Full Year Results for year ended 30 September 2018

29 November 2018

Full year results announcement for the year ended 30 September 2018

Notes: (i) This table includes non-statutory alternative performance measures - see page 23 for explanation, associated definitions and reconciliations to statutory numbers (ii) As part of the preparation of the FY18 Group financial statements, management identified several non-cash adjustments which have been applied to the Group's financial statements for FY17. Further details of the restatement can be found on page 35 (iii) 'Like-for-like' change adjusts for the impact of foreign exchange translation, fuel and other. The detailed like-for-like adjustments are shown on page 10 (iv) 'Underlying' refers to trading results that are adjusted for separately disclosed items that are significant in understanding the ongoing results of the Group. Separately disclosed items are detailed on pages 16 and 31 (v) See page 24 for definition and breakdown of net debt. 'Like-for-like' net debt adjusts the prior year comparative for foreign exchange translation and the impact of the Group's bond refinancing - see page 20 for reconciliation

The comments below are based on underlying like-for-like comparisons unless otherwise stated, as Management believes this provides a clearer view of the Group's year-on-year progression

Performance highlights

· Group revenue of £9,584 million, up 6% on a like-for-like basis

· Underlying EBIT of £250 million, £58 million lower than prior year on a like-for-like basis

o Tour Operator down £88m, impacted by discounting in 'lates' market; UK particularly disappointing

o Strong Airline profit growth of £35 million, despite higher disruption costs

o Group result includes £28 million of legacy and non-recurring charges to underlying EBIT

· EBIT SDIs of £153 million, including transformation and start-up costs

· Net debt of £389 million; increase due to delayed bookings and higher non-cash items

· Bank covenant compliant; headroom for future covenant tests

· Dividend suspended for Full Year 2018, reflecting the overall net loss after tax

Strategic progress developing new opportunities for growth and efficiencies

· Sales of holidays to own-brand hotels up 15%; 2019 pipeline of at least 20 new hotels

· Accelerating own-brand hotel growth through £150-million fund with first £35 million expansion capital

· Strategic integration of Expedia technology and content in first five markets

· Innovative ancillary services driving growth of 4%

Priorities for 2019 onwards

· Address performance in our UK tour operator business

· Better capacity management and improved operational flexibility

· Drive increased focus on cash and cost discipline across group

· Improve selling of higher-margin own-brand hotels and differentiated holidays

Outlook for 2019

· Expect to deliver progress on underlying EBIT and lower separately disclosed items, leading to substantial progress on reported operating profit

· Reported operating profit will be a primary focus going forward, together with free cash generation

Commenting on the results for 2018, Peter Fankhauser added:

"2018 was a disappointing year for Thomas Cook, despite achieving some important milestones in our strategy for transforming the business. After a good start to the year, we experienced a larger-than-anticipated decline in gross margin following the prolonged period of hot weather in our key summer trading period.

"Profit in our tour operating business fell £88 million as the sustained heatwave restricted our ability to achieve the planned margins in the last quarter. The UK was particularly hard hit with very high levels of promotional activity coming on top of an already competitive market for holidays to Spain. Despite the impact of the hot summer, our Northern European tour operator achieved a near record performance, albeit lower than that expected at the end of May. Meanwhile, our Group Airline delivered strong growth in customers and profit, up £35 million, benefitting from increasing capacity in a turbulent European aviation sector.

"We remain committed to our strategy for profitable growth and we've made some good progress during the year. Within our own-brand hotels business we have established our hotel investment fund, opening 11 new hotels last summer, including an innovative new concept in Cook's Club. This positions us well for 2019 as we build on our position as one of the top 5 sun & beach hotel companies in Europe with at least 20 new hotel openings planned. Meanwhile, the launch of our alliance with Expedia, now in five of our markets, offers customers a much wider choice of city and domestic hotels at lower cost to the business. Taken together, these developments are transforming our opportunities for growth.

"Looking ahead, we must learn the lessons from 2018 and go into the new year focused on where we can make a difference to customers in our core holiday offering. We will put particular attention on addressing the performance in our UK tour operator where the challenges of transformation in a competitive environment remain significant. Across the Group, we will continue to streamline our cost base and manage our capacity to give us greater operational flexibility and financial discipline, while focusing the team on delivering performance improvements and giving customers more reasons to holiday with Thomas Cook."

Replay of presentation for equity analysts and investors

A presentation for equity analysts and investors was held on Tuesday 27 November, on release of our FY 2018 results update. The recording of this event is now available on www.thomascookgroup.com. There is no further presentation planned for today.

Forthcoming announcement dates

The Group intends to announce a first quarter trading update on 7 February 2019.

Enquiries

SUMMARY OF 2018 PERFORMANCE

Overall, our financial performance in 2018 was disappointing, despite starting the year well and making good strategic progress. Group revenue was £9.6 billion, up 6% on a like-for-like basis, and group underlying EBIT was £250 million, down £58 million on a like-for-like basis.

