The merger TUI – First Choice for staying the world leader in tour operating

Migration from one industry to another industry

Opportunities and threats of mergers

Consolidation process in the field of tour operating

Introduction

Preusssag, a big company of the shrinking coal mining and steel industry in

the German Ruhrgebiet, decided - after a stage of consolidation and diversification –

to enter into the ongoing tourism market by buying the tour operator TUI.

The holding company took over later companies in the field of shipping where it

suffered from heavy losses.

Preussag sold it‘s coal mining and steel shares and became in 2000 a tour

operator with a strong shipping division which was in the meantime sold.

The losses in the field of shipping obliged TUI to merger with First Choice“

for maintaining enough liquidity to invest into the future against the

growing competitor „Thomas Cook“ on the German market.

History matters (1)

1968: Birth of TUI

1970: Integration of Air Tours International et TransEuropa

Participations at the hotel chains Iberotel, RIU and Grecotel

Creation of TUI Nederland, TUI Austria and TUI Switzerland

Integration of AirTour International and TransEuropa

1997: TUI is taken over by Preussag AG

Preussag was a state owned mining and steel company founded in 1923 as a state own, diversification into the shipping industry

With the acquisition of TUI (and at the same time also acquistion of Hapag Lloyd, a shipping and logistic holding), Preussag became a leisure and transport enterprise

History matters (2)

2000: Preussag became TUI Group

Acquisition of Thompson Travel (biggest British TO)

Strategic alliance with « Nouvelles Frontières », biggest TO of France

Acquisition of the Scandinavian TO Fritidsresor

2002: Creation of a shareholder company TUI AG

Acquisition of the container ship company CP Ships, one of the five biggest container ship companies

80% of the European market of tour operating, 21,5 millions of customers a year, 3600 outgoing travel agencies and 37 incoming agencies, 79 TO (in 18 countries), 127 planes with 9 different charter airline companies, 12 hotel chains in 28 countries with 279 hotels

10 cruise ships

History matters (2)

2000: Preussag became TUI Group

Acquisition of Thompson Travel (biggest British TO)

Strategic alliance with « Nouvelles Frontières », biggest TO of France

Acquisition of the Scandinavian TO Fritidsresor

2002: Creation of a shareholder company TUI AG

Acquisition of the container ship company CP Ships, one of the five biggest container ship companies

80% of the European market of tour operating, 21,5 millions of customers a year, 3600 outgoing travel agencies and 37 incoming agencies, 79 TO (in 18 countries), 127 planes with 9 different charter airline companies, 12 hotel chains in 28 countries with 279 hotels

10 cruise ships

2007: Creation of TUI Travel

TUI Travel was formed in 2007 from the merger of the TUI Group’s distribution, tour operator, airline and incoming operations with those of the former British First Choice Holidays PLC.

Strategy of TUI

• External growth and vertical integration in Europe

– Privileged distribution position: lower costs

– Creation of their own transport and accomodation structures:

• Limit the number of intermediaries and increase the margin

• Better control quality

• Equilibrate the accounting

• Multi-channel distribution :

– Traditional travel agency

– Internet

– Websites for « low costs »

• Expansion outside Europe :

– 2003: memorandum of understanding with Chinese travel organisation

– Interest for the Indian market

– Looking for access in the North American market

TUI has a complex holding structure which grew fast but the profits eroded

Volumes in mio Euro 2005 2006 Turnover 16‘619 20‘916

-Tourism 14‘097 14‘084

- Shipping 3‘834 6‘254

Cash flow 707 369

- Tourism 366 401

- Shipping 323 8

Profit Group 496 -847

- in % 2.29 - 3.66

Historic loss in 2006

2006: Turnover of €14,1 billion (tourism) and €6,3 billion (maritime transport)

But loss historic of € 847 million:

– Difficulties with maritime transport – Acquisition of the Canadian TO CP Ships (end of

2005) for €1,7 milliard – Restructuration costs –

First trimester 2007: – Loss of €105,8 million – Decrease of turnover of 2,5% = €4,09 milliards – Increase of tourism activities, good reservations but small

loss of € 237 million

Reason of the merger

Liquidity: merger with a financially strong horizontal partner 51% TUI and 49% First Choice Chairman and CEO: Chairman of First Choice, Peter Long TUI enhance its position as an European market leader Penetrate North American and French markets Pression: merger of Thomas Cook and MyTravel Forecast: Turnover of €17,6 billion and 27 million travellers

Complementary growth of both grouups Possible synergies in the field of costs and receipts Economies of scale and scope: competitif tariffs

Diminition of the competititon Eliminated inefficiencies by division of work and specialisation

The competitors are « tiny »

TUI was obliged to merger with a smaller TO but became under

the leadership of First Choice more profitable

Comparison of the firms TUI Touristik

First Choice TUI Travel*

Turnover (bio €) 13,7 4,0 17,6

Profit (mio €)* 278 200 475

Planes 127 34 161

Employees 32‘000 15‘000 47‘000

Share value 4,6 2,5 5,1

* Objectifs

Creation of an incontrable « financial empire » Lack of a convincing strategy and poor organic growth: forcing

externalgrowth

The merger made the company more transparent

Possible destruction of a part of the entreprise culture

Reduction of working places

Market power

Critics and implications

Question to discuss

Which are the strengths and weaknesses of the business model of TUI?

