TUI AG

XETRA:TUI1

Earnings Call Analysis

Revenue Growth and Robust Market Strategy

In a recent earnings call, executives discussed a 20% increase in total revenue for hotels, highlighting that this does not negatively impact margins due to arm's length commercial relationships. The company is on a path to a ratings upgrade, contingent upon consistent delivery of financial milestones. They also addressed the challenges of extreme weather, noting that while certain areas experienced heat waves and fires, overall risk is mitigated through diversified destinations and extended booking seasons. Musement, their experiences business, saw a revenue growth of 26%, and while it's below Viator's growth, the company has a strategic focus on balancing profit with growth. Additionally, they're expanding B2B deals and leveraging cross-selling opportunities within their travel ecosystem.

TUI AG Returns to Profitability Post-Pandemic

This quarter, TUI AG has brought forth some sunny news. Amidst a world recovering from the impacts of the pandemic, the travel and leisure company has reported a return to profitability and is tracking well to meet its full year 2023 expectations. Thanks to improved operational measures, TUI AG welcomed 5.5 million customers, which is 95% of their pre-pandemic 2019 customer levels. With an impressive airline load factor at 93%, the signs are clear that TUI AG's business is returning to normality. Q3 saw revenues surge to €5.3 billion, nearly a billion more than the previous year, evidencing a robust recovery with EBIT up by almost €200 million reaching €169 million.

Performance Strengthened Across Segments

A deeper look into their segments reveals significant performance enhancements, especially in hotels and resorts. Despite a conservative approach towards investment and only a marginal increase in available bed nights, the company achieved a 5% increase in occupancy and a noteworthy 9% lift in the daily average rate, outweighing the cost inflation witnessed in various destinations.

Strategic Expansion and Strong Cruise Sector Results

TUI AG did not only thrive in stay accommodations but also marked excellent advancements in the cruise sector despite a slight decrease in passenger days owing to the refurbishment of a fleet ship. The occupancy rates soared to 98%, almost nearing pre-pandemic levels, and TUI Musement, their tours and activities sector, maintained a stable high, marking a 33% growth in sold experiences. Strategically, TUI AG moved to tap into new markets by extending their successful hotel platform, which now includes a foray into the Middle East and Far East with the inauguration of their first hotel in China.

Innovative Product Diversification Aiming At Market Domination

TUI AG has innovated with dynamic packaging, aiming at profitability with the introduction of a more diverse product mix, including ECO-only and flight-only products, as well as car rentals and ancillary offerings. Competing in a space traditionally dominated by airlines, TUI AG is upgrading its product line to provide offerings that are on par with or surpass their competitors. The inauguration of their first product in the tourist segment market has been successful, adding a positive note to their market expansion efforts.

Reinvesting in Growth and Sustainable Partnerships

Finally, TUI AG has set its sights on growth through reinvestment of profits, especially in TUI Musement, and forming sustainable growth partnerships like the newly recreated RIU joint venture. This JV aims to exploit growth opportunities in acquiring new properties that are profitable. The company has committed to an investment of €150 million for the current and next fiscal year to support this. With a focus on quality, sustainability, and leveraging a strong B2C and B2B distribution network from Dubai, TUI AG is strategically placing itself to go beyond its European stronghold and capture the global market.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the TUI AG conference call regarding the Q3 results for the financial year 2023. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation.

Let me now turn the floor over to your host, Sebastian Ebel and Mathias Kiep.

[Sebastian Ebel, Chief Executive Officer]

Thank you. A warm welcome from sunny Hanover, we want to present today the Q3 numbers, and I will summarize the operational and strategic highlights of the season. Mathias will go into the detailed numbers, then we will talk about the trading update and assumptions for the full year and a summary from my side, and then we will move into the Q&A session.

If we look into the third quarter, April to June, we are back to profitability, and we are on track to deliver on the full year '23 expectations. That is the good message. What is even a better message is that all the measures we have taken will help us and to improve the situation further in the coming year. But in the third quarter, we had 5.5 million customers, which is 400,000 more than previous year, which is 95% of the '19 levels with an airline load factor of 93%.

So what you do see at the business is normalizing and coming back to normality. The Q3 revenue, EUR5.3 billion, almost EUR1 billion higher than the year before. EBIT improved by almost EUR200 million to EUR169 million. Summer bookings remained strong. There was a shorter dip because of the roads and the wildfire situation. This has normalized again with good prices and with 14% left to go.