We delivered a strong first six months of the year, achieving improved financial results and going into the summer with a positive position. As a result, we were confident of filling all our committed hotel accommodation and flight capacity at good returns. However, with the start of the heatwave in May, demand reduced sharply with customers across our European markets delaying holiday decisions as they enjoyed record temperatures at home. This delay in bookings restricted our ability to achieve the planned margins in the 'lates' booking period.

While all our source markets were impacted, we saw a particular hit to our UK business where the slowdown in bookings came on top of an already competitive market for Spanish holidays. We have a specific plan to address the performance in our UK Tour Operator, set out later in this statement.

Overall, a higher-than-anticipated decline in gross margin in the final quarter resulted in underlying EBIT in our Tour Operator business being £88 million down for the full year. Within this, our Northern European Tour Operator achieved a near record performance, albeit lower than that expected at the end of the first half, despite the impact of the hot summer.

The weakness in our Tour Operator was partially offset by a good performance in our Group Airline. This looked set for an excellent year until air traffic control issues led to industry-wide disruption. This was compounded by operational challenges as we grew capacity to take advantage of the failure of Air Berlin. Nevertheless, our Group Airline delivered a £35 million improvement in profit in 2018.

Overall, our Group underlying EBIT was £250 million, £58 million lower than the prior year on a like-for-like basis. This reduction includes £28 million of legacy and non-recurring charges, comprising a £14 million write-down of historic hotel receivables, £4 million of flight disruption costs and £10 million of further transformation costs, taken through underlying EBIT rather than separately disclosed items (SDIs). In addition, £24 million of prior year balance sheet adjustments were made, reflecting a write down of historic balances now considered to be irrecoverable.

Overall, SDIs totalled £153 million which principally relate to our transformation programme and start-up costs relating to new ventures.

Free cash outflow was £148 million, £294 million below last year. This reflects the lower underlying EBIT performance, higher cash-related SDIs, investment in our new hotel fund and a working capital impact from the slow start to bookings for the 2019 winter season.

Net debt was £389 million, including the impact of non-cash adjustments for foreign exchange and finance lease extensions, which totalled £141 million. While net debt is higher than previously forecast, the Group's lenders remain supportive and we have secured additional flexibility to ensure we can continue to deliver our strategic plan. With an increased focus on free cash generation and cost management in our new plans, we are confident that we will make good progress reducing net debt over the next few years.

Further details on interest, tax and the Group's overall loss after tax are provided in the financial review section of this statement.

The Board decided to suspend the dividend for FY18, reflecting the overall net loss after tax reported by the Group. This decision does not reflect a change in the long-term dividend policy, which is to target dividend growth that reflects the Group's progress in underlying earnings per share. For FY17 the Company paid a dividend of 0.6 pence per share resulting in a cash redemption of £9 million.

PROGRESS ON DELIVERING OUR STRATEGY

Despite the disappointing financial performance, 2018 was a year of good strategic progress for Thomas Cook. We've taken important steps to grow our own-brand hotels business, establishing our hotel investment fund and opening 11 new hotels, including an innovative new concept in Cook's Club. Meanwhile, the launch of our alliance with Expedia in five markets is giving customers greater choice, at lower cost to the business. These represent significant steps forward in our strategy which is transforming our opportunity for sustainable growth in the years ahead.

Customer at our Heart is delivering meaningful improvements

Three years after introducing "Customer at our Heart", we now have tangible evidence that it is delivering. Customers are more loyal to Thomas Cook with a higher rebooking rate in 2018 than the previous year and we attracted 3% more new customers than in 2017.

More than that, we see a direct correlation between Net Promoter Score (NPS), our key measure of customer satisfaction, and the financial returns we can generate as a business. Where a hotel meets our threshold measurement on NPS, we earn an additional two percentage points more in margin the following year, showing that customers are willing to pay more for better quality.

NPS across our hotel portfolio increased 2 points in the past 12 months, demonstrating that the work we've done to improve quality in destination and our stringent approach to the hotels we include in our portfolio is paying off. Following a summer of airline disruption, as we integrated new aircraft and managed the impact of industry-wide air traffic control issues, Group Airline NPS was down 3 points. As a result, after two years of consecutive growth, group NPS fell back 0.8 points in 2018.

Customer Care - building trust in our brand

Our focus on the customer drives the big decisions that we take as a business. At an operational level, that means gathering all the information we can about our customers' experience and constantly monitoring it to shape the decisions about the hotels we sell.

The introduction of a new customer feedback management tool, InMoment, at the start of 2018 provides our hotel quality managers with detailed, real-time information on customers' experience of all aspects of a hotel. This enables them immediately to identify issues and intervene with improvement plans.

Customer Contact - forging closer relationships

The success of our customer-led strategy rests on strengthening our direct relationships and ensuring that we are available where, when and how our customers need us. We want to increase the number of customers who book directly with Thomas Cook, with a focus on digital channels where our cost of sale is lower. At the same time, we want to make it easier for our customers to book all of the services and holiday extras which help to give customers a personalised holiday experience.

Online sales increased in all segments in 2018 with particularly strong growth in the UK, up almost 30% year on year. Germany increased by almost 25% and our Airline by 17%. Online now accounts for 48% of bookings across the Group.

