By Matt Scuffham
LONDON (Reuters) - Europe's biggest tour operator TUI Travel said it had seen a significant improvement in profitability in recent weeks and was putting more summer holidays on sale to meet increased demand.
The group, formed in 2007 through a tie-up between TUI AG's travel division and Britain's First Choice, reported an increased first-quarter operating loss but said trading had improved in the second quarter.
TUI Travel, in which Germany's TUI AG holds a 43 percent stake, said trading had been particularly strong in Britain and the Nordic countries, which have seen increases in summer 2010 bookings of 6 percent and 40 percent respectively.
CEO Peter Long said a sustained improvement in demand had left the group "confident that the worst is behind us."
"In a more stabilised environment where consumer confidence has levelled off and maybe slightly improved, the holiday is at the forefront of people's minds," Long told Reuters in a telephone interview on Tuesday.
He added that the harsh winter weather in Britain had encouraged holidaymakers to book for the summer.
Economic sentiment in the euro zone strengthened much more than expected in January and December while British consumer confidence also rose in January.
TUI Travel and rival Thomas Cook (Thomas Cook ORD EUR0.10) have reduced the number of holidays they sell by more than a quarter in the last two years, enabling them to increase average selling prices and avoid having to offer heavy discounts at the last minute to sell unwanted holidays.
The strategy helped both groups lift profits and margins through the recession, while smaller operators struggled.
However, TUI Travel is now adding to capacity in the UK and Nordics in light of the strong trading in those regions.
"What we're demonstrating is that we've got a flexible business model and that we're able to add capacity as well as cut. When we see an opportunity and improving demand we will do that," Long said.
Numis analyst Wyn Ellis upgraded the stock to 'add' from 'hold', citing the increases in capacity.
"We see this as a very positive development. The shares are modestly rated and we expect near-term share price strength," he said.
Shares in TUI Travel were up 0.2 percent to 258.3 pence at 12:15 p.m. British time, valuing the business at 2.9 billion pounds.
The group reported an increased operating loss of 107 million pounds ($167 million) in the quarter to December 31, compared with a 35 million loss the previous year.
Tour operators traditionally make a loss in the half year which does not include the key summer period.
TUI Travel said it had faced a tough comparative period as the first quarter in 2009 had come before the worst impact of the recession and had benefited from Britain's third-biggest holiday firm XL Leisure going into administration.
TUI Travel said it was confident of meeting expectations for 2010. The consensus forecast for full-year pretax profit currently stands at 352 million pounds, according to a Thomson Reuters I/B/E/S poll of 20 analysts.
Rival Thomas Cook gives a trading update on Thursday.
(Editing by Hans Peters and Mike Nesbit)