TUI AG – Annual report – 30 September 2023
Industry: Leisure
Principles and Methods underlying the Consolidated Financial Statements (extract)
Key judgements, assumptions and estimates (extract)
ASSUMPTIONS AND ESTIMATES (extract)
Assumptions and estimates that may have a material impact on the amounts reported as assets and liabilities in TUI Group are mainly related to the following balance sheet-related facts and circumstances:
- Assumptions for use in impairment tests, in particular for goodwill and property, plant and equipment
- Effect of climate-related risks on the useful lives and the measurement of assets
- Determination of the fair values for acquisitions of companies and determination of the useful lives of acquired intangible assets
- Determination of useful lives and residual carrying amounts of property, plant and equipment
- Determination of actuarial assumptions to measure pension obligations
- Recognition and measurement of other provisions
- Determination of the incremental borrowing rate used to measure lease liabilities
- Recoverability of future tax savings from tax losses carried forward and tax-deductible temporary differences
- Measurement of tax risks
- Recoverable amounts of touristic prepayments
- Determination that the package holiday represents a performance obligation due to the significant integration service
- Determination of period-related revenue recognition on a straight-line basis over the duration of the trip
- Determination of the expected credit losses (ECL) of financial instruments
ASSUMPTIONS FOR USE IN IMPAIRMENT TESTS, IN PARTICULAR FOR GOODWILL AND PROPERTY, PLANT AND EQUIPMENT
The impairment tests are performed on the basis of future discounted cash inflows derived from the medium-term corporate planning. Both the derivation of future cash inflows and the determination of the interest rate are heavily influenced by assumptions and estimates and are associated with uncertainties, in particular due to the strong general increase in prices and interest rates, which could lead to a decline in demand for tourism products and increased expenses for input factors. In addition assumptions and estimates regarding the financial impact of climate-related risks were made, which are described further below.
In the financial year 2023 TUI left behind the impacts of the COVID-19 pandemic. In the holiday experience division the complete product portfolio could be offered. In aviation business disruptions did not occur unlike in the financial year 2022. The number of guests reached near pre crisis levels, revenues exceeded pre crisis levels. In contrast the financial year 2023 was still affected by the general increase in prices, especially for fuel, and by changes in exchange rates. TUI was insufficiently hedged against these changes due to limited access to relevant hedging instruments. However, overall all the segments increased their results in comparison to the financial year 2022.
For the financial year 2024 it is expected that customer volumes will reach 2019 levels. In the course of the financial year 2023 TUI improved its financial position due to the recovery of its business, the capital increase and the prolongation of the RCF. Accordingly TUI has now far more options to hedge against changes in fuel prices or exchange rates. The further digitalisation of our business and the expansion of existing and new business areas are expected to take effect. Below we describe the key assumptions underlying the medium-term business planning in the segments.
In its business plan, Hotels & Resorts expects to deliver further earnings growth due to capacity expansion, demand growth and increases in average selling prices.
In the Cruises segment, results are expected to recover further in the financial year 2024 as the winter season of the financial year 2023 was still affected by the comparative late recovery of demand in 2022. Furthermore, results will increase until 2026 due to the expansion of the fleets of Marella and TUI Cruises. In Summer 2023 Marella took over one cruise ship from TUI Cruises, which will deliver a full year’s trading result in 2024. TUI Cruises will launch a new ship in Summer 2024 and expand its fleet to nine ships (excluding the Hapag Lloyd Kreuzfahrten brand) in the following years to 2027. However, the results will be negatively impacted by the cost of meeting the emission reducing regulatory measures, notably the introduction of the EU emission trading system from 2024.
The future development of TUI Musement depends in part on the development of customer numbers in Markets & Airlines. TUI Musement will also generate growth through the sale of tours, activities and tickets due to the expansion of its own / direct distribution via the internet and the app.