Summer means not ending at September like our business year means, including October, and with this, we are able to deliver a significant increase in the full year. We focus on the operational excellence and execution. We do see that in our core business, we have opportunities to improve further and we are really focusing on our strategic initiatives, which help us to grow further profitable, both will see a significant, will lead to a significant improvement in the coming year.

If we look into the segments, hotel and resorts have even increased their strong results compared to last year's quarter. The available bed nights didn't increase a lot. We were very cautious. We are very cautious on investments, but occupancy increased by 5% and the daily average rate by 9% and this increase we needed for the significant cost increases we have seen in the destinations.

Excellent development on the cruise side with all three cruise lines that we have slightly less passenger days because one ship cut out of the two cruises fleet had to be refurbished and then what brought into service in Marella. So you do see the significant synergies here. Occupancy at 98%, the 73% is with Hapag, which translates roughly to 80% if you go to cabin because they have a lot of single cabin customers, and this is almost at the level we're at 90%.

If I look at the last month, we are even slightly above '19 levels, so a really great development. TUI Musement on the same positive level like last year, we are investing there in future growth. You have seen 33% growth in experiences sold and this is important for us to get more customers and more interaction with our customers. So a very good development with EUR190 million in the Holiday Experience segment.

If we look at market EUR150 million improvement from EUR143 million negative to EUR6 million last year, there was an impact of EUR75 million flight disruption costs. We are happy to confirm that flights are operating on a level which are at '19 levels or even like in Germany by far better than '19 disruption levels.

So the significant investment we have taken is supporting a very good operation, and I must admit I have 25 years in Germany never seen such a smooth operation as we had with hardly no three hours plus delayed. Load factor 93% coming very close to the historical load factor, so a very good development.

If we look into the markets, a breakeven situation in Northern region and Western region, strong improvements. Germany, it looks as if is slightly worse. We had last year a significant positive hedging ineffectiveness effect. This year, we had a negative hedging ineffectiveness effect. That's all from COVID. That's all non-cash and we will not see that in the next fiscal year anymore because it comes from the COVID history. If we look at operational results, there has been also a significant improvement in Central region.

It's good to recap our strategic initiatives when we presented that we said we wanted to grow market share, which means that in the markets we are there with what we do, we want to do these things even better to grow profitable market share. We want to also grow in the overall tourism markets by bringing more new products into the market and gaining new customers.

We do know that in some markets, we performed better than in other markets, in the markets where we are not performing as best of our competitors. We have taken measures, we are implementing the measures, and we are in a catch-up mode. With the new product and new customers, I'm really happy to confirm that dynamic packaging, where we are introducing it, and we do it month by month with more products, more markets, it's selling very well and dynamic products have a very attractive margin, so this is doing very well.

I was, for example, in Oslo last -- this week, and they introduced Dynamic Packaging on Sunday and the first 10%, 20% of all bookings were dynamic package products. So this helps us a lot in growing without jeopardizing the market with the wholesale product we are in, and we are getting a lot of new customers because we broaden our product portfolio or doing more and more with Musement going into new markets, going after customers, also customers who are in the destinations, but not yet TUI customers.

And this we do on with a strong focus on quality and, of course, sustainability, which is in our heart, and with our people because we can only be successful if we have a winning team spirit and I'm really happy to see that we have more fun than, of course, by far more fun than we had through Cohort.

What does that mean for hotel and resorts? And on the next slide, you will see some more details on that. We leverage the TUI hotel platform we have built up. We now can connect more and more hotels management contracts. We have moved into the Middle East, into the Far East, the first hotel in China.

So first small numbers, but it's growing steadily. Asset right and joint venture growth mainly with TUI Blue and RIU you know that we have very strong joint venture partners in the world, Atlantica, Group Hotel, RIU in Canada, so this is doing very well. Cruise, Strong brands, I was really excited to read and to lead on the weekend analysis on the UK, how strong Marella in its segment IT, that was a very nice and positive surprise, and we will get in three new ships in '24, '25 to TUI Cruise and we are looking forward to that as well.

On market and airline assets, we want to grow market share by doing things even better dynamic packaging is absolutely important for us to grow profitable, but also the components which are, by the way, the prerequisites for a great dynamic packaging product is doing well. We introduced month-by-month, more ECO-only products, more flight-only products, but also car rental product a lot of ancillaries which we now bring into the market.

We do know that competitors, especially airlines are sometimes superior when it comes to ancillaries, we are in the catch-up mode, and we want to be there in the next couple of months with something which is comparable or even better and the tourist segment is a huge segment in Europe. We have not been strong in. We have now implemented in the first market the product and it's selling well.