Holidays - improving choice and flexibility

Our holidays are the primary focus of all that we do at Thomas Cook. At the heart of that strategy sits a streamlined portfolio of 3,150 hotels where we can have a greater influence over our customers' experience - generating higher returns for our business.

In an increasingly competitive market, we know the successful businesses will be those that genuinely differentiate their offer and provide real value to the customer.

This is a growing market. One in five of our customers go on more package holidays than three years ago. In addition, more than two in three want the opportunity to personalise their holiday, which is why we have launched innovative new services like Choose Your Favourite Sunbed and Choose Your Room.

Our customers are responding well to these innovations. Alongside our 24-Hour Hotel Satisfaction Promise, which is now in place across all our core hotels, we are distinguishing our holidays from other package holiday providers, giving them more reasons to book with Thomas Cook.

Hotels - our own-brand strategy is winning with customers

Own-brand hotels are the cornerstone of our holiday strategy, presenting the greatest opportunity for differentiation and, from that, higher returns.

All our customer research supports that decision. Across our three biggest markets, customers' satisfaction with their hotel is the most important influencing factor in their overall satisfaction with their holiday. Three in ten customers now say that the hotel is more important even than the destination.

The NPS in our own-brand hotels in 2018 was two percentage points higher than our differentiated portfolio as a whole. And our new concept hotels like Casa Cook are among the very top performing hotels for NPS. This plays into the financial returns we make from these hotels. We earn a significantly higher margin from our own-brand hotels versus those from our selected partner hotels.

In Summer 2018, we opened 11 new own-brand hotels, including a new concept in Cook's Club. This builds on the success of Casa Cook, extending the same design-led approach to bigger properties at a more accessible price that we can roll out at scale. 

The first hotel under the Cook's Club brand opened in June in Crete and transformed a traditional holiday resort hotel into a stripped-back, design-led hotel to appeal to a new generation of travellers. In its first summer, the hotel delivered occupancy levels of more than 93% and increased its average daily room rate by almost 50% versus the previous year.

In 2019, we plan to open at least 20 own-brand hotels. This includes up to 10 new Cook's Club hotels; the company's first Casa Cook in its biggest market, Spain; and the first family Casa Cook in Greece. The new properties will take the company's portfolio to 200 hotels with around 40,000 rooms, putting us in the top five largest sun and beach hotel groups in Europe.

This expansion is boosted by the launch of our new hotel fund, Thomas Cook Hotel Investments, in partnership with hotel development company LMEY. Casa Cook Ibiza will open next summer as the first new project for the fund. Managed by Thomas Cook, we expect the 189-room hotel to continue the success of the first two openings for the Casa Cook brand where more than 75% of guests have been new to the company. We are targeting a further five new projects for the fund for 2019, focusing on our key brands of Casa Cook, Cook's Club and Sunwing.

Airline - good performance in a challenging year for operations

The success of our holiday offer is supported by a well-managed airline which leverages its relationship with our holiday business while actively developing its own distribution channels to compete wing-to-wing with other European leisure carriers.

2018 was a strong year of growth for our airline against a backdrop of widespread disruption following the collapse of Monarch and Air Berlin in 2017 and strike action across European air traffic control. We took advantage of the upheaval in the market to expand capacity by 10% this summer, increasing our market share at a number of our key airports in Germany in particular. We also strengthened our operational setup to support that growth with the addition of two new Air Operating Certificates (AOCs), including a new operation in one of our biggest destinations, the Balearics.

We made good progress with our efficiency programme, removing a further £31 million in cost through synergies achieved as we bring our national airlines closer together to operate as one European airline.

Despite some operational challenges, we delivered good growth in customers and profit, which increased by £35 million year on year on an underlying basis. Our focus for 2019 is to consolidate the growth we achieved in 2018, strengthen our customer offer and further extend our reach.

Partnerships

Complementary holidays

Ultimately, we know that the success of our strategy will be determined by our ability to focus on delivering higher returns from our core sun & beach holidays while at the same time partnering with the best in the industry to offer customers even greater choice.

The launch of our Expedia alliance in the first five markets was a milestone development. Plugging in Expedia's market-leading capabilities and extensive catalogue of city and domestic hotels will transform the way we offer a choice of holidays to our customers: more than 150,000 hotels that meet our health and safety standards, with an improved booking journey, at reduced cost and complexity to our business.

Combined with our hotel sourcing partnership with Webjet in sun and beach, we delivered 58% growth in overall bed-bank bookings for the year. This demonstrates the prospects for this part of the business as we roll it out further - and begin to take advantage of Expedia's distribution channels to sell our own-brand hotels where we have excess capacity.

Thomas Cook China

Our joint venture with Fosun in China had a strong year, growing customers eight-fold and building the foundations from which it can grow over time to become comparable in size to our other key source markets, an important step as we look to diversify away from our dependence on north and western European markets.