What were the major threats of the merger of TUI with First choice?

Can the business model of TUI Travel be imitated?

The empire of Expedia

The biggest online tour operator

Innovation such as „priceline.com“

External growth through acquisition

08/12/2012

The empire of Expedia

Why did the company become the biggest full service

online travel agency with products such as priceline.com and trip advisor?

08/12/2012

Index

Introduction

Industrial Environment

Business model

Innovations & competitive advantages

Integration

Intro Industrial

environment Business model

Innovations & competitive advantages

Integration

08/12/2012

Introduction

• Born in 1996 – founded as division of Microsoft- USA

• 1999- quoted on the stock exchange

• Nowadays, presence >60 countries

.

Intro

Industrial environment

Business model

Competitive advantage

Integration

OBJECTIVE:

Leadership in the travel and on-line booking sector

Revenue

1. Financial Highlights:

2011 Gross Bookings: $29.1 Billion

2011 Revenue: $3.45 Billion

08/12/2012

Intro Industrial

environment Business

model Competitive advantage

Integration

08/12/2012

Industrial environment

High competitiveness

Disruptive trends & consumer behaviour comprehension

Time saving : KEYWORD

ICT

Intro Industrial

environment Business

model Competitive advantage

Integration

08/12/2012

Business Model

Intro Industrial

environment Business model

Innovations & competitive advantages

Integration

Suppliers:

Car rentals

Hotels

Cruises

Attractions

Etc…

Internet

GDS

Merchant

Call center

Travel agencies

Internet

Customers

Leisure

Business

08/12/2012

Strategy

Intro Industrial

environment Business

model Competitive advantages

Integration

Hotel

Car rentals

Attractions

Insurance

Low-cost

flights

Cruises

TO Packages

Bigger offer

Unique reference for customers

08/12/2012

Competitive advantage

Offers concentration

Time saving effectiveness (Priceline.com tool)

ICT flexibility and adaption

Trends following

Social aspect (reviews- Trip Advisor)

(Spin off 2011)

Intro Industrial

environment Business

model Competitive advantages

Integration

08/12/2012

Venere.com- Integration

Intro Industrial

environment

Business model

Competitive advantages Integration

1995 1999 2003 2007 2008

Microsoft Launched Expedia NASDAQ DYNAMIC PACKAGING $20 mill. Value Venere acquisition

08/12/2012

Venere.com Integration & Impacts on the main competitor

Intro Industrial

environment Business

model

Competitive

advantages

Integration

Question to discuss

Which is the main business of Expedia?

Why was “priceline.com” an innovation in the field of booking of tourism related

services?

Is “Trip Advisor” still a division of Expedia?

Which is the business model of Expedia?

Swiss International Airlines: Failing acquisition strategy of Swissair and

happy take over by Lufthansa

Liberalisation of the airline market

Volatility of the airline market

Grounding of an airline

Restructuration

Acquisition and integration in a mother company

Swissair was a successful flagship carrier with important airline related services such as “Gate Gourmet” or the airport shops “Nuance”. The external growth strategy through acquisition of other airlines to get a critical size failed. The grounding of the S Air Group was the end of the successful Swissair story. The airline and it’s airline related big industries were bankrupt. The state subsidized a new airline out of the regional carrier “Crossair” owned by the S Air Group which was not concerned by the bankrupt. The money from the Swiss Confederation, the Cantons and the private sector was spent in the first years of the activities of the new airline which had no clear strategy. The government was not willing to give further subsidies. The company was sold to Lufthansa where it is under German CEO’s a real “cash cow” for it’s mother company.

Introduction

The initial situation

Medium sized companies with small home markets are in general:

too small to compete with the big

too big to be regional airlines

too cost-expensive to be a low-cost carriers

The dilemmas of medium sized airline companies with small home markets

Strategies of Swissair since 1992

Project ALCAZAR (alone carrier zigzag at random)

Objective: Merger with similar companies (KLM, SAS, AUA and Swissair)

1996 failure of project ALCAZAR => status quo with 1992

1997: HUNTER strategy

Objective: acquire participations in European carriers to become an important group in Europe benefiting from rights in many nations

finding potential candidates turns out to be harder than expected

big spending on loss-making companies

2001: failure of HUNTER strategy

The aim of the “Hunter Strategie” of the S Air Group was to become a big leader company with subsidiaries

Integration through merger

Strategic Alliances

Global Consolidation

New global brands

Regional brands

Regional Consolidation

Time

Competition

2 October 2001 saw an increased necessity for strong liquidity, as

all suppliers insisted on cash payments of outstanding invoices

following the request of payment delay announced the day before.

Cash reserves of Swissair filed on this day were barely sufficient enough

just to carry out the first morning flights.

During the morning, fuel suppliers refused to fuel the waiting

aircraft. Other accounts were consolidated on the one hand because of

the prior termination of the cash pooling facility from the UBS, on the other

hand due to the threat of favoritism regarding debts.

