Jamaica, St Lucia ,Tenerife, Italy and Croatia by Riu, Blue Diamond and TUI Blue. In addition, two hotels in Germany and Austria were repositioned as TUI Blue.

  • Riu continues to deliver a very high occupancy rate of 90 %, with an increase in average revenue per bed of 6 %. Performance was particularly strong in Spain and Mexico, and the result also reflects the opening of the Riu Reggae in Jamaica in November 2016. Robinson delivered a 1 % increase in average revenue per bed and a stable earnings performance. Demand for Robinson clubs in Turkey (which comes mainly from our German customer base) continues to relatively subdued versus other destinations. Blue Diamond earnings increased as a result of hotel openings in the Caribbean, with a continued high level of occupancy despite these new openings.

Cruise





































































Cruises



EUR million



2017



2016 
restated



Var. %



Turnover1



815.0



703.1



+ 15.9



Underlying EBITA



255.6



190.9



+ 33.9



Underlying EBITA at constant currency



263.5



190.9



+ 38.0



Occupany 
in %, variance in % points



 



 



 



TUI Cruises



101.9



102.6



- 0.7



Marella Cruises4



101.7



100.6



+ 1.1



Hapag-Lloyd Cruises



76.7



76.8



-



Passenger days in "000



 



 



 



TUI Cruises



4,483



3,482



+ 28.7



Marella Cruises4



2,720



2,081



+ 30.7



Hapag-Lloyd Cruises



349



355



- 1.7



Average daily rates 2 in EUR



 



 



 



TUI Cruises



173



171



+ 1.2



Marella Cruises3, 4



131



121



+ 8.3



Hapag-Lloyd Cruises



594



579



+ 2.6


1 No turnover is carried for TUI Cruises as the joint venture is consolidated at equity



2 Per day and passenger



3 Inclusive of transfers, flights and hotels due to the integrated nature of Marella Cruises, in £.



4 Thomson Cruises until October 2017



  • Cruise delivered strong earnings growth as a result of new ship launches in Germany and UK, with continued high occupancy and average daily rates across the fleets. Overall, the segment delivered a strong ROIC performance of 19.9 % (versus WACC 5.25 %), reflecting our equity participation in TUI Cruises as well as excellent performances by our UK and Hapag-Lloyd Cruises subsidiaries.

  • TUI Cruises (our joint venture with Royal Caribbean for the German speaking market) delivered the first Winter of operations for Mein Schiff 5 and launched Mein Schiff 6 in June 2017. Fleet and average daily rate increased versus prior year, driven by the continued strength of demand for TUI Cruises" premium, all inclusive offering.

  • Marella Cruises (our UK brand, previously Thomson Cruises) de­livered the first Winter of operations for the Marella Discovery and launched Marella Discovery 2 in May. Fleet occupancy and average daily rate increased versus prior year, as we continue to deliver our modernisation programme and expansion in line with the UK cruise market.

  • Hapag-Lloyd Cruises (our luxury and expedition brand) delivered a strong performance and increase in earnings, with increased average daily rate and a good operational performance offsetting the lower number of operating days.

Source Markets









































Source Markets



EUR million



2017



2016 
restated



Var. %



Turnover



16,143.2



14,997.2



+ 7.6



Underlying EBITA



526.5



554.3



- 5.0



Underlying EBITA at constant currency



532.1



554.3



- 4.0



Net Promoter Score1
in %, variance in % points



50



49



+ 1



Customer satisfaction 
holiday overall 2



8.59



8.56



+ 0.03



Direct distribution3 
in %, variance in % points



73



72



+ 1



Online distribution4 
in %, variance in % points



46



43



+ 3



Customers in "000



20,184



18,986



+ 6.3


1 NPS is measured in customer satisfaction questionnaires completed post-holiday. It is based on the question "On a scale of 0 to 10 where 10 is extremely likely and 0 is not at all likely, how likely is it that you would recommend the brand to a friend, colleague or relative?" and is calculated by taking the percentage of promoters (9s and 10s) less the percentage of detractors (0s through 6s)



2 Customer satisfaction for holiday overall is measured in customer satisfaction questionnaires completed post-holiday, based on a customer rating on a scale of 0 to 10.



3 Share of sales via own channels (retails and online)



4 Share of online sales



Source Markets delivered a strong portfolio performance, thanks to their geographic diversity, market leading positions, popular range of holiday products and focus on efficiency. Having completed the TUI rebrand in all major markets, we have grown customer volumes and delivered higher levels of direct and online distribution, and will be able to market the brand more efficiently in the future. We also continue to leverage our market leading distribution capability to both maximise occupancy in TUI Group hotels and support strong relationships with third party hoteliers.

