We strengthened our partnership with Alibaba, the world's largest online marketplace, to increase the number of holidays we sell on its travel division, Fliggy, helping us to further leverage Alibaba's large customer base of active users in China. At the same time, we are building out our own digital distribution platform to grow our direct customer base. Our Webjet partnership is now integrated with our Chinese platform, along with a number of other bedbanks, creating a fully automated and scaleable customer offer.

We are also developing our first own-brand hotels in China, taking advantage of the fast-growing Chinese domestic tourism market. These include a 200+ room Sunwing family resort in Jaishan with another family property in the pipeline.

Thomas Cook Money

Our financial services division launched two new products in the UK: a new pre-paid travel card, Lyk, replaced Thomas Cook's existing cash passport with lower fees and more customer benefits; and Roam which offers a simpler way to buy and personalise your holiday insurance.

We have combined the management of Thomas Cook Money and UK retail to strengthen the reach of our innovative travel-related financial services to our large and loyal high street customer base and maximise returns from our store estate.

Thomas Cook Money has also grown its business-to-business partnerships including with European travel insurance broker InterMundial and digital challenger bank Revolut for travel insurance. In total, more than 3 million customers now use Thomas Cook for holiday money or travel insurance.

CURRENT TRADING AND OUTLOOK

Summer 2018

Our Summer 2018 season closed out with no material change compared to our pre-close trading update in September.

Winter 2018/19

Against a strong winter in 2017/18, bookings for the Group Tour Operator are 3% down on last year, with flat pricing, largely reflecting knock-on effects from the hot summer weather and poor demand for the Canary Islands.

UK bookings are broadly flat, albeit at lower margins due to increased capacity in the wider market. In Northern Europe, where as previously advised we have reduced winter capacity by 5%, the knock-on impact of the summer heatwave and continued mild weather is leading customers to delay booking their winter holiday, resulting in 8% lower bookings year on year. Excluding the legacy city and domestic hotel-only business, which is being transformed as we move over to Expedia, bookings in Continental Europe are down 2%. The modest decline is driven largely by the reduced demand for the Canary Islands, a key winter destination, a trend we are seeing across the Tour Operator. Demand is strong for Turkey, Egypt and Tunisia as customers seek alternatives to high hotel prices in the Canaries.

Airline trading is positive, with bookings 11% ahead of last year and improved pricing across short and medium-haul routes with bookings up 14%, reflecting good growth to Egypt and Turkey. Long-haul bookings, particularly to the US and Caribbean, are trading well with bookings up 4%.

Based on cumulative bookings to 17 November 2018. Notes: (i) Risk and non-risk customers (ii) Risk customers only (iii) Continental Europe bookings including our legacy city and domestic business were down 7%, with pricing up 2% (iv) Group Airline figures include intercompany sales to the Group Tour Operator

Summer 2019

Although it is still early in the booking cycle for Summer 2019, we have seen a mixed start to trading. UK bookings are positive, while Continental and Northern Europe bookings are behind a strong start to last year. Tour Operator pricing overall is ahead of last year. Demand for our holidays to Turkey and Egypt is strong, while we're seeing good growth in long-haul holidays, particularly to the USA.

Our Airline typically has a later booking profile compared to the Tour Operator, and it is therefore too early to comment on the Airline's current trading for Summer 2019.

Outlook - Priorities for 2019 onwards

Despite the overall result, we have made good strategic progress through the year. We have delivered many innovative and exciting initiatives that we believe will transform the prospects for our business in the future. It is important that we continue to execute our strategy where it matters - close to the customer in all of our markets - and to transform our business with consistency, pace and flexibility, enabling us to address changing customer expectations and demands.

At the same time, we must learn from 2018. We are putting particular focus on addressing the performance in our UK Tour Operator where the challenges of transformation remain significant, operating in a competitive environment with still too many legacy systems and processes. We now have a clear plan of action centred on driving awareness and take-up of own-brand hotels; reducing our committed risk capacity and replacing it with more non-risk, dynamically-packaged product; introducing new automated yield systems; combining our retail stores business with Thomas Cook Money to optimise store profitability; and targeting a best-in-class cost base.

Across Thomas Cook, we operate in markets that are sensitive to a range of uncertainties, including poor weather and third-party incidents. That means we have to manage risk in our financial and commercial commitments. As a result, we are making changes to our management of risk internally, the way we set targets for management and how we communicate these externally.

To provide greater consistency in our core financials, we are reducing our committed airline capacity for 2019 and increasing the focus on higher quality, higher-margin hotels and destinations, with clearer processes and incentives to ensure these are prioritised through our retail and online sales network.

As a result, looking to 2019, we expect to deliver progress on underlying EBIT and lower separately disclosed items, leading to substantial progress on reported operating profit. Reported operating profit will be a primary focus going forward, together with free cash generation.

OPERATING AND FINANCIAL REVIEW

SUMMARY OF 2018 PERFORMANCE

Overall, our financial performance in 2018 was disappointing, despite starting the year well and making good strategic progress. Group revenue was £9.6 billion, up 6% on a like-for-like basis, and group underlying EBIT was £250 million, down £58 million on a like-for-like basis.

