Mainstream is the largest Sector in terms of size, underlying operating profit and employee numbers. It services over 25m customers each year and comprises a number of the leading tour operators across Europe operating a fleet of 155 aircraft and circa 3,500 retail shops. The Mainstream Sector is divided into three divisions - Northern Region, Central Europe and Western Europe.
The Mainstream Sector reported an underlying operating profit of £277.4m in 2008, an improvement of £132.4m (2007: £145.0m).
| Mainstream | 2008 | 2007 | Change % |
| Customers (‘000) | |||
| Northern Region | 8,570 | 9,075 | -6% |
| Central Europe | 11,232 | 11,518 | -2% |
| Western Europe | 5,745 | 5,635 | +2% |
| Total | 25,547 | 26,228 | -3% |
| y-o-y variation | |||
| Revenue per customer | Total | ||
| Northern Region | +7% | ||
| Central Europe | +13% | ||
| Western Europe | +11% | ||
| Total | +10% | ||
| Underlying operating profit (£m) | |||
| Northern Region | 177.7 | 96.1 | +85% |
| Central Europe | 62.4 | 41.5 | +50% |
| Western Europe | 37.3 | 7.4 | +404% |
| Total | 277.4 | 145.0 | +91% |
| Underlying operating margin % | |||
| Northern Region | 4.1% | 2.2% | +190bps |
| Central Europe | 1.3% | 1.0% | +30bps |
| Western Europe | 1.4% | 0.3% | +110bps |
| Total | 2.3% | 1.3% | +100bps |
| Controlled distribution % | |||
| Northern Region1 | 73% | 72% | +1ppt |
| Central Europe1 | 38% | 37% | +1ppt |
| Western Europe | 49% | 47% | +2ppts |
| Total | 53% | 52% | +1ppt |
1 Excludes scheduled flying
The Northern Region comprises the distribution and tour operating businesses in the source markets of the UK & Ireland, the Nordic countries and Canada. Brands include Fritidsresor, the Nordic tour operator and retailer, First Choice and Thomson, the leading UK high street brands and Signature Vacations, the tour operator in Canada.
The Northern Region achieved an 85% improvement in underlying operating profit to £177.7m (2007: £96.1m). As outlined in the table below, the primary drivers behind the improvement in performance were margin enhancements in the UK and the Nordics. In the UK, this improvement resulted from the delivery of integration synergies and the reduction of loss-making capacity.
| Underlying operating profit bridge | UK | Nordics | Canada | Northern Region |
| 2007 underlying operating profit | 56.4 | 34.7 | 5.0 | 96.1 |
| Scheduled flying losses | 14.0 | - | - | 14.0 |
| Underlying margin enhancement | 33.5 | 14.7 | (9.6) | 38.6 |
| Synergies | 29.0 | - | - | 29.0 |
| 2008 underlying operating profit | 132.9 | 49.4 | (4.6) | 177.7 |
| Northern Region | 2008 | 2007 | Change % |
| Customers (‘000) | |||
| UK & Ireland | 6,978 | 7,564 | -8% |
| Nordic | 1,313 | 1,233 | +6% |
| Canada | 279 | 278 | flat |
| Total | 8,570 | 9,075 | -6% |
| y-o-y variation | |||
| Revenue per customer | Total | ||
| UK & Ireland | +7% | ||
| Nordic | +8% | ||
| Canada | +9% | ||
| Total | +7% | ||
| Revenue growth | |||
| UK & Ireland | -2% | ||
| Nordic | +14% | ||
| Canada | +10% | ||
| Total | +1% | ||
| Underlying operating profit/(loss) (£m) | |||
| UK & Ireland | 132.9 | 56.4 | +136% |
| Nordic | 49.4 | 34.7 | +42% |
| Canada | (4.6) | 5.0 | -192% |
| Total | 177.7 | 96.1 | +85% |
| Underlying operating margin % | |||
| UK & Ireland | 3.9% | 1.6% | +230bps |
| Nordic | 6.5% | 5.2% | +130bps |
| Canada | (2.6%) | 3.1% | -570bps |
| Total | 4.1% | 2.2% | +190bps |
| Controlled distribution % | |||
| UK & Ireland1 | 75% | 74% | +1ppt |
| Nordic | 79% | 73% | +6ppts |
| Canada | 16% | 17% | -1ppt |
| Total1 | 73% | 72% | +1ppt |
1 Excludes scheduled flying
UK & Ireland
UK & Ireland delivered a £76.5m improvement in underlying profits to £132.9m in 2008 (2007: £56.4m). This was driven by an improvement in underlying margins, primarily due to tight capacity control, including the elimination of loss-making routes and the delivery of integration synergies.