TUI Musement, we want to outperform the high growth. The T&A market, we want to use part of the profits we have to further fuel growth and to also expand the experiences the own product because these are the margin, the strong margin products. What does it mean in detail? As said, we use our hotel platform to connect more and more third-party properties. The TUI rand is strong. It's also strong. That was something new for me and attractive for customers in the middle and Far East and so that's why we have built a strong B2C, B2B distribution arm out of Dubai and it's working well.

Otherwise, we wouldn't have the strong occupancy we have just prepared. So the business is going international out of Europe. On the asset-right and JV growth, we use the capabilities our joint venture partners have to grow also on the property side. We are really happy to announce that we have agreed to a new RIU joint venture company for further growth. You know that we had to sell during COVID, the joint venture we had. To the RIU family, there was 22 properties, the management we always kept as you know and now we are building and have created a new joint venture with RIU, again, 49% us, 51% the RIU family.

We see excellent growth opportunities of hotels we can acquire, which are from the second day on profitable and contributing profit to us, and by that, we had decided to invest EUR150 million this year and next year, which means that we -- through the leverage we can further improve our hotel resorts because with the existing number of hotels we have, yes, we can always increase another 0.5% of occupancy of EUR1 more, and of course, ancillaries, we can do more.

But there is a theoretical limit if we don't grow the number of hotels through the platform through the hotels, and this is not possible, and the third cornerstone is the hotel fund. There, we are also very happy to talk about the first successful execution of first hotels, one luxury hotel resort Zanzibar, another hotel on Cape Verde, very good step forward. There is a strong pipeline of additional hotels.

You know that these hotels will be managed by TUI, so that we have a benefit, do it without having the capital deployed. Yes, we consult and we have initiated the hotel fund, but the hotel fund is independent from us. Customer satisfaction is very important for us, almost 0.5 point more from out of 10, 8.4%. There are two things which are really good. One is that our own hotel brands our cruise brands ranked even higher than the average and other hotel groups. Second, the increase in the TUI App because the TUI App looking forward is a very important tool for reduced cost and to sell more.

I quite often get the question is that against retail, not at all. I have been always a very strong support in retail. You know that we have enlarged the network in the UK. But what we want to do is we want to take the traffic from the web, which is very costly into our own ecosystem, our app, and this on the basis of strong customer satisfaction also on the distribution channel.

If we look at next page, please. If our App, I would say, two years ago, we were far ahead -- far behind our competitor, the best competitors. Today, we are getting very close to the best of breed and tomorrow we hope that we are one of the top third and of course being the market leader in some segments, the target should be to be the best.

If you look at the numbers, we doubled the share of our pax sales in the UK now to 10% latest numbers, Germany, 7% latest numbers, and if you know that a good target would be 50, if you compare it with a recommendation only brand who is there then you know what our target will be, how long will it take, not 10 years, it should not take more than three years, and if you know that the web traffic is very expensive, and if you have someone in the app, has two advantage distribution costs are lower, yes, you give maybe some incentives, but it's significantly lower, and of course, we can sell all the new products we have in.

We have now the cruise in. We have the recommendation only the flight only the experience other nice products to become and we want to interact with the customer by far more than when he goes on vacation every two years, and this will be supported by a pilot of ChatGPT being part of the app where you can -- where you don't need to select from where to where, what date, five star, in the full text, you write what you need, the system is learning what you have asked.

So if you never want to go to the US that you will not get even if it would fit well proposal for the US for self-learning and with good data. I mean you know that you quite often look into ask questions. It looks great, but it's not -- it's a lot of false information in. We have to make sure that our data is correct, out of database, which is secured.

So that's why we focus so much on app because that can reduce in the next three years, our distribution cost a lot and can fuel sales. And I think it's so important for us that we really -- the investments we take are limited, we built on the fixed cost structure we have and bring more to the customer with by far lower cost. Also in our heart is sustainability.

Very important, you know that we agreed to the SBTi targets, our own ambition is higher. We are having very -- achieving very big milestones politically agreement to produce green fuels. We have now done the first part using green fuel for TUI cruise. Therefore more to come. It has worked very well and we are using waste and its two-folded good. It's carbon-free and the waste don't have to be burned or something else, and second, we are now having -- we will have all the cruise ships in Germany with -- shore what is it power from the shore.

Shore power. We will have the first trials when we will get the first LNG shifts with bio-LNG. So we have signed a significant amount of contracts with providers for staff for the airlines. So this is in our heart, and this also, by the way, helps a little bit to lower the interest rates, which have increased quite significantly. So this is very important and we see what happens in the world. It's even more important. Next page. The nine months results and the details will be given by Mathias.