We delivered a strong first six months of the year, achieving improved financial results and going into the summer with a positive booking position. As a result, we were confident of filling all our committed hotel accommodation and flight capacity at good returns. However, with the start of the heatwave in May, demand reduced sharply with customers across our European markets delaying holiday decisions as they enjoyed record temperatures at home. This delay in bookings restricted our ability to achieve the planned margins in the 'lates' booking period.

While all our source markets were impacted, we saw a particular hit to our UK business where the slowdown in bookings came on top of an already competitive market for Spanish holidays. We have a specific plan to address the performance in our UK Tour Operator, set out later in this section.

Overall, a higher-than-anticipated decline in gross margin in the final quarter resulted in underlying EBIT in our Tour Operator business being £88 million down for the full year. Within this, our Northern European Tour Operator achieved a near record performance, albeit lower than that expected at the end of the first half, despite the impact of the hot summer.

The weakness in our Tour Operator was partially offset by a good performance in our Group Airline. This looked set for an excellent year until air traffic control issues led to industry-wide disruption. This was compounded by operational challenges as we grew capacity to take advantage of the failure of Air Berlin. Nevertheless, our Group Airline delivered a £35 million improvement in profit in 2018.

Overall, our Group underlying EBIT was £250 million, £58 million lower than the prior year on a like-for-like basis. This reduction includes £28 million of legacy and non-recurring charges, comprising a £14 million write-down of historic hotel receivables, £4 million of flight disruption costs and £10 million of further transformation costs, taken through underlying EBIT rather than separately disclosed items (SDIs).

Overall, SDIs totalled £153 million which principally relate to our transformation programme and start-up costs relating to new ventures.

Free cash outflow was £148 million, £294 million below last year. This reflects the lower underlying EBIT performance, higher cash-related SDIs, investment in our new hotel fund and a working capital impact from the slow start to bookings for the 2019 winter season.

Net debt was £389 million, including the impact of non-cash adjustments for foreign exchange and finance lease extensions, which totalled £141 million. While net debt is higher than previously forecast, the Group's lenders remain supportive and we have secured additional flexibility to ensure we can continue to deliver our strategic plan. With an increased focus on free cash generation and cost management in our new plans, we are confident that we will make good progress reducing net debt over the next few years.

Also included in the financial statements is £24 million of prior year balance sheet adjustments, reflecting a write down of historic balances now considered to be irrecoverable. See page 35 for further details.

Like-for-like Analysis

Certain items, such as the normal translational effect of foreign exchange movements, affect the comparability of the underlying performance between financial years. To assist in understanding the impact of those factors, and to better present underlying year-on-year changes, 'like-for-like' comparisons with FY17 are presented in addition to the change in reported numbers.

The 'like-for-like' adjustments to the Group's FY17 results and the resulting year-on-year movements are as follows:

The 'like-for-like' adjustments to the Group's performance by business line (the Group reports the operations of its Group Tour Operator and Group Airline businesses as its primary reporting segmentation, reflecting the way the business is managed and reported internally) are as follows:

Revenue

Group revenue increased by 6% to £9,584 million, due to a return in popularity for holidays to Turkey and North Africa (Tunisia and Egypt) which grew by a combined £545 million (44%). Greece remained strong, growing for the fifth consecutive year. Revenue generated from Spain was 3% lower, as customer demand shifted towards other destinations. The main components of the changes by destination are as follows:

Underlying Gross Profit and Margin

Underlying gross profit was broadly unchanged at £1,955 million, with revenue growth offsetting a reduction in underlying gross margin. Underlying gross margins were significantly impacted in the critical last few months of trading by an oversupply of holidays left to sell across the market and an even more competitive pricing environment than usual as a result of the extremely hot weather across Northern and Western Europe. As a result, and despite the good start to the year, Group underlying gross margin reduced by 140 basis points versus last year, to 20.4%.

Our UK and Nordic Tour Operators were particularly impacted by the heatwave. For our UK business the hot weather came on top of continued inflation in hotel costs for Spanish holidays. Meanwhile, margins in our Continental Europe businesses were also impacted by the business mix, with strong growth in our Russian business, which has a lower relative gross margin. Our Group Airline gross margin was impacted by disruption caused by third party strike action and delays in the registration of new aircraft. The relative impact on the Group's underlying gross margin performance by segment is set out below:

Underlying Operating Expenses / Overheads

Operating expenses before depreciation increased by 4% (£59 million) to £1,488 million as the benefits of initiatives to increase efficiency and reduce costs were more than offset by inflation and volume-related increases to the operating cost base relating to our decision to increase capacity in our Airline. Depreciation decreased by £5 million.

Underlying EBIT

Underlying EBIT of £250 million was 19% lower than the prior year on a like-for-like basis. The principal components of the Group's Underlying EBIT performance for the year are summarised below under "segmental review".

EBIT

Statutory EBIT of £97 million was £112 million lower than the prior year on a like-for-like basis, largely due to the lower underlying EBIT, together with an increase in SDIs to £153 million (FY17: £99 million). The principal components of the Group's SDIs performance for the year are summarised below under "other financial items".