Northern Region



EUR million



2017



2016 



Var. %



Turnover



6,601.5



6,564.4



+ 0.6



Underlying EBITA



345.8



383.1



- 9.7



Underlying EBITA at constant currency



351.1



383.1



- 8.4



Direct distribution1 
in %, variance in % points



92



92



-



Online distribution2 
in %, variance in % points



63



62



+ 1



Customers in "000



7,391



7,142



+ 3.5


1 Share of sales via own channels (retails and online)



2 Share of online sales



Northern Region comprises TUI"s sales and marketing subsidiaries in UK and Nordics and joint ventures in Canada and Russia. Overall, Northern Region delivered strong growth in turnover and customer volumes this year with continued high levels of direct and online distribution, despite a significant impact at the end of the financial year from repatriation and cancellation costs associated with the hurricanes in Florida and the Caribbean.



  • As expected, although UK demand for holidays abroad remains strong, margins across the package holiday market are normalising, particularly as a result of the weaker Pound Sterling. This is reflected to some extent in our financial year 2017 result. Nonetheless, our margins remain healthy and we are well positioned competitively. TUI is the clear market leader with a strong net promoter score of 55, high levels of direct (93 %) and online (59 %) distribution, and a highly integrated and efficient business model.

  • In Nordics, both turnover and earnings performance improved compared with prior year. This was driven by a particularly strong Summer, following the TUI rebrand and successful remix to destin­ations such as Spain, Cyprus, Bulgaria and Croatia, as demand for Turkey continued to be more subdued. With a new management team in place, Nordics" operations are becoming more efficient, having implemented the same yield management system as UK this year, as well as delivering overhead savings.

  • Earnings in Canada increased this year as a result of strong trading, including for Group hotels such as Blue Diamond and Riu. Earnings in Russia decreased slightly due to the non-repeat of prior year provision releases.































Central Region



EUR million



2017



2016 
restated



Var. %



Turnover



6,039.5



5,562.9



+ 8.6



Underlying EBITA



71.5



85.1



- 16.0



Underlying EBITA at constant currency



71.7



85.1



- 15.7



Direct distribution1 
in %, variance in % points



49



47



+ 2



Online distribution2 
in %, variance in % points



19



15



+ 4



Customers in "000



7,151



6,828



+ 4.7


1 Share of sales via own channels (retails and online)



2 Share of online sales



Central Region comprises TUI"s sales and marketing operations in Germany and Austria (operated as one market), Switzerland and ­Poland. Turnover for the segment increased by 9 % in financial year 2017, driven by higher volumes in all markets, and with an increase in direct and online distribution.



  • Germany and Austria delivered 2 % increase in customer volumes and further increase in market share, with a good performance and improvement in trading margin particularly in the second half of the year. Demand increased in particular for Greece, Spain, Egypt and long haul, which helped to offset the continued subdued demand for Turkey in the year.

  • As previously communicated this was offset by EUR 24 m impact from the sickness incident in TUI fly at the start of the year.

  • We remain focussed on growing the proportion of direct and online distribution in Germany, currently at 47 % and 18 % The increase in direct distribution, coupled with our ongoing cost savings programme, have also benefitted the result this year.

  • Switzerland and Poland both delivered a good performance this year, with an increase in customer volumes, turnover and earnings.

  • The Central Region result also includes an adverse variance to prior year of c. EUR 15 m following the Air Berlin insolvency, relating to receivables for aircraft and crew leased to Air Berlin in financial year 2017 on which the latter defaulted.































Western Region



EUR million



2017



2016 



Var. %



Turnover



3,502.2



2,869.9



+ 22.0



Underlying EBITA



109.2



86.1



+ 26.8



Underlying EBITA at constant currency



109.3



86.1



+ 26.9



Direct distribution1 
in %, variance in % points



71



70



+ 1



Online distribution2 
in %, variance in % points



54



52



+ 2



Customers in "000



5,642



5,016



+ 12.5


1 Share of sales via own channels (retails and online)



2 Share of online sales



Western Region comprises TUI"s sales and marketing operations in Benelux and France. Turnover for the segment increased by 22.0 % in financial year 2017, driven by the acquisition of Transat"s French tour operating business at the start of the financial year, as well as higher volumes in Benelux. Direct and online distribution also increased, in part aided by the TUI rebrand in all markets.



