We have a clear strategic goal which is to create superior shareholder value by being a global leading leisure travel group providing customers with a wide choice of differentiated and flexible travel experiences to meet their changing needs.  To enable us to achieve this goal we have identified four key strategic imperatives which are linked to our KPIs.

Product and Content

Growing our portfolio of higher margin differentiated content within the Mainstream Sector underpins our plans to improve our underlying operating margin.  Approximately 46% of our Mainstream tour operator turnover is generated by differentiated content and we have specific targets to increase this in each source market. Each source market has its own differentiated content offering specifically designed products for the requirements of their customers including concepts such as Blue in the Nordics, Sensatori and Holiday Village in the UK and Canada and Robinson Clubs, RIU and Sensimar in Germany.  These include exclusive hotels that no other company can match or easily replicate and have been tailored to include additional services and facilities to offer our customers exactly what they want on their holiday.  Our research identifies that our differentiated products are integral to customer retention, brand building and uniqueness and lead to a competitive advantage in the market.  These holidays also book earlier which enables us to generate premium margins by creating a more added-value experience for our customers.

Our specialist businesses offer significant potential for further growth.  These are high-growth, high-margin segments of the leisure travel market which present excellent opportunities for us to create leading positions in fragmented markets.  We have already completed 16 acquisitions this year where we have built upon or created new leadership positions and we will continue to identify and build new specialist segments to deliver long-term sustainable shareholder value.

Distribution and Brands

We are continuing to invest in our direct distribution channels as a key driver for reducing our distribution cost and thereby increasing our margin.  We gain a competitive advantage by selling to customers through these lower cost channels, as it leads to further control of the customer booking experience and the customer relationship.  By securing direct access to our customers, we can manage the whole holiday process from booking with an agent in our travel shops, online or via one of our call centres, to in-resort and after-sales service, whilst driving customer satisfaction and ultimately customer loyalty.

Across our source markets we have instigated a number of strategies to drive further direct distribution. In the UK we have focused on maximising the efficiency of our channels by utilising the down time in our shops to work as a virtual call centre. In France we are expanding the retail estate via 92 franchised agencies and 60 in-house stores to support the regional flying programme. In the Nordic source market, we are investing further in optimising our website to drive down the cost of customer acquisition.  Our ability to transition to a direct distribution model is underpinned by the strength of our leading ‘power’ brands in the Mainstream Sector and niche brands in our Specialist Sectors.

People and Operational Efficiency

The cost synergies arising from the integration of the UK First Choice and Thomson businesses and cost savings in Online Destination Services, France, Austria, Germany and the UK scheduled and ski businesses will contribute significantly to our short-term competitive position.  We have made excellent progress to date delivering £35m in 2008 and taken actions to deliver £100m in 2009.  In addition to the delivery of these cost synergies, the businesses are continually working to leverage their market-leading position and scale to maximise their cost competiveness and rationalise the cost base further through business processes and systems.

Our tour operators determine their flight capacity requirements and we typically only invest in assets such as yachts, inland waterway cruisers and expedition cruise ships that provide us with greater competitive advantage and enable us to earn premium margins. 

Within our mainstream source markets, through a combination of flexible lease profiles, which allow for 15-20 aircraft operating leases to expire every year, use of third party flying (accounting for 30% of all tour operator capacity) and uncommitted bed stock (accounting for 80% of bedstock), we have the ability to manage capacity in response to changes in the trading environment.  During the year, to further increase the flexibility of our business model and secure access to modern and fuel-efficient aircraft, we undertook sale and leaseback agreements for 20 owned aircraft and four new deliveries within the TUI Travel fleet. 

Across the Group we have a unique breadth and depth of experience with innovative entrepreneurs in our specialist businesses, skilled tour operators in Mainstream and functional experts in the centre. As such, we are ideally positioned to meet the changing dynamics of the marketplace and capture the growth opportunities wherever we operate.  The motivation and retention of our people is fundamental to the success of our business and to the delivery of our goal to create superior shareholder value.

Growth and capital allocation

We have identified a number of strategic imperatives that will deliver sustainable long-term growth. A key element is the introduction of 23 Boeing 787s which we are keen to establish as a key differentiator in Continental Europe and use to develop a pre-eminent position in the long-haul charter market.  Despite the production delays at Boeing, the Boeing 787 presents a significant opportunity to deliver growth going forward. Further organic long-term growth will be achieved through the introduction of some of our niche specialist brands in the Specialist and Activity Sectors into new European markets utilising our pan-European retail estate of circa 3,500 branches.  For example, we recently launched our inland waterways brand ‘Le Boat’ into our German retail estate, with excellent sales to date.

Our acquisition strategy is a key contributor to future growth. Despite the current economic climate, we have a strong pipeline of potential acquisition opportunities and we will continue to acquire niche high-growth bolt-on acquisitions with a high level of expertise within the business.

As a leading international leisure travel group, we are ideally positioned to benefit from the growing demand in emerging economies that are experiencing significant growth in leisure travel.  The World Tourism Organisation now ranks China in fifth place behind Germany, United States, United Kingdom and France spending $29.8bn in 2007 on tourism.  Close behind is the Russian Federation ranked ninth and spending $22.3bn in 2007.  As part of our strategy to develop our existing position in the Russian outbound market, we have signed a Memorandum of Understanding with S Group Capital Management to develop jointly a Russian and CIS leisure tourism presence.  In addition, we are also actively looking at expanding our existing position in the Chinese and Indian travel markets.

As a result of the synergy benefits of £175m and initiatives to deliver underlying margin enhancement (through increased controlled distribution, greater differentiated content and capacity management actions) we have a clear roadmap to an underlying operating profit margin of 4.6%. In addition, we have targeted a significant increase in our return on invested capital and thereby deliver sustainable value to our shareholders. In the past financial year, we have already made significant progress in realising these key objectives by improving our underlying operating profit margin by 0.9ppt to 2.9% (2007: 2.0%) and our return on invested capital to 8.4% (2007: 5.4%).