TUI Group Strategy

From an integrated holiday provider to an integrated digital tourism ecosystem

Attractive Tourism Market

TUI is a globally operating tourism company serving 21 m customers1 annually within its ecosystem. The tourism sector continues to be attractive, showing constant and above GDP growth for nearly a decade, providing an excellent basis for our businesses to grow.

The macro-fundamentals for our Hotel, Cruise and Destination Experiences businesses remain particularly favourable: the global sales volume for Hotels and Cruises is growing more than 4 % on a five year outlook, for Destination Experiences growth is even at 7 %. However, our Markets & Airlines intermediary business is facing some cyclical and structural challenges.

TUI Group’s Strategy

TUI’s integrated business model continues to be considered a success factor and remains to be a core element of our strategy. Access to 21 m customers1 in our core Markets & Airlines source markets with strong market positions (market shares between 20 – 40 %) allows us to drive premium returns in our Holiday ­Experiences businesses and provides a large basis for digitalised product up-selling. Therefore, we are committed to growing our integrated model on both ends, investing in customers’ growth and own product growth. While in recent years TUI was significantly investing into own product growth by redeploying non-core business disposal proceeds, we will re-focus future growth more towards digital customer acquisition and therefore continue to grow our integrated business model on both ends. Our digital platforms will enable us to accelerate customer growth and to create a digital ecosystem allowing us to up- and cross-sell our tourism products to an even larger TUI customer base. At the same time, we will be able to offer more individualised holidays to our customers.

Four Specific Strategic Initiatives

Our Group strategy is driven by four specific strategic initiatives.

1. MARKETS & AIRLINES: PROTECT AND WHERE POSSIBLE EXTEND STRONG POSITIONS

While the performance of our Markets & Airline business in FY 2019 was characterised by a number of specific external challenges such as potential Brexit and grounding of the 737 Max aircraft, it continues to face cyclical and structural challenges in the form of over-­capacities and cost pressure. Both elements may continue to drive further market consolidation in particular in the Airline sector following a broader tour operating market consolidation triggered by the insolvency of one of our key competitor. We will continue to address the structural challenges we face by improving our cost position and flexibility and by driving speed and innovation facilitated through centralised IT and processes as the core elements of our Markets Transformation & Domaining initiative. This shall allow us to further expand our product offering beyond traditional packages into attractive growth segments like accommodation only and dynamic package offerings, while remaining com­peti­tive and maintaining our leading positions in the traditional packaging market, supported by managing our airline asset intensity.

2) HOTELS & CRUISES: EXPANSION AT SCALE, DRIVING ­RETURNS BY BENEFITTING FROM VERTICAL INTEGRATION

With 411 hotels, TUI has built a sizable and highly profitable leisure hotel business (with a ROIC of 14 %). We are benefiting from our vertical integration, as we can leverage the distribution power in our Markets and Airlines segment to drive customers into TUI Hotels and Cruises. TUI will continue to invest in further portfolio expansion and diversification leveraging its Joint Venture structures besides own investments. However, our capital intensity will be reduced compared to our investment spending in recent years. In addition, we will accelerate the growth of our asset-light brand TUI Blue by targeting almost 100 Hotels2 by the end of FY 2020 versus currently about 10 Hotels in particular through management and franchise. Geographically, the Caribbean, South East Asia and Africa remain our key investment focus areas.

The fundamentals with strong demand and scarcity of supply remain intact for our cruise businesses and provide the basis for further growth. We will continue to invest in our cruise businesses by expanding and upgrading capacities in particular through our joint venture TUI Cruises.