  • Following the terrorist incident at Brussels Airport in 2016, Benelux delivered a strong trading performance, particularly in the second half. Having completed the TUI rebrand in Netherlands in 2016, the Belgium rebrand was completed in 2017. In addition, the airline operational issues experienced in Netherlands in the first half were dealt with effectively ahead of the Summer, resulting in an improved performance.

  • In France, the integration of Transat"s operations is on track. Disappointingly, however, the French result overall has not improved compared with prior year, mainly as a result of competitive pressures in late Summer trading. Nonetheless, we anticipate that the syn­ergies from the Transat deal will be delivered in the next few years, in line with our previously announced plans.

Other Tourism





















Other Tourism



EUR million



2017



2016 
restated



Var. %



Turnover



677.0



669.3



+ 1.2



Underlying EBITA



13.4



7.9



+ 69.6



Underlying EBITA at constant currency



17.8



7.9



+ 125.3


Other Tourism includes the turnover and profits of our Destination Services business (which looks after TUI customers in resort), result for the French scheduled airline Corsair, as well as the costs of central functions supporting the Tourism businesses.



  • Destination Services" turnover and earnings increased in the year, due to good underlying trading and the final delivery of merger synergies in the year. As the main contact in resort, Destination Services are a key part of holiday experience for our Source Market customers, and continue to improve their service and offering as a result of our IT and CRM initiatives.

All Other Segments





















All Other Segments



EUR million



2017



2016 
restated



Var. %



Turnover



220.8



165.7



+ 33.3



Underlying EBITA



- 49.9



- 56.4



+ 11.5



Underlying EBITA at constant currency



- 54.5



- 56.4



+ 3.4


  • This segment comprises the business operations for new markets and in particular the central corporate functions and interim holdings of TUI Group and the Group"s real estate companies.

  • The reduction in cost in the year is driven by the final delivery of corporate streamlining merger synergies.

Net assets

























































Development of the Group"s asset structure



EUR million



30 Sep 2017



30 Sep 2016



Var. %



Fixed assets



9,067.0



8,345.0



+ 8.7



Non-current receivables



800.6



786.8



+ 1.8



Non-current assets



9,867.6



9,131.8



+ 8.1



Inventories



110.2



105.2



+ 4.8



Current receivables



1,682.0



2,218.2



- 24.2



Cash and cash equivalents



2,516.1



2,072.9



+ 21.4



Assets held for sale



9.6



929.8



- 99.0



Current assets



4,317.9



5,326.1



- 18.9



Assets



14,185.5



14,457.9



- 1.9



Equity



3,533.7



3,248.2



+ 8.8



Liabilities



10,651.8



11,209.7



- 5.0



Equity and liabilities



14,185.5



14,457.9



- 1.9


The Group"s balance sheet total decreased by 1.9 % as against 30 September 2016 to EUR 14.2 bn.



Vertical structural indicators



Non-current assets accounted for 69.6 % of total assets, compared with 63.2 % in the previous year. The capitalisation ratio (ratio of fixed assets to total assets) increased from 57.7 % to 63.9 %.



Current assets accounted for 30.4 % of total assets, compared with 36.8 % in the previous year. The Group"s cash and cash equivalents increased by EUR 443.2 m year-on-year to EUR 2,516.1 m. They thus accounted for 17.7 % of total assets, as against 14.3 % in the previous year.



Horizontal structural indicators



At the balance sheet date, the ratio of equity to non-current assets was 35.8 %, as against 35.6 % in the previous year. The ratio of equity to fixed assets was 39.0 % (previous year 38.9 %). The ratio of equity plus non-current financial liabilities to fixed assets was 58.4 %, compared with 56.9 % in the previous year.

















































Structure of the Group"s non-current assets



EUR million



30 Sep 2017



30 Sep 2016



Var. %



Goodwill



2,889.5



2,853.5



+ 1.3



Other intangible assets



548.1



545.8



+ 0.4



Property, plant and equipment



4,253.7



3,714.5



+ 14.5



Companies measured at equity



1,306.2



1,180.8



+ 10.6



Financial assets available 
for sale



69.5



50.4



+ 37.9



Fixed assets



9,067.0



8,345.0



+ 8.7



Receivables and assets



476.9



442.1



+ 7.9



Deferred tax claims



323.7



344.7



- 6.1



Non-current receivables



800.6



786.8



+ 1.8



Non-current assets



9,867.6



9,131.8



+ 8.1


Development of the Group"s non-current assets



Goodwill



Goodwill rose by EUR 36.0 m to EUR 2,889.5 m. The increase in the carrying amount is essentially due to the acquisition of Transat"s French tour operating business. An opposite effect was driven by the translation of goodwill not managed in the TUI Group"s functional currency into euros. In the period under review, no adjustments were required as a result of impairment tests.



