Airline Business: KLM's operating result declined in the year just ended although the net result was boosted by asset sales and a 'writing up' of the Northwest stake. What should KLM be doing to counteract this?
We have to allocate capacity to those routes where we can generate the best margins and to attract those flows of traffic that contribute to better yields. So, number one is: where do you position yourself as an airline? Number two: how do you allocate capacity? And three: how do you build up a certain strength in marketing the solution so that you can improve yields?
If they had set the level of the poison pill at 25 per cent then it would not have meant an infringement on the economic rights that KLM had and it would not have been a problem at all. The fact that they put it at 19 per cent is, in our view, an indication that they just targeted it at one of the shareholders, in this case KLM. We find that unacceptable.
We feel that before you take steps that are irreversible you have to know exactly where your partner stands on the major issues. We are concerned that, having made agreements, they should make an attempt to undo them again. That's not the right climate to take steps that are irreversible and that's why we put the further enhancement of the alliance on hold. But the existing cooperation, in particular of course the Atlantic, is working fine for both carriers.
And that's why I'm so confused by them saying that KLM's seeking control. We are saying that if you are going to strengthen the balance sheet of Northwest Airlines - and as a consequence our interest would be diluted - that's totally acceptable to us. Our interest is the long-term viability of Northwest Airlines.
The connections available at Amsterdam/Schiphol are very impressive already and we have just decided to introduce a six-wave system, so that we can improve the connections by some 60 per cent in two years' time. That will create quite a competitive edge to take up the challenge we are facing from other hubs and from the level playing field as far as antitrust is concerned. They basically have the same impact, they work together.
The new agreement enables us to use the capacity of our partners, such as Transavia and Air UK, to a far greater extent. We have more flexibility to decide which carrier should operate which route depending on the market characteristics and the cost elements involved. The limits are benchmarks and there is a full understanding that, should the company wish to go beyond that, this can be discussed. I do not expect us to reach those limits within a fairly short period.
Stansted airport. So that is an additional alternative that could be worth developing. But if you wish to develop an additional hub on the continent of Europe it can only be done with a partner. Those issues are highly related.
We expanded capacity substantially in 1992/93/94, in the double digit area, and in 1995/96 we consolidated a little because we had an increase in Europe of 3-4 per cent only, which is below total market growth, in order to focus on yield. And now we are expanding capacity again more or less in line with the total market. Some 8 or 9 per cent capacity will be added in the coming year. It is a fine balance between focusing on yield and margins and on capacity.
It's definitely not the case that KLM will not continue to drive down costs further, on the contrary. Look at the project for the redesign of the hub, the introduction of the six-wave system or for increasing our scale of operations. Those are all steps in driving costs down. And it may be even more than DFl 1 billion.
Source: Airline Business