[Mathias Kiep, Chief Financial Officer]

Thank you very much, Sebastian, and good morning, everyone, from my side as well. Again, like every quarter, a few pages from my side on P&L, cash flow, balance sheet, and then we'll come back to trading outlook and the modeling assumptions for the remaining fiscal year.

Now I think we are very pleased with this quarter. It's another quarter that delivers on our corridor in this transformational year to increase our profit significantly and to deliver the foundation for further growth and I think if you look at the ingredients, the elements of this quarter.

One, it delivers strong improvement in profit, EUR170 million against last year. Second, it delivers a further improvement on the balance sheet. So net debt down EUR1.1 billion, and also, if you compare 12 months ago, a balance sheet, which is clean of funds provided to the government, and again, we cannot reiterate more that how grateful we are to our shareholders for the opportunity to execute on that.

In line with that, the progress that we could make in terms of extending our credit facilities to 2026 and the first rating upgrade and I would expect and would hope for further upgrades in the future that supports then our further recovery to a situation on the balance sheet that we were prior to the crisis.

At the same time, as Sebastian mentioned it, this also we explored ways of growing capital-light kind of outside our balance sheet and how do we get our very successful hotel operations into a position that they can secure further assets, and at the same time, we can profit with the rest of the business in terms of managing them and for the two operator to be connected to them and the RIU joint venture at the same time, the execution of the hotel fund that we could announce.

These are two further cornerstones to set the foundation for further potential for the future. Now on the next slide, you see what Sebastian already described what were the pillars of getting to this EUR170 million and EUR200 million improvement versus last year and there are two major contributors to that, and one is cruises, and we have talked a lot about the ramp-up and the trajectory.

You will see that in a minute also on one slide, where we summarize the KPIs and all the holiday experiences and the higher occupancy in the cruise ships that translates one-to-one into this improvement in profit, more or less 50-50, driven by Marella and TUI Cruises. The second and the biggest contributor, of course, is coming from markets and airlines.

Sebastian talked about improvement in the aircraft effectively. We don't see disruption these days. Of course, any one and single disruption is in delay is on to more is one that we don't want to have. But at the same time, we are in a normalization. But I think from a financial perspective is still the case and that you probably see with all the airlines that you need as an operator to invest more parts are still kind of lacking in terms of delivery maintenance taking longer.

So to get there, we had -- that's something that we already communicated and invest more. But overall, I think, the EUR150 million, that's really -- we're really pleased with that, in particular, if we compare that where we were 12 months ago. Now on hotels, I think, it's fair to say that last year already, they were performing very well into the summer, record numbers also against 2019.

You may remember also the footprint improved a lot in the Finnish projects that were available in 2022 for the first time compared to prior COVID, and also now there is inflation. So what we see as Sebastian said in the start of the presentation , in terms of the better occupancy, the increase in rates is also needed to kind of offset inflation and that's why you see here a EUR10 million improvement broadly and this, I think, verall we would expect to continue as a trend in the fourth quarter as well.

Now coming to the P&L details, balance sheet details and cash flow and the P&L, I talked about underlying EBIT. The adjustments are very much under control. We have a net impact, which is positive this quarter coming from the Sunwing effectively a joint venture and a book gain that was realized there. Overall I think that's very good that we can then further reduce our guidance in terms of adjustments to something from EUR10 million to EUR25 million for the full year, and prior to that, that was EUR40 million to EUR60 million.

On the interest side, you see an increase in this quarter, and you look at cash flow, we'll come to that in a minute, you will see actually the reduction that we expected. But you can see a lot of noncash interest, in particular, the RCF prolongation that's impacting our interest line. At the same time, all the kind of hedge or provision-related interest moving through the balance sheet and moving through our P&L because of the further rate increase that we saw and because of the high interest environment, they're moving through a balance sheet. To be fair, it's also sometimes a bit challenging to really predict that on a quarter-by-quarter basis.

But taking that into account and given that also we expect rating upgrades more towards end of the coming months rather than immediate. We had to adjust our P&L interest guidance to something between EUR450 million to EUR460 million. And if we go to the next page on cash flow, you see that effectively quarter-on-quarter, the interest cash costs came down, that's where you also see what we expected and what we wanted to achieve that in particularly on the RCF, the costs go down, and also, we don't see any further costs coming from the silent participations because they were then all paid down in the third quarter.

One thing to mention on the cash flow is working capital. You see an inflow of broadly EUR1.2 billion in the quarter. I'm really pleased with that. That's again showing the measures that we undertook in working capital, they're paying off. At the same time, it's less than last year.