Property, plant and equipment



Property, plant and equipment increased to EUR 4,253.7 m in the period under review, primarily driven by the acquisition of the cruise ship Marella Discovery 2, investments in hotel facilities, down payments on aircraft orders and the delivery of two aircraft. Property, plant and equipment also comprised leased assets in which Group companies held economic ownership. At the balance sheet date, these finance leases had a carrying amount of EUR 1,158.1 m, down 5.8 % year-on-year.





































Development of property, plant and equipment



EUR million



30 Sep 2017



30 Sep 2016



Var. %



Hotels incl. land



1,040.8



978.9



+ 6.3



Other buildings and land



165.1



155.4



+ 6.2



Aircraft



1,207.2



1,202.0



+ 0.4



Cruise ships



860.1



674.3



+ 27.6



Other plant, operating and ­office quipment



361.2



335.5



+ 7.7



Assets under construction, payments on accounts



619.3



368.4



+ 68.1



Total



4,253.7



3,714.5



+ 14.5


Companies measured at equity



Thirteen associated companies and 28 joint ventures were measured at equity. At EUR 1,306.2 m, their value increased by 10.6 % year-on-year as at the balance sheet date.









































Structure of the Group"s current assets



EUR million



30 Sep 2017



30 Sep 2016



Var. %



Inventories



110.2



105.2



+ 4.8



Financial assets available 
for sale



-



265.8



n. a.



Trade accounts receivable 
and other assets*



1,583.3



1,864.7



- 15.1



Current tax assets



98.7



87.7



+ 12.5



Current receivables



1,682.0



2,218.2



- 24.2



Cash and cash equivalents



2,516.1



2,072.9



+ 21.4



Assets held for sale



9.6



929.8



- 99.0



Current assets



4,317.9



5,326.1



- 18.9


* Incl. receivables from derivative financial instruments



Development of the Group"s current assets



Financial assets available for sale



As at 30 September 2016, the financial assets available for sale comprised the remaining interests in Hapag-Lloyd AG. In the financial year under review, TUI AG sold its stake in Hapag-Lloyd AG at a purchase price less costs of disposal of EUR 406.4 m. The resulting profit of EUR 172.4 m is carried under Financial income.



Current receivables



Current receivables comprise trade accounts receivable and other receivables, current income tax assets and claims from derivative financial instruments. At EUR 1,682.0 m, current receivables decreased by 24.2 % year-on-year.



Cash and cash equivalents



At EUR 2,516.1 m, cash and cash equivalents increased by 21.4 % year-on-year.



Assets held for sale



Assets held for sale decreased by EUR 920.2 m to EUR 9.6 m. The decline is primarily attributable to the disposal of Travelopia.



Unrecognised assets



In the course of their business operations, Group companies used assets of which they were not the economic owner according to the IASB rules. Most of these assets were aircraft, hotel complexes or ships for which operating leases, i. e. rental, lease or charter agreements, were concluded under the terms and conditions customary in the sector.





































Operating rental, lease and charter contracts



EUR million



30 Sep 2017



30 Sep 2016



Var. %



Aircraft



1,461.1



1,886.3



- 22.5



Hotel complexes



728.4



731.9



- 0.5



Travel agencies



217.1



229.1



- 5.2



Administrative buildings



233.8



271.2



- 13.8



Ships, Yachts and motor boats



29.2



204.6



- 85.7



Other



107.8



114.3



- 5.7



Total



2,777.4



3,437.4



- 19.2


Further explanations as well as the structure of the remaining terms of the financial liabilities from operating rental, lease and charter agreements are provided in the section Other financial liabilities in the Notes to the consolidated financial statements.



Information on other intangible, non-recognised assets in terms of brands, customer and supplier relationships and organisational and process benefits is provided in the section on TUI Group Corporate Profile; relationships with investors and capital markets are outlined in the section TUI Share.



TUI Group Corporate Profile see page 20; TUI Share from page 91



Financial position of the Group



Principles and goals of financial management



Principles



TUI Group"s financial management is centrally operated by TUI AG, which acts as the Group"s internal bank. Financial management covers all Group companies in which TUI AG directly or indirectly holds an interest of more than 50 %. It is based on policies covering all cash flow-oriented aspects of the Group"s business activities. In the framework of a cross-­national division of tasks within the organisation, TUI AG has outsourced some of its financial activities to First Choice Holidays Finance Ltd, a British Group company. However, these financial activities are carried out on a coordinated and centralised basis.