SEGMENTAL REVIEW

Performance by business line

During the year underlying EBIT decreased by £58 million on a like-for-like basis, analysed as follows:

A review of the performance of each of our business units is set out below:

Group Tour Operator

Our Group Tour Operator increased revenue in all our core markets, highlighting continuing demand for our product and service offering. Total customer numbers fell overall by 3% to 10.9 million, with strong growth in the sales of holidays to own-brand and selected partner hotels offset by reductions in complementary sales as we scaled back certain legacy, complementary business lines. In total, revenue grew by £258 million (or 4%) to £7,394 million (FY17: £7,136 million). However margins declined in all source markets, particularly in the fourth quarter, due to the over-supply of holidays left to sell in the Summer 'lates' market which put pressure on selling prices. 

The underlying EBIT for our Group Tour Operator, split by source market, is set out below:

UK

Our UK tour operating business achieved good top-line growth in FY18, with revenues increasing by 5% compared to the previous year. Sales of holidays to differentiated hotels grew particularly strongly, at 20%. Across our destinations, sales to Turkey and Egypt grew significantly, by 70% and 95% respectively, while sales to Spain, where we have seen the highest hotel cost inflation, decreased by 9%. Despite rebalancing our destination mix, we continued to experience margin pressure due to the competitive environment, particularly in the Summer 'lates' market when the heatwave significantly impacted market demand. As a result, underlying EBIT declined by £56 million to a loss of £7 million.

We continued during FY18 to take actions to improve the business positioning, including growing our online sales by almost 30%, closing a further 100 loss-making retail stores, and improving the quality and competitiveness of our product offering. However, it is clear that our UK tour operating business continues to operate in a highly competitive environment where the challenges of transformation remain significant. To address these challenges, we are implementing a clear set of actions in FY19 aimed both at growing gross margins and minimising overhead. These include driving awareness and take-up of own-brand hotels; reducing our committed risk capacity and replacing it with more non-risk, dynamically-packaged product; introducing new automated yield systems; combining our retail stores business with Thomas Cook Money to optimise store profitability; and targeting a best-in-class cost base.

Northern Europe

Strong Winter trading for Northern Europe led to a very positive first half performance, with underlying EBIT up by £9 million. At the beginning of May, the bookings position for Summer holidays was 7% higher than the previous year, with average selling prices up 5%. However, bookings and margins declined significantly in the fourth quarter, as many consumers chose to enjoy the prolonged good weather at home, rather than travel abroad. As a result, while revenue for the year grew by 9% reflecting overall higher volumes and pricing, full year underlying EBIT fell by £2 million to £95 million (FY17: £97 million).

Continental Europe

Our Continental Europe business also ended the Winter in a strong position, with a £3 million lower seasonal EBIT loss for the first half, and a positive bookings and pricing position for Summer. However, due to weak demand in the fourth quarter on account of the heatwave, underlying EBIT for the year as a whole declined by £30 million to £73 million (FY17: £103 million). Our German business was also impacted by the effects of the widespread flight disruption, processing a higher-than-usual number of flight changes, re-bookings and cancellations. In our Dutch and Eastern European businesses, volumes and profits declined as capacity was reduced. 

By contrast, Belgium continued to perform well, following the transfer of our Belgian airline business to SN Brussels in November 2017. Russia and France grew significantly during the year, with customer numbers up by 13% and 18% respectively. Russian growth was mainly due to increasingly strong demand for Turkey, while France benefitted from strong growth in demand for North African destinations, together with the effect of significant cost-cutting over recent years. 

Group Airline

Our Group Airline revenue of £3,519 million was up 14% on a like-for-like basis, reflecting improvements to both volumes and yields. Customer numbers increased by 14% to 20.2 million, while yields increased by 6% and 1% in short/medium-haul and long-haul respectively.

Growth in short/medium-haul was due to an increase in capacity, as a result of strong additional demand from third-party tour operators and seat-only customers, following the collapse of Monarch and Air Berlin/Niki. Short/medium-haul yields increased by 6% to £115 per seat sold; the long-haul business increased yields by 1% to £312 per seat sold.

The strong growth in customers, in combination with the full-year impact of our upgraded booking system, helped drive an increase in ancillary revenues of 11% to £333 million, primarily in relation to seat reservations. However, with short/medium-haul customers representing a significantly higher share of the overall customer base, ancillary revenue per customer overall decreased by 2% to £17.42 (FY17 like for like: £17.75). This is because short/medium-haul customers typically spend less on ancillaries than those on long haul.

Operating cost increases were in line with capacity growth, including the impact of higher hedged fuel prices as well as increases in US Dollar dominated costs (principally leasing and maintenance costs) due to less favourable exchange rates. In addition, our Group Airline experienced an unprecedented level of operational disruption due to a lack of sufficient aircraft capacity in the market, as well as increased restrictions in European air space. These cost increases were partly mitigated by the implementation of further efficiencies as part of our profit improvement programme, as well as lower maintenance costs as a result of improved return-of-lease requirements following the extension of aircraft leases. As a result, total cost per average seat kilometer (ASK) increased by 0.2 pence to 4.34 pence per ASK.