In Markets & Airlines, beginning with the financial year 2024 it is expected that customer numbers will reach 2019 levels. Wider use of online distribution and distribution by the app, the provision of dynamic production capacities for flights and accommodation and the investments in digitalisation are expected to further improve the results. In addition, TUI has now by far more options to hedge against changes in fuel prices and in exchange rates in comparison to financial year 2023. Conversely the emission trading system of the EU and Great Britain will lead to higher expenses. In addition, the usage of alternative fuels with lower climate-damaging emissions will increase in order to reach emission reduction targets for 2030 and beyond. These fuels are more expensive than conventional kerosine. For further information on assumptions and estimates in relation to climate related risks we refer to the section below.
Other key factors are the weighted average cost of capital after income taxes (WACC), on which discounting is based, the sustainable growth rate and the growth in perpetuity. Changes in these assumptions may have a significant impact on the recoverable amount and the amount of any impairment loss.
The weighted average cost of capital after income taxes (WACC), on which discounting is based, was derived from external capital market information about comparable companies. The cost of capital to Markets & Airlines was increased by an additional risk premium of 2.1 % (previous year: 1.9 %). This additional risk premium was based on an analysis of internal and external market expectations and reflects the elevated uncertainty with regard to medium- and long-term market developments. Additional country-specific risk premiums are included, in particular, in the measurement of individual hotels. For further details on the determination of WACC refer to the section ‘Goodwill’.
Finally we have implemented sensitivity analyses to estimate the uncertainty associated with the assumptions on which the impairment tests are based. The sensitivities and their impact on the fair value result exclusively from the adjustment of individual parameters. Possible compensatory measures were not taken into account. Sensitivities have been calculated for changes of the WACC and sustainable growth in perpetuity. In addition, sensitivity analyses have been carried out for a general increase or decrease of future cash flows and for material climate related risks. For further details refer to the section ‘Goodwill’.
EFFECT OF CLIMATE-RELATED RISKS ON THE USEFUL LIVES AND THE MEASUREMENT OF ASSETS
OVERVIEW OF CLIMATE RELATED RISKS
The tourism industry faces significant impacts from climate change. As temperature rises the attractiveness of certain destinations might decline. Extreme weather events due to climate change might damage our assets and might lead to increased cancellations of holidays. Political and legal developments might increase the expenses for emission certificates and customer preferences might change. Climate change might also present opportunities for TUI to extending the touristic season in summer destinations or to diversify to new regions. All these changes impact to some extend already and will have a more significant impact on long term financial performance.
As a result of climate-related risks TUI has committed to the Science Based Targets initiative (SBTi) to reduce emissions by 2030 in comparison to a baseline 2019. Our targets are:
- Reduction of airline CO2e per revenue passenger kilometer by 24 % by 2030
- Reduction of absolute CO2e from our cruise operations by 27.5 % by 2030
- Reduction of absolute CO2e from TUI Hotels & Resorts by 46.2 % by 2030
Furthermore it is the commitment of TUI to achieve net-zero emissions by 2050. The reduction of emissions will be accomplished with investments in new technologies and the use of fuel with less CO2 emissions.
To assess the impact of climate-related risks on our financial performance and business model TUI has conducted a qualitative and quantitative climate risk assessment in the financial year 2023. A number of assumptions underpin this assessment regarding changes to the intensity and frequency of weather related events, technology development, development of energy and carbon prices and the development of knowledge on global warming. The impact of climate-related risks was assessed for two scenarios, one scenario which implies a global warming of approximately 4.3°C and a scenario which implies a global warming of approximately 1.5°C, both by 2100. The analysis was carried out for the periods until 2030, 2040 and until 2050. The level of uncertainty of the results of the analysis increases over time.
Given the uncertainty TUI has applied critical estimation and judgment in the evaluation of the impact of climate-related risks regarding the recognition and measurement within its financial statements which are described below.