But please remember, last year, we effectively came from very low booking situation, no business into the third quarter where there was full operations or the ramp up to full operations for the first time. So this is more or less a one-off impact that you saw last year and the EUR1.2 million, I would say, EUR1 billion is a normalized number.

Last point on cash flow before I come to the balance sheet is on net invest. I think we feel still comfortable with the corridor of 450 to 500. Now it's August, we'll always see some phasing in September Boeing negotiation, hotel projects, and whether there is a movement in weeks, you then sometimes have a phase in between the fiscal years. But I would say, overall, this is a good number, and that's something we don't need to touch.

In terms of looking at the balance sheet, again, I'm very pleased that when you see RCF, there's no drawing and KfW has no drawing, it's really a buffer. The bond is warrant disappeared and TUI also -- because it was sitting in equity, you don't see the silent participations anymore.

And with the EUR2.2 billion net debt, I think that's a position which on a net debt level is actually better than we had in 2019 at the same time of the year, and with that, I think with this quarter, and that's I think for me and Sebastian it was really important to us, we set another building block towards what we wanted to achieve for the full year and I think we are in this corridor around consensus, but we will come to the details in a second, so back to you, Sebastian on current trading.

[Sebastian Ebel, Chief Executive Officer]

Thank you, Mathias. Thank you very much. Before I go into the actual trading numbers, a short recap on the road wildfires. By the way, we also had fires in Turkey and on Gran Canaria. 8,000 guests, we did evacuate from Southern Rhodes. That means that 80% of our customers were unaffected and Rhodes is a very important destination with us with roughly 5% of the summer program, which means that 34,000 customers were not affected.

We stopped all arrivals and booking holidays, including the 28th of July. We took very well care of our guests. We refund -- we amended bookings, re-bookings we did offer. We brought in a lot of people of our organization to take care of our prebuild that worked very well. We operated 12 repatriation flights, by the way, we took also a lot of customers not TUI customers with us back home to show the value of the package, and I think that worked very well, and the financial impact has been roughly EUR25 million due to cancellations, loss margin compensation, cost on the ground, repatriation flights and less bookings to Rhodes on this side.

I'm happy to say that the business is back and Rhodes is booking well again, and sometimes the power of media is not reflecting what the situation on the ground was I went there and most of our customers were not impacted. If you look at the bookings we had adjusted to the time when these things started very strong bookings. We had a time with less bookings and so a small dip, not only to Rhodes, but also to the other summer destinations.

We look every morning into the numbers, and it's good to reconfirm that we are back on where we had been before. Summer 86% sold, you should keep in mind the summer doesn't end like our fiscal year in September, but goes into October, UK, even 89%, a strong plus 1% year-over-year. Germany, 11% year-over-year, so a good development, if you see that we are almost, but not at the '19 level, it is mainly the long-haul business. The long-haul business has not recovered. It's significant. Germany even has halved still, and it's mainly going to the west, and it's mainly because of the huge increase of prices because of having not enough scarce capacity.

So with the main core business, we are at our '19 levels and very optimistic for the future years. If you look into details, it's really a promising outlook for the fourth quarter, very good development in our hotel resorts. You know the historical levels with a 1% point, we are coming to an almost practical optimum, maybe another percentage point is there, but you can only put or you should only put one person into one bed, and so unless we grow, and that's why we have all the growth initiatives we are coming closer to the optimal situation.

Yes, price increases, ancillary increases will support further profit growth, and it's good to see that we can compensate the cost increases by price increases. On cruise, as Mathias said, it took us longer or started later, the catch-up.

We are now at the historical levels last month, even slightly above with a significant increase in the daily rate, so very good development. If you take into account the increase interest, we have to pay because debt related -- quite related debt in TUI Cruises, we are at the levels which we had seen before and I think with the capacity increase, we'll see something good there as well.

TUI Musement, the 33% in the third quarter growth, 10% anticipated, slightly less spend of customers, which comes with a package, significant growth with new customers, which are sometimes our customers sometimes not our customers. So the strategy to get to new customers is working well by increasing the offering, working with QR codes and working with the App and now Mathias, what does that mean for the full year?

[Mathias Kiep, Chief Financial Officer]

Thank you, Sebastian, and indeed, what we thought is maybe a good idea to go through our segments to give you some indication on what is needed to deliver one on the significant EBIT increase for the group, but also to get something which is despite the situation in Rhodes to something which is around consensus.

Now starting for the group, we have accumulated position, which is now EUR400 million better than last year, and of course, if we just would then deliver on last year and in the fourth quarter that would remain. And I think that's of course signing off than our overall guidance.

