Shares in TUI Travel dived in morning trading on the FTSE 100 after the group said it took a £105 million hit as a result of air space closures prompted by a giant ash cloud being emitted from an Icelandic volcano earlier this year.

In the third quarter ended 30 June the travel company reported a fall in revenue of four per cent to £3.4 billion. Underlying operating profit was reported as rising by one per cent to £103 million, however this figure did not include the impact of the volcanic ash cloud.

TUI said that 400,000 of its customers had been affected by the ash cloud, costing the company £105 million.

In the last 12 weeks the group said that booking volumes had been strong in Nordics, Germany, France and Belgium, however bookings in the United Kingdom and the Netherlands were down.

In the United Kingdom bookings to date are up two per cent, however TUI said that the British market had been affected by good weather domestically, airspace closures and by uncertainty about the new government's recent emergency budget. These factors, TUI said, meant people were booking holidays later, thus hurting profitability in the third quarter.

The group said that early trading for Winter 2010/11 and Summer 2011 had begun "positively".

Peter Long, Chief Executive of TUI Travel, said, ''The strong booking trends experienced up until the volcanic ash disruption in mid-April and the subsequent rebound in early May were not sustained throughout the early summer period. This was particularly marked in the UK source market where trading was affected by further airspace closures, good weather and post election uncertainty regarding the emergency budget. All of these factors have had an impact on consumers' booking patterns.

"Consequently, the booking curve has shortened and the mix of lates market sales for Summer 2010 has increased. The higher than expected proportion of sales in the lower margin lates period will inevitably affect UK profitability. Additionally in Germany, although volumes have been good, there is continued price pressure in commodity segments. When we take the later booking curve and the adverse impact of foreign exchange translation into account, we believe that the results for the year will be at the lower end of the range of expectations. Furthermore, it remains difficult to predict how the later booking pattern will change over the next 12-18 months in the light of the current economic environment. We are, therefore, taking a more prudent view of the outlook, including the timeline for the delivery of our margin roadmap. Nevertheless, I have a strong belief that our continued focus on differentiated product, turning around underperforming businesses and growth initiatives will enable us to achieve our medium term margin targets".

Richard Hunter, Head of UK Equities at Hargreaves Lansdown Stockbrokers, commented, "TUI shares have tumbled in early trade following a thinly-veiled profit warning.

"The financial fallout from the volcanic ash disruption was greater than expected, whilst consumer caution after the government's emergency Budget and hot weather in the UK were also cited as reasons for the poor performance. The current trading position has marginally improved, although management remain understandably cautious for full year prospects. The Q3 update follows on from a first half loss in May and, whilst this was somewhat expected given the seasonal nature of the industry, today's update does little to provide comfort.

"Nonetheless, the dividend policy of the company remains progressive and TUI currently yield in excess of 5%. The shares are seen as attractively valued, and any future industry consolidation cannot be totally discounted. The current market view is that the shares are a buy, although the consensus may come under some downward pressure following this announcement."

By 09:35 shares in TUI Travel were down 8.38 per cent on the FTSE 100 to 206.70 pence per share.

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