EFFECT OF CLIMATE-RELATED RISKS ON THE USEFUL LIVE S OF ASSETS
The useful lives of assets can be affected by climate-related risks in different ways:
- Physical changes in the climate like an increased frequency and intensity of acute events (storms, fire and floodings) as well as long term trends like increased temperature might impact our assets
- Transitional changes related to the transition to a low-carbon economy including policy, legal, technology and market changes might affect the use of our assets
In the assessment of the impact of the climate change on the useful lives of our assets TUI applied the following assumptions and estimates:
The impact of physical risks on our aircrafts and our cruise ships is assumed to be low. Both assets could be flexibly used and itineraries or flight routes could be adjusted. The main risk relates to the commitment of TUI to decarbonize its business. However, all aircrafts of the current aircraft fleet have the capability to utilise sustainable aviation fuel (SAF). In addition the useful lives of our aircrafts, which are mainly leased and recognised as right of use assets, end before 2050 so that TUI could replace the aircraft with new technologies such as hydrogen powered aircraft if these prove viable. Likewise our cruise ships can either already utilise sustainable marine fuel (SMF) or can be converted to do so. Accordingly TUI concluded that climate-related risks do not affect the useful life of aircrafts or cruise ships.
TUI assessed as well the useful lives of our Hotels in light of climate related risks. Based on the aforementioned analysis TUI concludes that the risk from acute weather events like storms, fire and floodings will increase only to a level which is still manageable through insurance and the large and regional spread of our hotels & resorts portfolio. Furthermore the increase of these risks will most likely occur in the long term so that our leased hotels with a relatively short useful life are less affected. Based on this analysis TUI concludes that none of our hotels will have a reduced useful life due to sea level rise. The risk for our hotels relating to the decarbonization of our business is assumed to be low as there exists already technology to produce carbon neutral energy for example from renewable sources such as solar panels or wind turbines. The useful lives of our hotels could also be affected by consumer behaviour reacting to increased temperatures. Certain destinations might see a reduced number of tourists in the long term, especially in the peak season e. g. in summer in the Mediteranean. However, it is assumed that the shoulder seasons in spring and autumn will become broader which will mitigate this effect. In addition TUI has the ability to steer our customers to our owned Hotels and to manage reduced numbers of guests through reduction in use of 3rd party capacity. Overall, TUI does not see any impact of climate-related risks on the useful life of hotels.
Overall, useful lives and residual values have not been amended in the prior and current financial year as a result of climate related risks.
IMPACT OF CLIMATE-RELATED RISKS ON THE MEASUREMENT OF DEFERRED TAX ASSETS IN RELATION TO LOSSES CARRIED FORWARD
TUI applies a five-year planning horizon derived from its medium-term corporate planning when determining the usability of tax losses carried forward and deductible temporary differences. Medium-term climate-related risks are factored into the measurement of deferred tax assets in relation to losses carried forward. Accordingly, the considerably higher charges that will occur in the long term do not impact the measurement of deferred tax assets in relation to losses carried forward.
IMPACT OF CLIMATE-RELATED RISKS ON IMPAIRMENT TESTS, IN PARTICULAR FOR GOODWILL AND PROPERTY, PLANT AND EQUIPMENT
When performing impairment tests, the discounted future financial charges determined on the basis of the above-mentioned climate-related risk analysis were deducted from the discounted future cash flow surpluses calculated based on our medium-term planning. Due to the long-term nature of these future charges and uncertain technological and regulatory developments, the charges determined in this manner are subject to a high level of uncertainty.
The underlying assumption is that until 2030 TUI will reduce its climate-damaging emissions in accordance with the SBTi and will subsequently follow a linear path to achieving net-zero emissions by 2050. It is likewise assumed that the emissions of our suppliers are reduced for the period until 2050. These will be achieved in particular by gradually replacing aircraft fuel and bunker oil with fuels that do not cause climate-damaging emissions. The expectation here is that these fuels will be available in sufficient quantities. This assumption depends on the development of technologies and production capacities and is therefore subject to elevated uncertainty. A key estimate concerns price movements for fuels without greenhouse gas emissions. Currently the prices for these fuels are by far higher as conventional fuels. It is assumed that the prices will level off by 2050.