Goals



TUI"s financial management goals include ensuring sufficient liquidity for TUI AG and its subsidiaries and limiting financial risks from fluctuations in currencies, commodity prices and interest rates.



Liquidity safeguards



The Group"s liquidity safeguards consist of two components:



  • In the course of the annual Group planning process, TUI draws up a multi-annual finance budget, from which long-term financing and refinancing requirements are derived. This information and financial market observation to identify refinancing opportunities create a basis for decision-making, enabling appropriate financing instruments for the long-term funding of the Company to be adopted at an early stage.

  • TUI uses syndicated credit facilities and bilateral bank loans as well as its liquid funds to secure sufficient short-term cash reserves. Through intra-Group cash pooling, the cash surpluses of individual Group companies are used to finance the cash requirements of other Group companies. Planning of bank transactions is based on a monthly rolling liquidity planning system.

Limiting financial risks



The Group companies operate on a worldwide scale. This gives rise to financial risks for the TUI Group, mainly from changes in exchange rates, commodity prices and interest rates.



The key operating financial transaction risks relate to the euro, US dollar and pound sterling and changing fuel prices. They mainly result from cost items in foreign currencies held by individual Group companies, e. g. hotel sourcing, aircraft fuel and bunker oil invoices or ship handling costs.



The Group has entered into derivative hedges in various foreign currencies in order to limit its exposure to risks from changes in exchange rates for the hedged items. Changes in commodity prices affect the TUI Group, in particular in procuring fuels such as aircraft fuel and bunker oil. These price risks related to fuel procurement are largely hedged with the aid of derivative instruments. Where price increases can be passed on to customers due to contractual agreements, this is also reflected in our hedging behaviour. In order to control risks related to changes in interest rates arising on liquidity procurement in the international money and capital markets and investments of liquid funds, the Group uses derivative interest hedges on a case-by-case basis as part of its interest management system.



The use of derivative hedges is based on underlying transactions; the derivatives are not used for speculation purposes.



More detailed information on hedging strategies and risk management as well as financial transactions and the scope of such transactions at the balance sheet date is provided in the Risk Report and the section Financial instruments in the Notes to the consolidated financial statements.



See from page 30 and from page 209



Capital structure

















































































Capital structure of the Group



EUR million



30 Sep 2017



30 Sep 2016



Var. %



Non-current assets



9,867.6



9,131.8



+ 8.1



Current assets



4,317.9



5,326.1



- 18.9



Assets



14,185.5



14,457.9



- 1.9



Subscribed capital



1,501.6



1,500.7



+ 0.1



Reserves including net profit available for distribution



1,438.1



1,174.4



+ 22.5



Non-controlling interest



594.0



573.1



+ 3.6



Equity



3,533.7



3,248.2



+ 8.8



Non-current financial liabilities



1,896.1



2,213.3



- 14.3



Current provisions



382.6



415.4



- 7.9



Provisions



2,278.7



2,628.7



- 13.3



Non-current liabilities



1,761.2



1,503.4



+ 17.1



Current financial liabilities



171.9



537.7



- 68.0



Financial liabilities



1,933.1



2,041.1



- 5.3



Other non-current financial ­liabilities



459.8



272.7



+ 68.6



Other current financial ­liabilities



5,980.2



5,794.9



+ 3.2



Other financial liabilities



6,440.0



6,067.6



+ 6.1



Debt related to assets 
held for sale



-



472.3



n. a.



Liabilities



14,185.5



14,457.9



- 1.9


 

































Capital ratios



EUR million



30 Sep 2017



30 Sep 2016



Var. %



Non-current capital



7,650.8



7,237.6



+ 5.7



Non-current capital in relation to balance sheet total%



53.9



50.1



+ 3.8*



Equity ratio%



24.9



22.5



+ 2.4*



Equity and non-current ­financial liabilities



5,294.9



4,751.6



+ 11.4



Equity and non-current ­financial liabilities in relation 
to balance sheet total%



37.3



32.9



+ 4.4*



Gearing%



17.2



41.9



- 24.7*


* Percentage points



Overall, non-current capital decreased by 5.7 % to EUR 7,650.8 m. As a proportion of the balance sheet total, it amounted to 53.9 % (previous year 50.1 %).



The equity ratio was 24.9 % (previous year 22.5 %). Equity and non-­current financial liabilities accounted for 37.3 % (previous year 32.9 %) of the balance sheet total at the reporting date.



The gearing, i.e. the ratio of average net debt to average equity, moved to 17.2 %, down from the previous year (41.9 %).



