TUI searching for right properties for Middle East expansion

TUI is withholding going in to the Middle East due to a lack of the right kind of product to meet its customer demand.

Speaking at IHIF EMEA in Berlin, the vertically integrated operator’s chief strategy officer and CEO holiday experiences Peter Krueger said over the last two years he has made four visits to the region, where he is constantly asked as to when TUI will start operating in serious volumes there.

However, he said with much of the focus in the region on luxury accommodation, there is a lack of product that TUI requires for its customer base - four and five star mainstream, all-inclusive properties.

Krueger said: “I see it more as a supply issue than a demand issue, if they have the right supply customers will come automatically.

“In other words what we need to do is similar to Cape Verde, we need to build and operate our hotel brands. If we create the product first then people will travel.”

He added TUI first started operating in Cape Verde 12 years ago after buying its own land on which it built its own hotels.

Once the hotels had been developed, the operator was able to use its airline to deliver the required capacity, so increasing value accretion by keeping the entire operation in house

Krueger said: “In Cape Verde we now have 12 hotels which adds a contribution to the country’s GDP of almost 40%.

“Nobody else other than us has the ability to develop these vertically integrated destinations and a lot of our competitors are now following us.

“Our strategy is to be the first mover, then there is value accretion on the real estate side and that’s exactly what we’re looking for.”

And that’s not the only positive impact on the balance sheet Krueger said, adding: “We use our aircraft assets very strategically to align them end to end with the hotel business and therefore the end to end profitability is very high.

“The yield is one third higher in return on capital employed compared to your competitors because of the strong vertical integration that we have and that’s a big benefit.”

Elsewhere, Krueger said TUI is seeing a lot of growth in both East and West Africa and is investing accordingly.

He added: “It’s very close to Europe, has nice holiday product, amazing beaches, cheap products and there is more stability now from a political perspective.”

TUI is also looking at growth in South East Asia where it has hotels in both Thailand and Vietnam and where Krueger is keen to adopt a strategy that has already proven effective for the operator in the Caribbean.

He said: “You need to combine the short and long haul markets so that we have long haul customers coming from Europe to the Caribbean and then we have short haul from the US and Canada.

“We have six million customers in the US and Canada and if you have a hotel with 500 rooms in Jamaica, then if you sell half the capacity to the short haul market where prices tend to be higher because the flight component is less expensive and there’s more willingness to send more in the US and Canada, then you only have to sell 250 rooms to the long haul market.”

He added any new hotel built by TUI also helps it meet its expansion targets as the operator currently owns 420 hotels but aims to have 700 under its control.

And Krueger is confident this target will be met as it is currently getting 10 new hotels a quarter, totalling 40 per year.

Krueger also said TUI is continuing to invest heavily in the cruise market where it currently operates 16 ships.

A new ship is due to join the German fleet this June while a further two expected to be delivered in the next year will double the capacity available to the German market.

While each ship costs about €1 billion, he added a combination of low interest rates, certain tax breaks and high demand for the product make it an attractive investment.

And Krueger added TUI is always looking for new investor partnerships from across the spectrum as it currently works with all kinds of investor, including private equity, institutional investors, pension funds and family businesses.

“We are very diverse and very agile when it comes to partnerships and every region is different,” Krueger said.