At the same time, if you think about what is needed for a round to be around consensus, we would expect a further increase of this Q4 number, which is needed to get there just from a mathematical point of view. Now running to the segments, Hotels, you have seen in the third quarter that the increase was milder compared to the other segments.

I think in Q4 last year, they really had a record quarter, and so we would be happy if they would get towards that amount in the running quarter. At the same time, I think they have some effects from inflation, et cetera. So let's see where they get out at the same time, again, just to stress, last year was really, really strong.

Cruises, you see the ramp-up Sebastian just mentioned you're back to the occupancy levels, which actually are the full potential of the business. So against Q4 of last year, we would see naturally there a further significant increase. Musement, same, I think you've seen the excursions, the tickets are selling well. At the same time, we deliver more packs into our own business, and last year with the EUR40 million, there should be a further increase possible in the fourth quarter.

Now the biggest step-up is then still to be expected for markets and airlines just mathematically again to get to the number required and we are well booked in terms of the summer. We've seen now some softness. At the same time, disruptions are under control. We have had a bit of more invest to get there. At the same time, the disruptions were really costly also in the fourth quarter of last year.

So we should see an improvement also in markets Airlines again that first really strong number that we saw in '22, which was more or less on the reported level of 2019. I think overall, I think the third quarter is fair to say we were better than 22%. We are better than '19 reported not full potential of the firm because if you adjust 2019, there is still some way to go, and I think that pattern is probably something which in this transformation year will accompany us further.

If I may conclude with the rest of the modeling assumptions on the next page, adjustments, interest investments we talked about. I think something to mention on investments in net debt. This excludes the, I could call it, accounting effect that the joint venture, the additional joint venture with RIU has, as Sebastian explained, we will use the potential which sits in RIU 2 in order to fund the additional new joint venture, so in the consolidated entity, we will see effectively this funding dent on top, and that will be then in our consolidated number.

This cash, which is then created within RIU 2 will then be used in order to fund the new RIU joint venture and then to allow further growth there. So this will move to our balance sheet. But effectively that something from my point of view, I tend to ignore. I look at, of course, the consolidated debt. But in terms of the net investments, I exclude that because it's just moving cash from left side to right side. So I think that's from my side, again, Q3, a good cornerstone towards our targets for this year and back to you, Sebastian.

[Sebastian Ebel, Chief Executive Officer]

Thank you, Mathias, more to come. We have given to you our view for this year and looking into the winter, very promising. Why do we -- are we really looking forward with a lot of optimism.

We have agreed to a strategy, which improves the profitability and the margin of the business, which we are in today, very strong, and we do know that there are markets where we perform well and we do know markets where there is the potential to perform better and second, we have defined and not only defined, but we are in the implementation mode to generate profitable growth and to accelerate the profitable growth with new products and addressing more new customers, -- it's -- the biggest part is dynamic packaging. It's the components which we are selling.

It's the activities which we are bringing to more and more customers and keeping the customer into the ecosystem, and by the way, which I had forgotten when I mentioned improved probability and margin, the more customers we bring into the app, the lower our distribution cost will be.

The more we produce centrally, the lower our costs will be. So this is part of improving the situation of the business, the wholesale business we are in, and the incremental growth will come on an existing fixed cost basis and will bring us incremental margins. By the way, the margin on the dynamic package product is really very attractive.

So that's why we are looking into the new year with a very strong ambition to increase further our profitability even if we don't expect tailwind because it might be that we do see a consumer climate, which will be stable, but not improving anymore or may even be a small channel.

With all the measures we have taken, we are very confident that we can grow the profitability of our customers -- our company significantly, which would mean that we strengthened the balance sheet by focusing on cash flow with all the positive effects on gross leverage on the rating, which then would mean lower interest costs.

So we think we are on a very good track. Mathias always said, this was a year of transition, and it has been and will be a year of transition, and we are looking forward to the coming years with a great optimism.

Thank you very much, everyone, and with that, we would be open for questions. Thank you.

[Operator]

[Operator Instructions] And the first question comes from Jamie Rollo, Morgan Stanley. Please go ahead. Your line is open.

[Jamie Rollo, Morgan Stanley]

Thanks. Good morning, everyone. Thanks for taking my question. Three please. The first is just really maybe it's an accounting one, but your total hotel revenues are up 19%. Your reported ones are about flat. A little bit of that is a drop in Robinson, but it looks to be mostly a shift away from external to internal operating sales. So if you can talk a bit about that mix shift and the impact on hotel margins as you're effectively selling more to your internal tour operator. Secondly, on the net interest guidance, any feeling for 2024, please, now you've refinanced and assuming rates sort of stay where they are. And then thirdly, we've really got six, seven weeks in a year to go. It sounds like disruption costs will be much lower than last year even with the wildfires. So any sort of comments on full year expectations and consensus please. Thank you.