Underlying EBIT for our Group Airline grew by 37% to £129 million on a like-for-like basis, largely reflecting an improved performance at Condor, as a result of delivering a successful turnaround, supported by profitable growth in the short/medium-haul business. Our UK airline grew revenues by 14% during the year but reported underlying EBIT broadly unchanged due to benefits from higher volumes and yields being offset by significant fuel price and foreign exchange headwinds.

Corporate

Corporate costs increased by £5 million to £40 million (FY17: £35 million), reflecting additional costs incurred to support corporate projects such as the set-up of the hotel fund.

OTHER FINANCIAL ITEMS

Underlying Net Finance Charges

Group net finance costs for the year of £124 million were £19 million lower than last year (FY17: £143 million). Bank and bond interest charges reduced by £7 million, following the replacement of previous bonds with new lower-coupon bonds issued in December 2016 and December 2017. Letters of credit and other interest payable charges reduced by £13 million, due to lower bonding costs and lower non-cash interest charges as a result of the changes in discount rates.

Separately Disclosed Items

Total Separately Disclosed Items (SDIs) relating to operating and finance totalled a net charge of £179 million, which is £39 million higher than the prior year (FY17: £140 million) due to an acceleration of transformation activity, and additional costs associated with the start-up costs relating to new ventures, partially offset by lower finance charges.

Analysis of the Group's Separately Disclosed Items are listed below:

Further information on Separately Disclosed Items is set out in Note 4 on page 31.

Taxation

The tax charge for the year was £110 million (FY17: £34 million), reflecting a non-cash adjustment of £64 million. As a result of the performance of the UK business it is considered appropriate to release the UK deferred tax assets. The cash tax cost of £39 million is broadly unchanged year on year.

Operating lease charges

Operating lease charges in the year increased by £7 million compared to last year to £243 million. Aircraft operating lease charges increased by £25 million to £169 million primarily due to capacity growth.

In addition to the above, the Group incurred seasonal wet lease costs of £162 million (FY17: £75 million) during the year, of which £4 million (FY17: £nil) is included within separately disclosed items. The year-on-year increase was primarily due to our successful initiative to increase our market share in Germany following the Air Berlin insolvency. Due to very limited availability of aircraft the growth was supported by wet lease(i) aircraft. 

Underlying earnings per share

Underlying earnings per share, before separately disclosed items, was (0.3) pence, a year-on-year decrease of 9.4 pence (FY17: 9.1 pence). Basic earnings per share for the year was (10.6) pence, a year-on-year decrease of 11.3 pence (FY17: 0.7 pence). Further information is included in Note 8 on page 34.

Summary Cash Flow Statement(i)

Free cash flow for the year was an outflow of £(148) million, £294 million lower than last year. This was the result of a £80 million decrease in earnings before interest, tax, depreciation and amortisation (EBITDA), a £172 million adverse working capital movement and £45 million of higher cash exceptional costs, as a result of the accelerated transformation activity. The net working capital outflow of £60 million in the year was largely related to the weak summer trading activity, as well as a £34-million investment in our joint venture hotel fund. 

Net cash interest paid decreased by £11 million to £118 million following the replacement of previous bonds with new lower-coupon bonds issued in December 2016 and December 2017.

The Group's cash outflow, together with non-cash changes such as foreign currency translation, resulted in net debt of £(389) million, £208 million higher on a like-for-like basis than the position as at 30 September 2017 (FY17 LfL: £181 million).

Current year cash exceptional items are analysed as follows:

Net Assets

Net Assets increased by £35 million from £256 million at September 2017 to £291 million at September 2018. This includes a positive revaluation of £198 million for the Group's derivatives in respect of fuel and currency hedging, due mainly to an increase in the differential between our hedged fuel prices and spot prices, together with a positive revaluation of our pension liability of £94 million due to an improvement in bond yields used to calculate the present value of the Group's pension obligations.

Net Debt

The Group sources debt and finance facilities from a combination of the international capital markets and its relationship banking group. During FY18, the Group's net debt has increased from £40 million to £389 million, a worsening of £349 million.

The composition and maturity of the Group's net debt is summarised below.

In November 2017 the Group entered into new financing arrangements amounting to £975 million. These include an enlarged £875-million revolving credit facility and bonding and guarantee facility, maturing in November 2022. In addition, the Group has a £100-million annual rolling bilateral funding from one of our insurance providers.

In December 2017, the Group refinanced its €400-million bond with a new bond of the same size which matures in June 2023. This has further improved the Group's liquidity and debt maturity profile and has lowered our annual interest costs due to a coupon rate reduction of nearly 300 basis points compared to the bond which was refinanced.

As at 30 September 2018 the Group had £875 million of Committed Facilities, which comprised a Revolving Credit Facility of £650 million, of which £20 million was utilised at 30 September 2018 (£28 million in September 2017), and a £225 million bonding and guarantee facility of which £193 million was drawn at 30 September 2018 (30 September 2017: £267 million). All of the combined £213 million of drawn balances have been used solely for bonding, and therefore is not reflected in our gross debt.

