TUI Travel International Money and Finance - Essay Example

Title: International Money and Finance Introduction: A company having its operations across the borders can be said to be involved in international financial dealings. This naturally involves several business risks and returns that are spread across the global business world. Foreign exchange is the process of trading of money across different countries in the world (Melvin & Norrbin, 2012, p.1). Thus considering a company operating at an international level, there are several outcomes of the company that are significant for understanding in order to realize the status of the company as well as consider measures accordingly to sustain the success of the company. These include the financial outcomes of the company, the strengths, weaknesses, opportunities and threats of the company, as well as the strategic plans used by the company to manage its risks. The present study focuses on an understanding of these factors considering the case of TUI Travel PLC. TUI Travel PLC: TUI Travel PLC is a leisure travel company that is leading in the world. The company operates in around 180 countries and has around 31 million customers of its services that reflect the company’s performances in 31 major market areas across the world (TUI Travel PLC, 2012). The company offers the best available holiday tours and services for its customers that include sun and beach, activities and adventures, luxuries, excursions and transfers, accommodations, oceans and rivers, and responsible travels (What we do, 2012). The Performance of the Company: TUI Travel PLC being one of the leading companies in leisure travel services, its operations is spread across 180 countries that include 31 of the major market areas. The major source markets of the company include UK, Sweden, Germany, France, Belgium, the Netherlands, Austria, Poland, Switzerland and Canada. “TUI Travel’s core markets account for £388bn of global travel spend” with the three largest markets being Germany, France and the UK (Market Overview, 2012). The performance of the company has been in line with the company’s strategies and the company has reflected development in its business operations with the turnover of the company increased by 5 percent that accounts to around 3.5 billion Euros as recorded in the first quarter of the FY2012. The previous year results for the company had recorded 3.3 billion Euros. “This growth is principally attributable to a higher proportion of differentiated product sales” (Hanover, 2012). The major competitors for TUI include Kuoni Travel Holding Ltd,. Thomas Cook Group plc, and Travelport Limited. The top industries for the company are travel agencies and services, transportation services sector, and business services sector (TUI Travel PLC Competition, 2012). Financial Trends of TUI Travel PLC in Last Five Years Time: The financial trends of the company reflect improvement in the performances of the company with the gross margin being recorded at 8.86 percent improving from revenue of £13.51 billion in the year 2007 to £14.69 billion in 2011. The net income recorded an improvement from a loss of £123.00 in 2007 to £89.00 million in 2011. The net profit margin of the company is 0.43 percent and the operating margin is at 0.97 percent. Increases have also been reflected over the years in the dividends per share and earnings per share of the company. While the dividends per share increased by 2.73 percent on an average over the last five years, the earnings per share reflected an increase of 171.65 percent year on year. This is a remarkable achievement for the company since not many companies in the industry are known to pay dividends (ft.com/marketsdata TUI Travel PLC, 2012). As far as the cash flow of the company is concerned, records reflect a fall in the cash reserves of TUI in 2011 by £402.00 million. However, on the other hand, TUI gained from its operations £613.00 million that reflects a cash flow margin of 4.17 percent. It is also of the record that the company has utilized £213.00 million for purposes of investments and made payments of £806.00 million in cash flow financing. The capital structure of the company that can be reflected from the balance sheet of TUI, it can be obtained that the company has very less dependence on debt for its capital needs (ft.com/marketsdata TUI Travel PLC, 2012). Thus the overall financial performance of the company over the last five years can be said to have been highly satisfactory and positive. The losses for the company have also been managed effectively and the earnings of the company reflect strict gains for TUI enabling an expectation for the company for a satisfactory performance in the near future as well. Strategic Plans and Developments of TUI: The strategic goal of TUI involves creating improved value for its shareholders by reaching at the leading position in the industry of leisure travel services, hereby offering its customers with varied choices of different and flexible pleasures, fulfilling their needs and desires of travel. The major areas focused by the company as parts of its strategy includes “product and content, distribution and brands, people and operational effectiveness and growth and capital allocation underpin everything our businesses do. In addition, the Group is focused on three strategic growth initiatives: product, distribution and operational efficiency” (Strategy, 2012). As far as the strengths and weaknesses of the company are concerned, the strengths of the company include its enhanced operating performances, its strategic alliances, its strong position in the market, and its wide range of services. The weaknesses of the company include the company’s limited financial leverage, and limited position as far as liquidity of the company is concerned (TUI Travel PLC: Company Profile and SWOT Analysis, 2011). Thus the strengths of the company allow TUI to compete successfully with the major competitors in the industry. Moreover, being widespread across the world proves to be a positive attribute as far as the geographical locations of the company is concerned, being able to reach out to wide range of customers. However, the financing of the company may be affected because of its limitations in financial leverage and liquidity. TUI’s Management of Risks: Management of Exchange Rate Risk: The performances of the TUI Travel PLC involve different financial transactions in the global financial markets. The company has its focus on the management of the financial risks that are part of such global transactions. There are policies that characterize the categories of financing, including the rules, experiences and workflows. Also, the various limitations on transactions and items risk are categorized. Trading, agreement and management of operations are set apart in terms of both functions and managements. There is a continuous monitoring on the conformity with the rules and limitations. Being a part of the principle, the hedges that the Group has been involved into have been required to be supported by fundamental documented or potential transactions. For this purpose, familiar and standard software is used for recording, assessment and coverage of these hedges (Financial Risks, 2012). In the TUI Group that includes the TUI Travel PLC as well, the financial risks largely take place from transactions of payments that occur in foreign currencies, since the business involves services to customers across the borders. Also, the requirement of fuel, and financing by means of the money and capital markets are certain other factors that tends to increase the financial risks of the company. With the purpose of limiting the risks “arising on changes in exchange rates, market prices and interest rates for underlying transactions, TUI uses derivative financial instruments not traded on stock markets” (Financial Risks, 2012). These include principally transactions of fixed-price like forward