3) GDN-OTA PLATFORM: BUILDING SCALE BASED ON ­COMPETITIVE PRICING TO ATTRACT CUSTOMERS TO JOIN THE TUI ECO-SYSTEM

TUI has launched a new online travel agency platform in six markets3 complementary to its existing Markets & Airline businesses, currently focusing in particular on the accommodation only market, meta-­search business and flight combined offerings based on Airline partnerships. Unlike our traditional package markets, TUI is not operating an own airline in these markets but sourcing aircraft seats flexibly. Initially, we will run our GDN-OTA platform as a customer acquisition engine by attracting customers with very competitive product pricing and are prepared to accept no platform profitability or moderate losses to build market share and to feed customers into our TUI ecosystem. However, driving as many new customers as possible into our own hotels and cross-selling our own products remains a key objective and should drive additional margins in our Holiday Experiences businesses. Our CRM systems are set to support such a digital up- and cross-selling and will focus on customer retention within the TUI eco-system. To date, we have a run-­rate of 250 k GDN-OTA customers and are confident to achieve our target of 1 m customers by 2022, now even much earlier by rolling out our platform to further markets and meta-search business opportunities globally. We see a strategic opportunity for this platform to become the leading distribution system also for independent third party hotels, in particular when combined with our brands and sophisticated property management systems, positioning TUI as a holistic digital hotel service provider.

4) DESTINATION EXPERIENCES PLATFORM: BUILDING SCALE IN THE ‘THINGS TO DO’-MARKET AND ATTRACTING CUSTOMERS TO JOIN THE TUI ECO-SYSTEM

The tours and activities market encompasses a sales volume of around € 150 bn and is growing approx. 7%4. In this market, TUI has built a growing plattform business with around 150 k products. Our business model is based on a two-­sided open platform, accessible for direct booking, distribution partners and 3rd party curated product suppliers along-­side serving our own customers and connecting our own destination experiences products. While we see strong profitable growth rates5, investing in an accelerated customer acquisition may initially come at the expense of margins. As with our GDN-OTA initiative, our CRM systems will be applied to up- and cross-sell our products to customers once acquired. We see product depth as the main constraint to accelerate our platform growth and are therefore committed to investing in additional product offerings both, organically and inorganically in line with our vision to offer ‘1 m things to do’ to our customers.

SUMMARY & CONCLUSION

TUI has built a profitable business, its integrated business model has proven to be successful. To grow our integrated model on both ends TUI will re-focus on accelerated customer growth in addition to further investments into Holiday Experiences. Initially, such customer growth may come at lower margins but will drive customer acquisition acceleration into the TUI ecosystem. Once acquired, TUI will up- and cross-sell its own products with the support of our sophisticated and digital CRM systems, driving margins in our Holi­day Experiences on top of the demand from our existing traditional Markets and Airline business, which will become more competitive as a result of our Transformation & Domaining initiative.

Our environment

For TUI Group, economic, environmental and social sustainability is a cornerstone of our strategy for continually enhancing the value of our Company. This is the way we want to create the conditions for longterm economic success and assume responsibility for sustainable development in the tourism sector.

The goals we set ourselves in our ‘Better Holidays, Better World‘ sustainability strategy include ‘Step lightly’, where we aim to reduce the environmental impact of our business operations and to fix goals for improvements in all Group areas.

Greenhouse gas emissions and the impact of these emissions on climate change pose one of the major global challenges for the tourism sector. In FY 2019, TUI Group’s total emissions decreased year-on-year in absolute terms, primarily due to the sale of the airline Corsair. Relative carbon emissions across our airlines slightly increased by 0.9 % in the FY 2019 to 65.2 g / rpk (previous year 64.6 g / rpk, excluding Corsair). Main reasons for the increase are the overall reduction in load factors and the grounding of Boeing 737 Max. TUI continues to operate one of Europe’s most carbon-efficient airline fleet and continually seeks to deliver further improvements.

The grounding of the Boeing 737 Max and the late deliveries have significantly impacted progress against our initial aviation carbon target to cut our carbon itensity of our operations by 10 % by 2020 (baseline year 2014: 67.56 CO2 / rpk). Compared to our baseline year 2014, we have improved airline carbon efficiency by 3.6 %.

Our employees

For the TUI Group well-qualified and engaged employees are a key factor in the long-term success. To meet the technological, cultural and organisational challenges of digital transformation effectively, we aim to empower our employees to keep abreast of the times. At the same time, we have to recruit new ‘change-makers’. We want to be an attractive employer whose employees are passionate about the company and to offer them development opportunities that meet their personal needs. ‘The best company to work for’ is therefore the key goal of our Group-wide HR strategy. In 2019, our Engagement Index6 of 76 matched the previous year’s level. Our goal is to exceed a People Engagement score of 80 by 2020 in order to feature among the Top 25 global companies in this area.