Treasury and Cash Management

The Group's funding, liquidity and exposure to foreign currencies, interest rates, commodity prices and financial credit risk are managed by a centralised Treasury function and are conducted within a framework of Board-approved policies and guidelines.

The principal aim of Treasury activities is to reduce volatility by hedging, which provides a degree of certainty to the operating segments, and to ensure a sufficient level of liquidity headroom at all times.

The successful execution of policy is intended to support a sustainable low-risk growth strategy, enable the Group to meet its financial commitments, and enhance the Group's credit rating over the medium term.

Due to the seasonality of the Group's business cycle and cash flows, a substantial amount of surplus cash accumulates during the summer months. Efficient use and tight control of cash throughout the Group is facilitated by the use of cash pooling arrangements and the net surplus cash is invested by Treasury in high quality, short-term liquid instruments consistent with Board-approved policy, which is designed to mitigate counterparty credit risk. Yield is maximised within the terms of the policy but returns in general remain low given the low interest rate environment in the UK, the US and Europe.

A small portion of the Group's cash is restricted in overseas jurisdictions primarily due to legal or regulatory requirements. Such cash does not form part of our liquidity headroom calculation.

Hedging of Fuel and Foreign Exchange

The objective of the Group's hedging policy is to smooth fluctuations in the price of Jet Fuel and foreign currencies, in order to provide greater certainty for planning purposes. The proportion of our exposures that have been hedged are shown in the table below.

As at 31 October 2018

As Fuel is priced in US Dollars, our net fuel costs are influenced by both the fuel price and the movements in the US Dollar against our base currencies.

On a constant volume basis, FY18 fuel costs increased by approximately £50million compared to prior year due to higher hedged fuel rates combined with an FX headwind, predominantly driven by the Sterling's weakness against the US dollar at the time of hedging. For FY19, we expect the effects of increasing fuel prices over the hedging period, offset by an FX tailwind due to a weaker US Dollar against our base currencies, to increase fuel costs by around £60m.

The Group does not hedge the translation of overseas profits into Sterling, and as a result of currency movements during the year, underlying EBIT in FY17 was lower by £14 million.

The average and period end exchange rates relative to the Group were as follows:

Credit Rating

The Group received an upgrade from S&P to B+ in January 2018, with a Stable outlook. Moody's maintained their B1 Stable rating throughout the year. Fitch also maintained their B+ rating, however issued a Negative outlook at the end of September 2018 following the Group's pre-close trading update.

Forward looking statements

This document includes forward-looking statements that are based on estimates and assumptions and are subject to risks and uncertainties. These forward-looking statements are all statements other than statements of historical facts or statements in the present tense, and can be identified with words such as "aim", "anticipates", "aspires", "assumes", "believes", "could", "estimates", "expects", "intends", "hopes", "may", "outlook", "plans", "potential", "projects", "predicts", "should", "targets", "will", "would", as well as the negatives of these terms and other words of similar meaning. These statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those otherwise expressed.

The forward-looking statements in this document are made based upon our estimates, expectations and beliefs concerning future events affecting the Group and are subject to a number of known and unknown risks and uncertainties. Such forward-looking statements are based on numerous assumptions regarding the Group's present and future business strategies and the environment in which it will operate, which may prove not to be accurate. We caution that these forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in these forward-looking statements. Undue reliance should, therefore, not be placed on such forward-looking statements.

Any forward-looking statements contained in this document apply only as at the date of this document and are not intended to give any assurance as to future results. Other than in accordance with any legal or regulatory obligations, the Group does not undertake any obligation to update or revise any forward-looking statement after the date on which the forward-looking statement was made, whether as a result of new information, future developments or otherwise.

APPENDIX 1 - USE OF ALTERNATIVE PERFORMANCE MEASURES

This is the headline measure of the Group's performance, and is based on profit from operations before the impact of separately disclosed items. Underlying EBIT provides a measure of the underlying operating performance of the Group and growth in profitability of the operations.

The Group uses three non-statutory cash flow measures to manage the business. Operating Cash Flow is net cash used in operating activities excluding the cash effect of separately disclosed items. Free Cash flow is cash from operating activities less capital expenditure and interest paid. Net Cash Flow is the net decrease in cash and cash equivalents excluding the net movement in borrowings, facility set-up fees and finance lease repayments. These cash flow measures are indicators of the financial management of the business. They reflect the cash generated by the business before and after investing and financing activities and explain changes in the Group's Net Debt position.

Reconciliation to IFRS measures:

Earnings are based on results before separately disclosed items after a notional tax charge divided by the weighted average number of ordinary shares, adjusted for any potential dilutive impact of the assumed conversion of the employee equity-settled share based payment schemes outstanding.

Appendix 2 - Audited statutory information with comparatives

See note 10 for details on the restatement.

See note 10 for details on the restatement.

See note 10 for details on the restatement.

See note 10 for details on the restatement.