Technological innovation, such as in the form of hydrogen-powered aircraft, is not taken into account. Greater fuel efficiency was only considered insofar as it relates to the planned fleet renewal in aviation or else can be achieved by means of known technologies such as underwater coatings on cruise ships. Fleet expansion in the Cruises segment has also been factored in. In the segment Hotels & Resorts, it is assumed that emission reductions will be achieved by means of existing and continued investments in renewable energies, such as solar panels.
This reduction in greenhouse gas emissions will be underpinned by a public regulatory framework encompassing everyone, including TUI’s suppliers, leading in particular to a reduction in free emission allowances or an increase in the price of emission certificates. While harmful gas emissions will be reduced in the manner described above, rising prices for emission certificates will generate substantial financial charges before the expenses for emission certificates drop to zero in 2050. The calculation of these financial charges reflects TUI’s own costs and the costs of emission certificates passed on by suppliers.
In addition, physical risks from climate-related one-off events such as storms or floods or long-term developments such as rising temperatures, affecting the Hotels & Resorts segment, were taken into account. Average annual charges were determined based on external studies. It is expected that the financial impact of these climate-related risks are relatively low.
Overall, the use of low-emission fuels and rising prices for emission certificates will lead to significant financial charges, particularly for energy-intensive aviation operations in the Northern Region, Western Region, and Central Region segments. The Cruises segment will also be impacted. In Hotels & Resorts segment, the burden will be relatively low; in fact, the autonomous generation of energy, such as by means of solar power, may even generate cost savings.
One key assumption, then, concerns the extent to which costs for low-emission fuels and emission certificates can be passed on to customers. TUI assumes that the reduction in greenhouse gas emissions will generate general price increases (green inflation). TUI additionally benefits from opportunities to pass on costs across the entire value chain. Overall, TUI therefore assumes that it will be able to pass on 90 % of the costs in aviation, a sector that is particularly affected, and 95 % in other sectors.
In the light of the uncertainties regarding the long-term financial burden from climate-related risks, TUI has calculated sensitivities for the particularly affected Markets & Airlines and Cruises. These are presented in the section on ‘Goodwill’. The sensitivities relate to assumptions on the development of climate related risks in general, the development of prices for alternative fuels and emission certificates and the potential for passing on climate change-related costs to our customers. Overall, TUI does not regard climate-related risks as a triggering event for carrying out impairment tests.
PROPERTY, PLANT AND EQUIPMENT
The measurement of wear-and-tear to property, plant and equipment items entails estimates. The carrying amount of property, plant and equipment as at 30 September 2023 totals € 3,480.3 m (previous year € 3,400.9 m). Material assumptions and estimates are the determination of useful lives and residual carrying amounts of property, plant and equipment. The effects of climate-related risks are also taken into account here. From the analysis to review the amounts carried, an evaluation is carried out on a regular basis to assess whether there are any indications of a potential impairment. These indications relate to a number of areas and factors, e. g. the market-related or technical environment but also physical condition. If any such indication exists, management must estimate the recoverable amount on the basis of expected cash flows and appropriate interest rates.
More detailed information on the useful lives and residual values of property, plant and equipment items is provided in the section ‘Property, plant and equipment’ in the section ‘Accounting and measurement methods’.
(12) Goodwill
The goodwill disposals relate to the sale of the operating business in Canada by the company Sunwing Travel Group Inc., Ontario, which is accounted for using the equity-method. The disposal is attributable to the Northern Region. In this context, we refer to section ‘Significant associates’. The reclassification of assets held for sale led to a reduction of goodwill of € 2.3 m and relate to the planned disposal of the Robinson Club Cabo Verde. Detailed information on acquisitions and divestments are presented under Acquisitions – Divestments.
