Stricter Climate Rules And Excess Capacity Will Hamper Travel Profitability

Key Takeaways

• Rising operational costs, high debt, and industry-wide labor challenges threaten profitability and limit TUI's ability to invest and compete effectively.
  
• Demographic stagnation and shifting consumer preferences erode demand for traditional offerings, intensifying risks of low occupancy and market share decline.
  
• Digital transformation, unique product focus, and entry into new markets position TUI for resilient growth, improved margins, and greater flexibility amidst evolving tourism demand.

Catalysts

Provides tourism services worldwide.

• Tighter climate change regulation, escalating carbon taxes, and increasing consumer focus on sustainability are likely to drive up operational costs for TUI and erode demand for traditional package and cruise products as more travelers opt for lower-emission alternatives, ultimately putting pressure on both revenue and net margins.
  
• Long-term demographic stagnation in core source markets such as Germany, combined with a lower growth outlook for the European middle class, signals muted future growth in outbound leisure travel, reducing TUI's ability to drive top line expansion or maintain existing occupancy rates.
  
• The persistent high debt burden and need for ongoing refinancing increases vulnerability to rising interest rates and reduces TUI's capacity to invest in both modernization and growth initiatives, thereby constraining long-term profitability and putting further downward pressure on net earnings.
  
• Structural overcapacity in TUI's cruise and hotel assets, especially if travel patterns shift or global shocks persist, raises the risk of enduring low occupancy rates and subpar returns on invested capital, resulting in depressed revenues and continued margin compression.
  
• Hospitality industry-wide labor shortages and escalating labor costs threaten to erode the improved operating margins TUI expects from vertical integration, while at the same time, short-term rental platforms and direct booking competitors are likely to further undermine TUI's traditional value proposition, increasing the risk of market share losses and sustained earnings pressure.

TUI Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on TUI compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming TUI's revenue will grow by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.7% today to 3.1% in 3 years time.
• The bearish analysts expect earnings to reach €777.7 million (and earnings per share of €1.31) by about August 2028, up from €663.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.2x on those 2028 earnings, down from 7.1x today. This future PE is lower than the current PE for the GB Hospitality industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

TUI Future Earnings Per Share Growth

Risks

• Ongoing investment in digital transformation, including app improvements, AI-driven search, and direct sales platforms, positions TUI to enhance customer loyalty, reduce dependency on third parties, and improve operational efficiency, which can support long-term margin expansion and earnings growth.
  
• Strategic focus on differentiated and unique products-especially growing the proportion of high-margin, experience-led offerings and expanding the vertical integration across Holidays, Cruises, and Hotels-creates resilience against commoditization and competitive pricing, potentially supporting revenue growth and higher net margins.
  
• Expansion into underpenetrated markets such as Asia, Africa, Italy, and new product areas like city trips and tours increases TUI's addressable market, providing structural tailwinds for top-line growth over the coming years.
  
• Successful cost discipline, net debt reduction, and refinancing activities-including favorable promissory notes and shifting from leases to ownership for aircraft-improve the balance sheet, reduce interest expenses, and provide greater flexibility, bolstering the company's ability to invest in growth or withstand macroeconomic shocks, thus supporting future earnings and profitability.
  
• Ongoing global growth in tourism demand-including middle-class expansion in emerging markets, the rise of silver tourism among retirees, and generally higher consumer spending on leisure experiences-is likely to underpin secular demand for TUI's offerings, providing long-term support for revenue and cash flow.

Valuation

• The assumed bearish price target for TUI is €7.3, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of TUI's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €16.0, and the most bearish reporting a price target of just €7.3.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €25.4 billion, earnings will come to €777.7 million, and it would be trading on a PE ratio of 6.2x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of €9.29, the bearish analyst price target of €7.3 is 27.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.