Equity





























Composition of equity



EUR million



30 Sep 2017



30 Sep 2016



Var. %



Subscribed capital



1,501.6



1,500.7



+ 0.1



Capital reserves



4,195.0



4,192.2



+ 0.1



Revenue reserves



- 2,756.9



- 3,017.8



+ 8.6



Non-controlling interest



594.0



573.1



+ 3.6



Equity



3,533.7



3,248.2



+ 8.8


Subscribed capital and the capital reserves rose slightly year-on-year. The increase of 0.1 % each was driven by the issue of employee shares. Revenue reserves rose by EUR 260.9 m to EUR - 2,756.9 m. Non-controlling interests accounted for EUR 594.0 m of equity.



Provisions



Provisions mainly comprise provisions for pension obligations and provisions for typical operating risks classified as current or non-current, depending on expected occurrence. At the balance sheet date, they accounted for a total of EUR 2,278.7 m, up by EUR 350.0 m or 13.3 % year-on-year.



Financial liabilities





























Composition of liabilities



EUR million



30 Sep 2017



30 Sep 2016



Var. %



Bonds



295.8



306.5



- 3.5



Liabilites to banks



381.3



410.8



- 7.2



Liabilites from finance leases



1,226.5



1,231.7



- 0.4



Other financial liabilities



29.5



92.1



- 68.0



Financial liabilities



1,933.1



2,041.1



- 5.3


Structural changes in financial liabilities



The Group"s financial liabilities decreased by a total of EUR 108.0 m to EUR 1,933.1 m. There were no significant changes in the structure of liabilities.



Overview of TUI"s listed bonds



The tables below list the maturities, nominal volumes and annual interest coupons of listed bonds.



On 26 October 2016, TUI AG issued bonds with a nominal value of EUR 300.0 m with a 5-year period to maturity. On 18 November 2016, the proceeds from this bond issuance were used to repay the five-year bond issued in September 2014 with a nominal value of EUR 300.0 m.

















Listed bonds



Capital measures



Issuance



Maturity



Amount 
initial
EUR million



Amount 
outstanding
EUR million



Interest rate
% p. a.



Senior Notes 2016 / 21



October 2016



October 2021



300.0



300.0



2.125


Bank loans and other liabilities from finance leases



Apart from the bonds worth EUR 300.0 m, used for general corporate finan­cing, the Hotels & Resorts and Cruises segments, in particular, took out separate bank loans, primarily in order to finance investments by these companies. Most liabilities from finance lease contracts are attributable to aircraft as well as one cruise ship.



More detailed information, in particular on the remaining terms, is provided under Financial liabilities in the Notes to the consolidated financial statements.



See section on Financial liabilities in the Notes, page 202



Other financial liabilities



Other liabilities totalled EUR 6,440.0 m, up by EUR 372.4 m or 6.1 % year-on-year.



Off-balance sheet financial instruments and key credit facilities



Operating Leases



The development of operating rental, leasing and charter contracts is presented in the section Net assets in the Management Report.



See page 65



More detailed explanations and information on the structure of the remaining terms of the associated financial liabilities are provided in the section Other financial liabilities in the Notes to the consolidated financial statements. There were no contingent liabilities related to special-­purpose vehicles.



Syndicated credit facilities of TUI AG



TUI AG signed a syndicated credit facility worth EUR 1.75 bn in September 2014. This syndicated credit facility is available for general corpor­ate financing purposes (in particular in the winter months). It carries a floating interest rate which depends on the short-term interest rate level (EURIBOR or LIBOR) and TUI"s credit rating plus a margin. The bond was to mature in December 2020, but in the financial year under review, its maturity was extended ahead of the due date to July 2022. At the balance sheet date, an amount of EUR 115.9 m from this credit facility had been taken up in the form of bank guarantees.



Bilateral guarantee facilities of TUI AG with ­insurance companies and banks



TUI AG has concluded several bilateral guarantee facilities with various insurance companies with a total volume of £ 92.5 m and EUR 130.0 m. These guarantee facilities are required in the framework of the delivery of tourism services in order to ensure that Group companies are able to meet, in particular, the requirements of European oversight and regulatory authorities on the provision of guarantees and warranties. The guarantees granted usually have a term of 12 to 18 months. They give rise to a commission in the form of a fixed percentage of the maximum guarantee amount. At the balance sheet date, an amount of £ 32.9 m and EUR 50.0 m from these guarantee facilities had been used.