The business reduced loss-making scheduled flying capacity by 22% in its Winter 2007/08 programme and by 43% in its Summer 2008 programme. As a result, in 2008 the business recovered £14m of losses incurred in the previous financial year and remains on track to fully recover the remaining £13m of losses over the next two financial years.
Capacity was also rationalised in the charter programme, mainly in the short-haul destinations of the Balearics, mainland Spain and Portugal and also in some medium-haul destinations such as the Canaries and Greece. Total charter capacity was reduced by 5% in Winter 2007/08 and by 7% in Summer 2008. As a result of these capacity reductions, total customers decreased by 8% from 2007 to 2008, of which there was a 26% reduction in scheduled flying customers and a 4% reduction in charter customers. This action supported a stronger pricing environment in the lates booking period, in which previously there has been significant discounting of holidays. As a result of having significantly less holidays left to sell across all departure months, stronger margins and improved load factors were achieved despite higher fuel costs, leading to a £33.5m improvement in operating profit.
Integration in the UK continues to progress very well, with synergies of £29m delivered for the full year. Significant milestones have been achieved during the year, including the launch of the UK Summer 2009 programme on one reservation platform, the integration of our UK airlines, which operated under one license for Summer 2008, and the integration and relocation of airline and tour operating functions into a new UK head office in Luton.
The business has continued to grow its level of controlled distribution, with a one percentage point increase to 75% in 2008 which was primarily driven by an increase in our web sales following the re-launch of the First Choice website.
In addition to the integration process, the UK brands continued to focus on delivering differentiated product and high quality service. During the year Thomson launched its Sensatori Hotel Concept with Sensatori Crete opening on 1 May 2008. The 5-star concept includes West End entertainment, premium dining options, swim-up rooms, an extensive spa and first-rate childcare. First Choice opened three more Holiday Villages in Cyprus, Algarve and Mexico focusing on family facilities and activities.
Nordics
The Nordics business grew underlying operating profit by £14.7m to £49.4m in 2008 (2007: £34.7m). Revenue increased by 14% to £766m (2007: £669m) and operating margin improved by 130 basis points to 6.5% (2007: 5.2%). This improvement was primarily driven by strong Winter 2007/08 trading due to the expansion of the long-haul programme, where the deployment of an additional 747 aircraft from our French business into its Winter programme enabled the Nordics to fly direct to long-haul destinations such as Thailand. As a result customer bookings to Thailand were 39% higher in 2008 than the prior year. We continued to build on our position as a leading provider of long-haul package trips in the Nordic market by introducing a second Boeing 767 aircraft from the UK market into the Winter programme, with new destinations such as Surat Thani (Thailand), Phnom Penh (Cambodia) and Boa Vista (Cape Verde).
Additionally, the differentiated Blue Concept label was expanded to new customer segments during the year, including the successful rollout of Blue Exotic, a family concept for the premium end of the market and built on high accommodation standards, local cuisine and entertainment and the popular holiday children club ‘Bamse’. More than one third of total customers now purchase Blue Concept products which has led to improved margins.
There was significant growth in controlled distribution, with bookings through our own channels reaching 79% for the year, up six percentage points over the prior year. For the Summer 2008 programme 81% of products were sold through our websites or via our own shops. This has also contributed to the improvement in operating profit and margins in 2008.
Canada
Canada reported an underlying operating loss of £4.6m in 2008 (2007: profit of £5.0m). This loss was primarily incurred as a result of significant overcapacity in the market, which led to margin erosion. However, Signature, the tour operator, maintained a 12% market share and the retail brand, SellOffVacations, was successfully restructured during the year. Canada remains an important countercyclical market to the UK, operating nine aircraft through winter and one in the summer season. It also sells differentiated content developed in the UK, such as the Holiday Villages in the Caribbean.
Central Europe
The Central Europe division comprises the distribution and tour operating businesses in Germany, Switzerland, Austria and the Eastern European markets. Brands include TUI Austria and TUI Deutschland, leading travel and tourism companies.