[Sebastian Ebel, Chief Executive Officer]

And the first questions are great questions to the CFO.

[Mathias Kiep, Chief Financial Officer]

Very good, so taking the question in order, one is on the reported sales. I think that's also on the quarter by quarter. I mean you see the better trading of the tour operators, the better integrated revenue coming from the hotels. While I think last year, some of our hotels also sold more externally than they did this year. So I think for the hotel, it's a shift in revenue. For the tour operator, it's coming back to revenue and having more internal revenue at the same time in terms of the result. For the hotels, that's not kind of a change. At the same time, it's also that a lot of this internal revenue -- this external revenue of last year has also shifted to something else. Now second question on interest guidance '24. We will provide naturally more details next year towards next year in December. I think what we see is that on the RCF, we're getting the interest savings that we wanted to have. We see more of these balance sheet related P&L impact. We also see that something, I think, I also mentioned context of the race and when we talked about interest guidance, and of course, whenever we do have new leases for the aircraft coming in, that they come in at higher cost than in the past, and that's something I think that will play an impact in particular as we are getting towards the delivery corridor now with Boeing and this is something that will need to kind of be reflected in our interest costs. The disruption cost impact on full year, so the impact of the wildfires, I think if you look at our trading, Sebastian has summarized it, I think we saw softness. We saw direct costs of the cost of the rotor situation. At the same time, we still feel comfortable around Bloomberg consensus as we said. I think that suggests that probably there would have been something that we could have been in a better position without it. But at the same time, it's something that we can currently compensate against what we expected.

[Sebastian Ebel, Chief Executive Officer]

And maybe one word to the airline disruption costs. We are really pleased with what we do see. I've never seen in 30 years such a good operation in Germany. There are hardly none and in the UK, it has normalized, and we do know that there are still some challenges at the one or the other airports and we are back to the '19 levels, which is despite all the maintenance or spare part issues is a great result and we invested quite significantly in achieving that and this also led to an increase in customer satisfaction. So I think it was a good decision to invest into this.

[Jamie Rollo, Morgan Stanley]

Thanks. Can I just follow up on, just on the first question, so the 20% increase in total revenue in hotels versus the sort of minus 1% reported revenue. Does that, I might say, now that is mainly a shift back to the internal tour operator, but you're saying there's no impact on margins. Essentially, you have for commercial relationships internally, some of the pricing to external hotels and tour operators. Is that right?

[Mathias Kiep, Chief Financial Officer]

Yes, absolutely. They're all at arm's length. Thank you.

[Jamie Rollo, Morgan Stanley]

Thank you very much.

[Operator]

The next question comes from Richard Clarke of Bernstein. Please go ahead.

[Richard Clarke, Bernstein]

Thanks very much. Good morning. Three questions, if I may. Just firstly, obviously, you're targeting a ratings upgrade. Just wondering what you see as the pathway towards that. Is there anything you need to do or is that just a matter of time? How are those discussions going with the rating agencies? Second question, just on the extreme weather we've seen this year, and I guess you're beginning to think about your capacity planning for next year. Is there anything changing in the way you're thinking about destination mix with regard to some of the sort of heat waves and fires? Do you need to remix towards different destinations? And how do you think about that to next year and longer term? And then lastly just on Musement. I think you say you're targeting market share gains in the experiences business. You had revenue growth, I think, of 26% Viator was at 59% for Q3. I think you're guiding to 10% growth for Q4 Viator again, significantly faster than that. To get those market share gains to match the fastest growing companies, what do you need to do? Do you need to launch Musement as a B2C brand? Do you need more B2B deals? How do you get that market share gains or do you start matching the top performers in that space?

[Sebastian Ebel, Chief Executive Officer]

Okay. Would you like, Mathias, the first or should I?

[Mathias Kiep, Chief Financial Officer]

Yes, good morning, and I will start just with the first quickly on rating. I think indeed we need to continue with our road map and continue to deliver quarter-by-quarter. I think it's fair that the rating agencies would like the numbers on paper before they react on that, and I think that's the pathway, which after the capital raise and towards the third quarter based on the second quarter, we got an increase now. I think the third quarter delivers upon what we discussed with them and I would expect them to look at the fourth quarter again with more detail to see what that kind of implies to them.