The sad story of the „grounding“ of Swissair following September 11 (1)

The banks refused a credit increase before the sales proceeded, and

insisted on a formal referral validity of the sale agreement.

At 15:45, CEO Mario Corti announced a cessation of flight

operations due to the security risks caused by the crossing of the

Flight Duty Regulations.

This led to thousands of stranded passengers around the world, including

flight crews. Their corporate credit cards were blocked by the banks, with

some hotels expelling the crews, and having them return home at their

own expense. In addition, all tickets sold were voided.

The sad story of the „grounding“ of Swissair following September 11 (2)

Source: www.wikipedia.org ,Swissair

The political debate about bailing out a national carrier

The arguments of the Swiss economists against a bail out of the national carrier by the state (1)

The point of view of Swiss economists*:

« ... Swissair was not a victim of deregulation but of the

failures in a protected market. »

* Dans « Swissair: limiter les dégâts », E. Baltensperger, S. Borner, M. Bütler, J.P.

Danthine. R. Eichenberger, R.L. Frey, H. Hauser, F. Jaeger, B. Kappeler, J.-C. Lambelet,

R. Leu, J. Marbacher, B. Schips, A. Swoboda, E.-L. von Thadden, T. von Ungern-

Sternberg, C.Wypolsz

The arguments of the Swiss economists against a financial bail out of the national carrier by the state (2)

Maintaining jobs

It’s not the role of the state to maintain certain jobs, rather than other ones.

A flexible job market is the best solution, and should be encouraged by the

state.

Protectionism – Switzerland risks losing it’s position with respect to other nations in aviation industry

Given the over-capacity in the market there’s no doubt other aviation

companies will be interested in guaranteeing flights to and from Switzerland

(conditions: sufficient demand and good regulatory environment)

The arguments of the economists against a financial bail out of the national carrier (3)

Promotion of the Place – Public Good characteristic of national carrier

Good transport infrastructure and connections are necessary to guarantee

the future economic growth of Switzerland. This may justify government

help to airports – infrastructure linked to the place – but not the help to

airlines.

The government didn’t share the point of view of the economists and supported the creation of a new national carrier

After the grounding of Swissair the Swiss Confederation provided massive financial support

Report of the Federal Council (Switzerland’s Federal Government) to the Federal Parliament (Chambers of Representatives and Cantons) of 7 November 2001

« The existence of a active national carrier at international level is of

utmost importance for a economic place. The negative impact on the

economy and the labour market of a absence of a governmental

reaction has forced the Swiss Confederation to participate in financing

a programme for restructuring the national civil aviation and to

contribute to maintain a performing hub in Zurich…»

The Federal state, the cantons and the private sector supported the launch of a new carrier in a big solidarity action for the employees and

the Canton of Zurich where the main Swiss hub is situated

Financial aid for SAir Group and the new « Swiss » (in mio. Frs.)

Source Aim Amount Type

Confederation ** Maintain Swissair until end of march 2002 1’450 Direct payment

Participation Crossair 600 Capital action (stock)

Various costs 39 Direct payment

Cantons and cities Participation Crossair 451 Capital action (stock)

Airport operation 150 Credit, Subsidy

Private sector Participation Crossair 1’672 Capital action (stock)

Total ** 4’317

** without insurance for unemployment and social plan

The launching of a new airline

The state paid the deficit until the launch of the new company

The difficulties for launching a new airline after the grounding

The new airline was launched by enlarging the regional carrier

“Crossair “ with the two letter IATA code LX which was an

independent subsidairy company of the Swissair. This company

didn’t go bankrupt. The start of this company was difficult despite the strong

support from the federal and local goverment, the private sector and the

private sponsors.

The new airline had to overcome the bad image of the bankrupt S Air group.

The new airline had to achieve a strong turn around from zero.

The new airline had to reduce the number of planes.

The fight against the low cost carriers which came into the market after the grounding

Pricing and tariffs

Reorganization of the Swiss national airline and focus on key segments

Reduction operating costs

Reduction of the airline fleet

Competing against low-cost competitors

Typical Swiss quality

Swiss doing better than the mother company Lufthansa before and after the crisis

The positive impact of the merger with Lufthansa

Swiss International Air Lines: the most profitable airline of the Lufthansa Group

• Founded in march 31st 2002

• Serving 90 Destinations with 77 aircrafts in 42 countries

• Fully owned daughter by Lufthansa

– Since the take over by Lufthansa in 2005 for 310 Million Euros, SWISS is operating very successful

– It is today a cash cow for the Lufthansa Group

– It has 45 aircrafts for a sum of 2 billion CHF on order

• Member of Star Alliance since April 2006

Swiss was doing better than the mother company Lufthansa

before and after the crisis and now

Swiss International Airlines as subsidiary company of the Lufthansa Group

Question for discussion

Was is worthwhile that the state subsidized the launch of a new

national carrier? Would it have be better to spend more money of the taxpayer to held ownership in Swiss hands? Why was the acquisition by Lufthansa for Swiss International a success?