The Central Europe division reported an underlying operating profit of £62.4m in 2008 (2007: £41.5m). This improvement of £20.9m was driven by strong summer trading in Germany and the successful turnaround of the Austrian business.
| Central Europe | 2008 | 2007 | Change % |
| Customers (‘000) | |||
| Germany | 10,197 | 10,388 | -2% |
| Switzerland | 354 | 319 | +11% |
| Austria | 681 | 811 | -16% |
| Total | 11,232 | 11,518 | -2% |
| y-o-y variation | |||
| Revenue per customer | Total | ||
| Germany | +15% | ||
| Switzerland | -17% | ||
| Austria | +21% | ||
| Total | +13% | ||
| Revenue growth | |||
| Germany | +12% | ||
| Switzerland | -8% | ||
| Austria | +2% | ||
| Total | +11% | ||
| Underlying operating profit/(loss) (£m) | |||
| Germany | 49.2 | 39.7 | +24% |
| Switzerland | 4.0 | 3.3 | +21% |
| Austria | 9.2 | (1.5) | +713% |
| Total | 62.4 | 41.5 | +50% |
| Underlying operating margin % | |||
| Germany | 1.2% | 1.1% | +10bps |
| Switzerland | 2.0% | 1.5% | +50bps |
| Austria | 2.4% | (0.4%) | +280bps |
| Total | 1.3% | 1.0% | +30bps |
| Controlled distribution % | |||
| Germany1 | 39% | 38% | +1ppt |
| Switzerland | 39% | 37% | +2ppts |
| Austria | 19% | 18% | +1ppt |
| Total1 | 38% | 37% | +1ppt |
1 Excludes scheduled flying
Germany
Underlying operating profit for 2008 was £49.2m, an improvement of £9.5m over the prior year (2007: £39.7m). This was delivered by strong Summer trading, following the reduction of airline capacity by eight aircraft (10% of capacity) for the Summer 2008 programme. As a result there was significantly less capacity to sell, particularly in the sun and beach lates markets, which resulted in higher load factors and margin improvement, despite pressure from higher fuel costs.
During the year, demand for premium packaged products increased. Popular destinations included the Canaries, Balearics, Greece, Turkey and Portugal. Differentiated product launches included the Sensimar hotel franchises in Crete, Rhodes and the Turkish Riviera for the 2009 Summer season and TUI Maxima, an exclusive Riverboat on the Danube. We have also introduced this year the TUI Snow Guarantee , which entitles customers in the event of no snow to start their trip later or travel to a sun and beach destination.
The expansion of the Polish source market, which is included in the Germany result, has also contributed to strong growth, with revenue and customer growth of 32% and 11%. Both our brands in the Polish market, TUI and Scan, performed well in the year. Winter 2007/08 volumes to Egypt (which represents 25% of the Winter programme) more than doubled, whilst in Summer 2008 volumes to Greece (which represents 25% of the Summer programme) were 41% higher than in 2007.
Switzerland
Underlying operating profits improved by £0.7m (21%) to £4.0m in 2008 (2007: £3.3m). The introduction of the TUI Germany product model into the Swiss mainstream market last year continued to yield strong customer demand in 2008. As a result, customer volumes increased by 11% in 2008. In addition, the business improved profitability in the year by growing controlled distribution two percentage points through its direct-selling brand Vogele thereby reducing commission costs. The business also benefited from cost efficiencies implemented in the previous financial year.
Austria
Austria delivered a significant turnaround in 2008, achieving underlying operating profits of £9.2m compared to a loss of £1.5m in the prior year. Operating margin improved by 280 basis points to 2.4% (2007: (0.4%)). This was primarily driven by improved capacity management and the reduction in guaranteed bedstock which led to improved prices and margins. As a result, customer volumes decreased by 16% over prior year, however revenue per customer was 21% ahead. In particular, significant capacity was cut in the Gulet brand following the release of the exclusivity agreement to guarantee beds with Magic Life. Austria also delivered £2.5m of synergies in the year resulting from the integration of First Choice’s business into TUI Austria.
The Western Europe division comprises the distribution and tour operating businesses in France, Belgium and the Netherlands. Brands include Nouvelles Frontières and Marmara, tour operators in France, Jetair, the largest holiday brand in Belgium and TUI Nederland, the only vertically integrated tour operator for the Dutch source market.