[Sebastian Ebel, Chief Executive Officer]

On the extreme weather, I think, we have three or four measures. One, and this is something very important. If you look at the media, at least the one I saw, it seemed to be that there is a huge heat wave and there are fires everywhere, so the power of pictures. If you look into the details, Greece had less wildfires this year than the years before. If you look at the temperature, they changed the measurement from two meters above ground to ground. So the weather was as nice and as pleasant as it had been before with 30, 32 degrees, and the precaution, the local authorities have now taken are huge. So I would assume that they will fight if fires happen, and they will always happen. They had always been happening. They have more now the infrastructure to fight that. So the power we have to -- and we are going -- and by the way, it has been fairly successful in the last couple of days. To tell customers you are safe, great vacation, great weather, and this is so important that we are well prepared for these onetime effects and good communication, taking care well of the customers and making sure that they have a great time, that's one thing. The second thing is we have seen and we will see further the prolongation of the season starting earlier and being longer. We have now started to prolong Greece, for example, until mid of November. I could imagine we are just discussing that to do it until Christmas or after Christmas because we do see that the bookings for autumn and early winter or late autumn are very, very strong and to be prepared. It sounds easy, but then you must have hotels, which because it can be called Majorca in February, and it can be called on Greece that have heating and so on. It's not as easy, but that's why with our own hotels and good partners, we are preparing for that. And as I said, for Rhodes, we fly to mid of November. Second, we are looking at additional destinations. We have been very successful in building up Cape Verde, an island in the Atlantic Ocean like the Canary Islands have the advantage that the heat is not as high as if you're Spain mainland. So they benefit the Canary Islands, Cape Verde. Portugal, we are putting more capacity in Portugal because the Atlantic Coast is nice, but also new destinations for us like the Belgium Coast, like the Dutch Coast like Nordic, where I had just been by the way raining like hell. When you discuss about risk, I mean, it has been always a risk to go to the Nordic country because it can be awfully cold, never, I mean, the rain was like I experienced when I was 10 years old. So there is risk and opportunities. Everywhere, it's important to have a broad offering, the right hardware and software to offer these also short-term and therefore, dynamic packaging is so important because there, you are not fixed to a capacity, which you may not need because the weather in the Nordics is bad or you may need capacity because the weather is great, but no one knows in advance, and therefore, also to have the product with direct access, daily pricing built on the spot to the consumer is so important, and overall, we think -- it gives us more opportunities than risk because we are so much focused on the Mediterranean, and we didn't go after the opportunities in other destinations that we are changing through direct access to hoteliers and DC to airlines. And on the other hand, I'm not so sure if we see less business in the high season because the price value proposition is extremely good, and there is -- maybe you may suffer one day or the other of too much sheet. But at the end, you can be fairly sure that there is great weather, and therefore, we do see that as an opportunity and the risk we see as not so big. Musement. Thank you. For us, it's a trade-off. You know that we do a lot of B2B business. So the growth you see net is not the real growth, and we are enlarging the base of B2B deals. You know the very prominent ones like booking, and we also try to balance out the profit we get from our core business into growth because we think that to balance it out is very important because just to buy growth doesn't mean it's profitable growth, and why do we think that we are in a better situation because we are in the situation where we sell the Musement products additionally to existing products or we sell the Musement product and offer tomorrow the package, and therefore, the cross-selling opportunity is big, and that has started to work well, still on a small level, and as said, if we would say we invest EUR50 million in Musement, which would mean EUR50 million loss, we may increase or not we may we would definitely increase the numbers of customers, but probably not everyone would be very happy to do that we would do that. So we really try to balance it out, and as I said, the real growth we do see, you don't see because we do it through intermediaries, and it's an agent model where we only see our margin.

[Richard Clarke, Bernstein]

Okay. That makes sense. Okay. Thank you very much.

[Mathias Kiep, Chief Financial Officer]

Thank you.

[Operator]

At the moment there seem to be no further questions. [Operator Instructions] There are no further questions, so I'd like to hand back to the speakers for some closing remarks.

[Sebastian Ebel, Chief Executive Officer]

Thank you very much. So the third quarter was good. We are optimistic about the fourth quarter, but not bad, and we are even more enthusiastic of the journey we are I think that's what always Peter Long said, the journey we are on, and we have changed the company. We are transforming the company. We want to be stronger with what we do. We see the opportunities of the transformation. It's all about execution, about delivery, and there, we have a great team, and therefore, looking forward, we are very happy to be with TUI and to be in this market and thank you for being with us and I think if questions will arise, the team is very happy to answer. Thank you.

[Mathias Kiep, Chief Financial Officer]

Thank you very much. Have a good day.