TUI AG also concluded bilateral guarantee facilities with a total volume of EUR 45.0 m with banks to provide bank guarantees in the framework of ordinary business operations. Some of the guarantees have a term of several years. The guarantees granted give rise to a commission in the form of a fixed percentage of the maximum guarantee amount. At the balance sheet date, an amount of EUR 15.5 m from these guarantee facilities had been used.



Commitments from finance leases



The EUR 300.0 m bond from October 2016 and the credit and guarantee facilities of TUI AG contain a number of obligations.



TUI AG has a duty to comply with certain financial covenants (as defined in the respective contracts) from its syndicated credit facility worth EUR 1.75 bn and a number of bilateral guarantee lines. These require (a) compliance with an EBITDAR-to-net interest expense ratio measuring TUI Group"s relative charge from the interest result and the lease and rental expenses; and (b) compliance with a net debt-to-EBITDA ratio, calculating TUI Group"s relative charge from financial liabilities. The EBITDAR-to-net interest expense ratio must have a coverage multiple of at least 1.5; net debt must not exceed 3.0 times EBITDA. The financial covenants are determined every six months. They restrict, inter alia, TUI"s scope for encumbering or selling assets, acquiring other companies or shareholdings, or effecting mergers.



The bond worth EUR 300.0 m from October 2016 and the credit and guarantee facilities of TUI AG also contain additional contractual clauses typical of financing instruments of this type. Non-compliance with these obligations awards the lenders the right to call in the facilities or terminate the financing schemes for immediate repayment.



Ratings by Standard & Poor"s und Moody"s





























TUI AG ratings



 



2012



2013



2014



2015



2016



2017



Outlook



Standard & Poor"s



B -



B



B+



BB-



BB-



BB



stable



Moody"s



B3



B3



B2



Ba3



Ba2



Ba2



stable


In the light of improved metrics and a resilient business profile, Standard & Poor"s upgraded the corporate rating from "BB-" to "BB" in February 2017.



TUI AG"s bonds worth EUR 300.0 m from October 2016 are assigned a "BB" rating by Standard & Poor"s and a "Ba2" rating by Moody"s. TUI AG"s syndicated credit facility worth EUR 1.75 bn is assigned a "BB" rating by Standard & Poor"s.



Financial stability targets



TUI considers a stable credit rating to be a prerequisite for the further development of the business. In response to the structural improvements resulting from the merger between TUI AG and TUI Travel and the operating performance observed over the past few years and the strengthening of the business model despite a challenging environment, Standard & Poor"s lifted their TUI ratings. We are seeking further improvements in the rating so as to ensure better access to the debt capital markets even in difficult macroeconomic situations, apart from achieving better financing terms and conditions. The financial stability ratios we have defined are leverage ratio and coverage ratio, based on the following basic definitions:



Leverage ratio = (gross financial liabilities + discounted value of financial commitments from lease, rental and leasing agreements + pension provisions and similar obligations) / (reported EBITDA + long-term leasing and rental expenses)



Coverage ratio = (reported EBITDA + long-term leasing and rental expenses) / (net interest expense + of long-term leasing and rental expenses)



These basic definitions are subject to specific adjustments in order to reflect current circumstances. For the completed financial year, the ­leverage ratio was 2.5(x), while the coverage ratio was 6.1(x). We aim to achieve a leverage ratio 3.00(x) to 2.25(x) and a coverage ratio 5.75(x) to 6.75(x) for financial year 2018.



Interest and financing environment



In the period under review, short-term interest rates remained at an extremely low level compared with historical rates. In some currency areas, the interest rate was even negative, with corresponding impacts on returns from money market investments but also on reference interest rates for floating-rate debt.



Quoted credit margins (CDS levels) for corporates in the sub-investment trade area remained almost flat year-on-year. On overall weak demand for CDS titles, quotations were on a very low level for TUI AG. Refinancing options were available against the backdrop of the receptive capital market environment, and TUI AG took advantage of this in October 2016 by issuing bonds worth EUR 300.0 m.



In the period under review, TUI also took advantage of the sound condition of the syndicated credit market in order to extend the maturity of TUI AG"s syndicated credit facility worth EUR 1.75 bn to July 2022 ahead of the due date.



In addition to the bond issue of EUR 300.0 m refinancings of aircrafts in the completed financial year included one new Boeing B787-9 aircraft by means of finance lease based on a sale-and-lease-back agreement and one used Boeing B737-800 aircraft with a bank loan.



Liquidity analysis



Liquidity reserve



In the completed financial year, the TUI Group"s solvency was secured at all times by means of cash inflows from operating activities, liquid funds, and bilateral and syndicated credit agreements with banks.