Western Europe achieved a strong improvement in underlying operating profits to £37.3m (2007: £7.4m), primarily driven by the turnaround in the French business.
| Western Europe | 2008 | 2007 | Change % |
| Customers (‘000) | |||
| France | 2,451 | 2,524 | -3% |
| Netherlands | 1,430 | 1,380 | +4% |
| Belgium | 1,864 | 1,731 | +8% |
| Total | 5,745 | 5,635 | +2% |
| y-o-y variation | |||
| Revenue per customer | Total | ||
| France | +15% | ||
| Netherlands | +5% | ||
| Belgium | +12% | ||
| Total | +11% | ||
| Revenue growth | |||
| France | +11% | ||
| Netherlands | +9% | ||
| Belgium | +20% | ||
| Total | +13% | ||
| Underlying operating profit / (loss) (£m) | |||
| France | 4.8 | (18.7) | +126% |
| Netherlands | 8.4 | 5.7 | +47% |
| Belgium | 24.1 | 20.4 | +18% |
| Total | 37.3 | 7.4 | +404% |
| Underlying operating margin % | |||
| France | 0.4% | (1.6%) | +200bps |
| Netherlands | 1.2% | 0.9% | +30bps |
| Belgium | 3.2% | 3.2% | flat |
| Total | 1.4% | 0.3% | +110bps |
| Controlled distribution % | |||
| France | 46% | 47% | -1ppt |
| Netherlands | 55% | 53% | +2ppts |
| Belgium | 49% | 43% | +6ppts |
| Total | 49% | 47% | +2ppts |
France
France reported underlying operating profits of £4.8m in 2008, a very strong improvement of £23.5m over the prior year (2007: loss of £18.7m). This improvement was driven by the following:
- In Nouvelles Frontières (NF), the tour operator product offering was rationalised to focus on profitable destinations. This resulted in improved yield management and stronger pricing for both the Winter 2007/08 and Summer 2008 programmes. In Corsair, the fleet was reduced by one aircraft thereby reducing operating costs. The scheduled flying programme was also rationalised to combine tourist and expatriate customers and focused on fewer destinations, mainly the French West Indies and Indian Ocean.
- A recovery in customer demand in the first quarter of 2008 for one of Corsair’s key destinations, La Reunion. This destination was heavily impacted in the first quarter of 2007 by the outbreak of the Chikungunya disease.
- Strong summer demand in Marmara for the higher margin destinations of Egypt and Turkey, leading to strong pricing increases.
- Synergy opportunities between NF and Marmara. These resulted in savings of £1.0m delivered in the year from selling Marmara products through NF shops and negotiating savings on seat rates for shared routes.
As a result of these actions the NF business successfully turned around its performance and delivered an operating profit in the year. The final result was however adversely impacted by a charge of £6m for additional depreciation in respect of the six owned aircraft in Corsair to reflect changes in the aircraft market and a charge of a further £6m in respect of seasonal hedges which did not satisfy hedge accounting effectiveness tests. These charges are included in the overall underlying operating result for France of £4.8m.
During the year NF launched Koudou, a low-cost club concept. Corsairfly repositioned itself as a leading brand for long-haul family travel. At Marmara, the Club Marmara concept continued to be popular within Mediterranean destinations.
Netherlands
Netherlands reported an underlying operating profit of £8.4m in 2008 (2007: £5.7m). Revenue and customer growth were 9% and 4% ahead of the prior year, with growth mainly in the destinations of Turkey and Egypt and the USA. The KidsWorld brand achieved strong growth and successfully introduced Bulgaria, a new destination for 2008. During the year, the business absorbed costs of £4.0m from a higher than normal level of aircraft maintenance which adversely affected the underlying profitability of the business. These issues have all been resolved.
Belgium
2008 underlying operating profit was £24.1m, an improvement of £3.7m over prior year (2007: £20.4m). This was driven by revenue and customer growth of 20% and 8%, respectively, with medium-haul volumes up 22% over prior year as the business benefited from strong demand for Turkey, Morocco and Egypt. Controlled distribution increased by six percentage points during the year (mainly through the web) and is now at 49% of total bookings, leading to lower commissions and improved margins.
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