Shares in TUI Travel, which had fallen nearly 30 per cent since March, closed up 7 per cent, or 15.6p, at 230p, making them one of the top risers on the FTSE 100 board.
Chief executive Peter Long said the group had seen a sustained improvement in demand since July, and that trading for winter 2010-2011 and summer 2011 was positive. However, he remained cautious about the outlook for next year.
"Whilst current booking activity is good, driven by demand for our differentiated products, we remain cautious about 2011, given the continued economic uncertainty and the relatively early stage of the booking cycle," Long said.
The company, formed in 2007 through a tie-up between British holiday company First Choice and the travel division of Germany's TUI AG, unveiled underlying operating profit up 11 per cent at 447 million in the year to end-September. That compared with 401m in the previous year, with the total dividend rising 3 per cent to 11p from 10.7p.
That was at the top end of City forecasts, which ranged between 428m and 447m. TUI Travel, in which TUI AG holds a majority stake, said the improvement reflected a 75m boost from merger savings realised during the year and lower losses in Canada, where it entered into a joint venture with Sunwing in January.
TUI Travel said there was also a 20m benefit from a partnership with Air Berlin in Germany.
Those factors helped offset a weaker trading performance in Britain, where bookings were hit by disruption from the volcanic ash cloud in April and shrinking consumer confidence ahead of the government's austerity measures.
The company said last summer's football World Cup and good weather also encouraged British holidaymakers to stay at home.
However, TUI Travel, which owns Thomson Holidays, said demand in the UK for activity-led holidays such as biking and sailing had lifted bookings for next summer by 7 per cent compared to last summer.
The group said bookings for its "differentiated" product range - holidays available only through TUI which include sporting breaks - were up 26 per cent for next summer.
On Wednesday rival Thomas Cook posted full-year results at the low end of expectations and said it would cut costs in its UK business by up to 50m to offset any further downturn in trading.Long, who also sits on the TUI AG board, declined to comment on speculation the German group would look to buy the 43 per cent stake in TUI Travel it doesn't already own once it has sold its stake in container shipping group Hapag-Lloyd.
KBC Peel Hunt analyst Nick Batram said he expected a bid from TUI AG to materialise but believed it was already factored into the price of TUI Travel shares, which trade at a 20 per cent premium to Thomas Cook.
"The tone of today's statement and current trading may see the shares go better, but we believe the shares are fairly priced, with Thomas Cook offering better value," Batram said.
Last month, TUI Travel corrected its 2009 accounts for overstating customer bookings by 117m as a result of a post-merger technical glitch.
Long said he was confident the issue, which led to the departure of finance director Paul Botwell, had been resolved.
"We have done a very thorough and rigorous review of all our controls using our internal audit function and our external auditors," he said.