At the balance sheet date, TUI AG, the parent company of TUI Group, held cash and cash equivalents worth EUR 1,039.0 m.



Restrictions of the transfer of liquid funds



At the balance sheet date, there were restrictions worth around EUR 0.3 bn on the transfer of liquid funds within the Group that might significantly impact the Group"s liquidity, such as restrictions on capital movements and restrictions due to credit agreements concluded.



Change of control



Significant agreements taking effect in the event of a change of control due to a takeover bid are outlined in the chapter on Information required under takeover law.



See chapter Information required under takeover law



Cash flow statement




















Summary cash flow statement



EUR million



2017



2016



Net cash inflow from operating activities



+ 1,583.1



+ 1,034.7



Net cash out- / inflow from investing activities



- 687.7



+ 239.0



Net cash outflow from financing activities



- 733.8



- 662.1



Change in cash and cash equivalents with cash effects



+ 161.6



+ 611.6


The cash flow statement shows the flow of cash and cash equivalents with cash inflows and outflows presented separately for operating, investing and financing activities. The effects of changes in the group of consolidated companies are eliminated.



Net cash inflow from operating activities



In the financial year under review, the cash inflow from operating activities amounted to EUR 1,583.1 m (previous year EUR 1,034.7 m). The year-on-year increase was mainly driven by the positive operating performance and improvements in the working capital as well as the one-off payment to pension funds in the UK effected in the prior year.



Net cash outflow/inflow from investing activities



In the financial year under review, the cash outflow from investing activities including the payments received for the sale of Travelopia Group and the remaining shares in Hapag-Lloyd AG totalled EUR 687.7 m (previous year cash inflow of EUR 239.0 m). The cash outflow for capital expenditure related to property, plant and equipment and financial investments amounted to EUR 1,171.6 m. The cash inflow from the sale of the stake in Hapag-Lloyd AG amounted to EUR 406.4 m. The cash outflow for capital expenditure related to property, plant and equipment and intangible assets and the cash inflow for corresponding sales do not match the additions and disposals shown in the development of fixed assets, as these also include the non-cash investments and disposals.



Net cash outflow from financing activities



In the period under review, the cash outflow from financing activities increased by EUR 71.7 m year-on-year to EUR 733.8 m.



In October 2016, TUI AG recorded a cash inflow worth EUR 294.9 m from the issue of bonds. Other TUI Group companies took out financial liabilities worth EUR 34.9 m. In the completed financial year, a cash outflow of EUR 306.8 m was recorded for the redemption of a bond originally maturing on 1 October 2019, cancelled by TUI AG. Further material cash outflows resulted from the redemption of financing lease obligations (EUR 97.8 m) and other financial liabilities (EUR 108.8 m) as well as interest payments (74.8 m) and dividend payments to TUI AG shareholders (368.2 m) and minority shareholders (EUR 88.6 m).























Change in cash and cash equivalents



EUR million



2017



2016



Cash and cash equivalents at the 
beginning of period



+ 2,403.6



+ 1,682.2



Changes due to changes in exchange rates



- 49.1



+ 105.8



Change in cash and cash equivalents due 
to changes in the group of consolidated ­companies



-



+ 4.0



Cash changes



+ 161.6



+ 611.6



Cash and cash equivalents at the end 
of period



+ 2,516.1



+ 2,403.6


Cash and cash equivalents comprise all liquid funds, i.e. cash in hand, bank balances and cheques.



The detailed cash flow statement and additional explanations are provided in the consolidated financial statements and in the section Notes to the cash flow statement in the Notes to the consolidated financial statements.



See page 140 and 223



Analysis of investments



The development of fixed assets, including property, plant and equipment, intangible assets and shareholdings and other investments is presented in the section on Net assets in the Management Report. Additional explanatory information is provided in the Notes to the consolidated financial statements.



Additions to property, plant and equipment



The table below lists the cash investments in intangible assets and property, plant and equipment. This indicator does not include financing processes such as the taking out of loans and finance leases.
















































Net capex and investments



EUR million



2017



2016



Var. %



Cash gross capex



 



 



 



Hotels & Resorts



223.0



262.3



- 15.0



Cruises



281.4



45.6



+ 517.1



Source Markets



111.8



93.7



+ 19.3



Northern Region



58.5



51.5



+ 13.6



Central Region



22.3



20.6



+ 8.3



Western Region



31.0



21.6



+ 43.5



Other Tourism



115.2



101.0



+ 14.1



Tourism



731.4



502.6



+ 45.5



All other segments



41.2



20.8