TUI Merger Announced

The combined German-British company, if approved, would serve 27 million customers each year and have revenues of 17.6 billion euros ($23.4 billion), the companies said Monday, sending the companies' share prices up in Frankfurt and London.

The optimism about TUI's future boosted stock prices despite the announcement Monday that TUI suffered a net loss 847 million euros in 2006, compared with a net profit of 496 million euros a year earlier.

While earnings in the tourism division rose last year, the company continues to have problems with its shipping sector. Analysts and shareholders have long argued that TUI should spin off its underperforming shipping division.

The company has until now rejected the suggestion, but the tie-up could signal a change in thinking about the shipping business, since it will not be included in the merger.

TUI would hold 51 percent of the merged company -- TUI Travel, which would be headed up by First Choice's CEO Peter Long -- and First Choice shareholders would keep 49 percent. TUI Travel would be headquartered in London and listed on the London Stock Exchange. Up until now, TUI's tour business has been run out of the northern German city of Hanover.

Regulatory approval required

The announcement comes one month after German rival Thomas Cook and British MyTravel said they would go ahead with their own merger. The new merged group, to be called Thomas Cook Group and headquartered in London, would have combined annual sales of around 12 billion euros.

Both mergers are conditional upon the approval of anti-trust authorities.

First Choice shareholders also have to give their approval for the merger to go forward. Approval by TUI shareholders was not required.

It's unclear what regulators will think about further industry consolidation, Kepler analyst Mark Reed told Reuters.

"You can argue whether regulators would allow the big four to go down to the big three," Reed said. "So there must be even more of a question mark whether they will let it (the industry) go down to the big two."

But First Choice's Long said he doesn't expect regulatory problems. The industry has had a difficult past couple of years, with competition from cheap airlines and online booking.

"We don't anticipate any issue, because the definition today of our marketplace is very different to what it was a number of years ago," Long told reporters during a conference call.

Savings expected

The groups will likely combine their airline operations. First Choice, which operates about 30,000 flights a year to 60 destinations around the world, recently announced plans to buy 23 Boeing 787 Dreamliner Jets.

It's unclear whether the merger will bring layoffs. Last year, TUI announced it would trim its workforce by 3,600. TUI insisted Monday that the merger with First Choice would not result in lay-offs in Germany.