In accordance with the provisions of IAS 21, goodwill allocated to the individual segments and sectors was recognised in the functional currency of the subsidiaries and subsequently translated when preparing the consolidated financial statements. Similar to the treatment of other differences from the translation of annual financial statements of foreign subsidiaries, differences due to exchange rate fluctuations between the exchange rate at the date of acquisition of the subsidiary and the exchange rate at the balance sheet date are taken directly to equity outside profit and loss and disclosed as a separate item. In financial year 2023, an increase in the carrying amount of goodwill of € 0.4 m (previous year reduction of € 22.5 m) resulted from foreign exchange differences.
The following table presents a breakdown of goodwill by cash-generating unit (CGU) at carrying amounts. ‘Other’ consists of the two independent cash-generating units, Robinson, and Midnight International (formerly Blue Diamond), which belong to the Hotels & Resorts segment.
As at 30 September 2023, an impairment test of capitalised goodwill was performed at the level of cash-generating units. No impairments of capitalised goodwill were identified.
For all CGUs, the recoverable amount was determined on the basis of fair value less costs of disposal, being the higher value compared to the value in use. The fair value was calculated by discounting the expected cashflows. This was based on the medium-term plan for the respective entity as at 30 September 2023. Budgeted revenues and EBIT margins are based on expectations with regard to the future business performance. We refer to the section ‘Key judgements, assumptions and estimates’.
The discount rates are calculated as the weighted average cost of capital, taking account of country-specific risks of the CGU and based on external capital market information. The unchanged high weighted average cost of capital reflects the current market situation.
The table below provides an overview of the parameters versus the previous financial year, underlying the determination of the fair values per CGU. As in the previous year, the EBIT margin has been adjusted for deductions of centrally incurred costs. The table lists the CGUs to which goodwill has been allocated:
In view of the existing uncertainties regarding future business development, an analysis of sensitivities for the main planning parameters was carried out. In the sector Markets & Airlines a risk premium of 2.1 % (previous year 1.9 %) was added to the cost of capital. For further information we refer to ‘Key judgements, assumptions and estimates’. The following table shows the effects of potential deviations in fair value in financial year 2023:
The fair values determined in the sensitivity analysis would have led to an impairment requirement of € 13.0 m in the CGU Robinson and of € 11.6 m in the CGU Midnight International in the Hotels & Resorts segment if the WACC had increased by 100 basis points. A reduction in the Cash inflow by 10 % would result in an impairment requirement of € 16.9 m in the CGU Midnight International and of € 7.7 m in the CGU Robinson. With the exception of the impairments presented in the Hotels & Resorts segment, the sensitivity analysis did not reveal any further indications of an additional need for impairment losses.
In the financial year 2023 a study was carried out on the financial impact of climate related risks on the business model of TUI. The use of low-emission fuels and rising prices for emission certificates will lead to significant financial charges, particularly for energy-intensive aviation operations in the Northern Region, Western Region, and Central Region segments. The Cruises segment will also be impacted. In Hotels & Resorts, the burden will be relatively low; in fact, the autonomous generation of energy, such as by means of solar power, may even generate cost savings. In addition, physical risks from climate-related one-off events such as storms or floods or long-term developments such as rising temperatures, mainly affecting Hotels & Resorts, were taken into account. It is expected that the financial impact of these climate-related risks are relatively low. The financial impact overall is especially dependent in as far these costs can be passed on to customers. For further information on the impact of climate related risks on impairment test refer to the section ‘Key judgements, assumptions and estimates’. The estimation of the financial impact are particular uncertain with regard to the development of climate related risks, the price development for alternative fuel and emission certificates and the willingness of customers, to bear these costs, amongst others. Therefore, sensitivities of climate related risks and chances were calculated for especially impacted energy intensive Markets & Airlines and Cruises segments. The sensitivity for climate related risks refers to an increase of climate related costs by 50 %. The climate related chances relate to a decrease by 50 %.
The sensitivity on climate related risk would not have led to an impairment. The following table provides the effects of the sensitivities on the fair value as of 30 September 2023.
Accounts examples 