transactions and swaps and, options as well to a smaller level. “These transactions are concluded at arm’s length with first-rate companies operating in the financial sector whose counterparty risk is regularly monitored. Foreign exchange translation risks from the consolidation of Group companies not reporting in Euros are not hedged” (Financial Risks, 2012). The fluctuations in the exchange rates in financial transactions have been found to have a negative influence on the balances of the TUI Travel PLC that are kept unhedged. If there is a rise in the costs of the input, then the cost of offering the products to the customers also tend to rise and hence proves to be disadvantage for the company. In order to handle this risk, the risk management team of the company considers strategic measures that include: higher retention of the customers delivering repeat rates of booking and earlier trends in booking; highly trusted brands that provide value and superiority and broadens the choices of the customers; and involvement of the colleagues of the company who play the major role in bringing success to the company (Principal Risks, 2011). The risk factors and profiles are reported by the sectors on a quarterly basis. The function of the Group Risk Management team of the company strengthens and combines the Group risk profile, intimately examining the development of the business with respect to the management of the risks all through the organization. The Group Risk Management team of the company produces the consolidated Group risk profile in front of the Audit Committee for assessment which is done twice in a year.  In addition, at every meeting of the Audit Committee, improvement on the growth of the structure is accounted and the sector management teams are called to analyze and talk about their risk profile in a rotating manner. “Group Audit Services (GAS) play a key role in ensuring that the businesses adhere to the risk management procedure.  More importantly, GAS also reviews and tests the evaluation of reported risks - ensuring that identified controls are tested and actions have been validated to appropriately mitigate risk as reported” (Risk Management, 2012). Management of Country and Political Risks: Companies offering for travel and leisure services are vulnerable to domestic and international risks that mostly affect the countries where they operate. Also the political conditions of the countries might create risks for the services of the companies. The risk management team of TUI Travel PLC considers these factors significantly while considering the strategies in order to deliver their services successfully. They focus on the factors that affect the demands and choices of the customers and accordingly shift their services and offers. For instance when the company realized that the customers were booking later than usual and the North American demands would take some time for recovery, the company altered their offers and capacities for the Winter reflecting the present situations in the market. Also, accordingly the Summer plans are considered by the team (Principal Risks, 2011). As far as political risks are concerned, disruptions in operations are normally caused by events occurring on a large scale. There may be future decline in attractiveness of any particular destination. This would make the company unable to work efficiently. The potential impact of these risks involves significant losses: cancellations of holidays, repatriation of customers, reduction in the demands of customers, and likely increase in premiums for insurances. Product variance and operational efficiency are the two strategic initiatives of the company in this regard. TUI Travel focuses on ensuring a balance in the destination programs intending to provide flexible supplier agreements. The purpose is to reduce the effects of such risks (Principal Risks, 2011). The company tries to promote the benefits of the offers of travelling offered by the company with the assistance of a recognized operator of tourism. The political situations are continuously monitored, particularly in destinations where the conditions are more volatile and accordingly actions are considered depending on advice of security intelligence. Also, the company maintains strong relationships with tourism facilities that prevail in the local areas and other associations of the travel industry, trying to obtain the support of the government of the countries as well. As part of their strategy, TUI Travel also liaises with the stakeholders of the aviation industry and providers of meteorology services such that emergency responses may be obtained in cases of adverse conditions of the weather (Principal Risks, 2011). Country and political risks also involve the varying demands and preferences of the consumers. If the company fails to realize the varying demands depending on different countries and political states of affairs, the company would lose its consumers. Moreover, with political unrests in several countries at different points of time, there are risks for the company not to be able to identify the suitable opportunities for its services. The company might also have lesser experiences in newer markets, hence proving it to be difficult for the company to handle. In order to manage these risks, the team has its focus on developing its portfolio of products in the Mainstream sector, increase the inventory of hotels in the Accommodation and Destinations Sector, strengthen its leading position in the Specialist and Activity Sector, as well as focus on its online presence for its customers. Also, the company is trying to strengthen its position in the foreign markets like Russia and Ukraine and investigating new opportunities such that the risks may be mitigated (Principal Risks, 2011). Recommendations: While international operations are beneficial for the company in many respects, it is important to note that business risks will always be associated with the operations of the company. Particularly, financial and political risks are highly significant since business transactions involve different rates of exchanges and these occur between different countries involving different political states of affairs. Hence in order to manage such risks, the top management of the company needs to understand in details the different political and financial risks that can affect the operations of the company. Such responsibilities need to be shared among both the board members of the company as well as the teams of management. Monitoring the political and financial risks help to improve the performances of the company. Risks need to be evaluated in terms of their associations with one another and the way both the internal and external functions of the company may be affected. A systematic process needs to be followed in order to assess the risks such that the exposure of the company to the risks may be suitably realized. Also, in order to realize whether the company is considering the correct measures, a constant monitoring policy needs to be adhered. Mapping the politics, evaluating the risks, and assessing the controls and the plans need to be incorporated in the risk management plans of the company. Conclusion: From the above study, it can be concluded that TUI Travel PLC is a company that has been considering its measures and strategies well and efficiently leading to positive outcomes for the company over the years. The financial performances of the company reflect the effectiveness of the strategies of the company. The market position and the broadened variety of products can be said to be the positive attributes of the company attracting greater number of consumers. At the same time, the management team of the company is equally concerned with the management of the financial as well as political risks, with the strengths of the company supporting the actions of the company as well. 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