1

Mutual development of Schiphol after the merger KLM - Air France

in view of the

dynamics of airline competition

AMO lecture TU DelftMay 12th, 2005

2

Relevant issues

– Industry developments

– KLM’s key strategic choice

– Merger with Air France and joining the SkyTeam alliance

– Mainport proces at Schiphol

– Impact of KLM’s strategic choice on Mainport Schiphol

3

Relevant passenger market of Schiphol consist of “Netherlands local market” en “SPL transfer potential”

Transfer potential

158 Mln.

Source: ICAO/IATA / AEA Statistics 2003 / Airline Business (Regional) / AAS - Historisch Vlucht Systeem (Incl. LCLF, charters)

Number of passenger movements in 2002

Worldwidepassenger market

1.600 mln

Europe-related market (to/from and within EUR)

550 mln

Relevant SPL markets

185 mln

Rest of the world

1033 Mln.

Europe related market

554 Mln.

Rest of Europe related

373 Mln.

SPLrelevantmarket

181 Mln.

Netherlands local market : 26.6 mln - Regional airports: 1.5 mln- Airports outside NL: 1.5 mln

Local traffic at SPL: 23.6 mln(89% of Netherlands local market)

Transfer potential: 158 mln

Transfer traffic at SPL:17 mln (11 % of transfer potential)

Traffic at SPL

40 mln

2

Local

Transfer

4

Airline industry: old world

• Market access was highly regulated:– System of bilateral traffic rights between countries– National carriers dominated the market– Air transport was a luxury good

• High government influence in the value chain:– National airline– National airport– National air traffic control organization– Permits (airline, maintenance, etc.)

5

Airline industry: structural changes

• Phased deregulation (free market access):– 1978: one step introduction in USA– 90’s : phased introduction in EU – 90’s : phased introduction on North Atlantic route (Open skies)– Coming decades: gradual deregulation world wide

• Airline business becomes a global industry:– Main markets are: North America, Europe and Far East (>90%)

• Airline industry becomes a consumer business (market driven):– In 2004 ca. 2 billion passengers– Cargo network more independent from passenger network

6

Airline industry: new world

• Free market access leads to specialization and consolidation:

– Hub-operation + low cost operation + charter operation

– Hub-operators create world wide alliances

• Specialization and consolidation leads to fierce competition:

– Price wars and shifts in market shares

– Consumers become highly price sensitive

– Supported by technological developments (internet shopping)

• National carriers must choose a new competitive position

7

Growth of the European passenger market

0

10,000

20,000

30,000

40,000

50,000

60,0004/

1/88

4/1/

89

4/1/

90

4/1/

91

4/1/

92

4/1/

93

4/1/

94

4/1/

95

4/1/

96

4/1/

97

4/1/

98

4/1/

99

4/1/

00

4/1/

01

4/1/

02

4/1/

03

4/1/

04

4/1/

05

4/1/

06

AEA Total Scheduled Passenger Traffic (in million RPK)

Source: AEA, incl.domestic, excl. charters

Average annual growth rate 1988-2003: 6.0 %(passenger traffic within and to/from Europe)

Expected growth rate of 4-5 % per year until 2012

3

8

KLM’s key strategic choice

• In a consolidating industry mid-sized companies are most endangered:– Large companies use their market and financial power– Small companies specialize in niche markets

• Key strategic choice for KLM was between:– Continuity of the company as an independent legal entity– Continuity of the economic activity

• KLM decided for continuity of economic activity:– Specialize as a hub-carrier at AMS– Continuity safeguarded as partner in a global alliance

9

Worldwide alliances

SkyTeam12%

Star alliance22% Oneworld

17%

Others40%

KL-NW-CO9%

SkyTeam21%

Star alliance22% Oneworld

17%

Others40%

Before 2004 After 2004

10

Different forms of alliancesLevel of

integration

Coordination

Integrated units

Managerial

Company

Scheduling,pricing, etc.

Routesin ‘JV’

Merger of shares(one bottom-line)

Full merger

Air France-KLM

Economicbenefits

KLM-Northwest

Star alliance,KLM-Delta

11

Merger Air France - KLM

Merger between Air France and KLM leads to:

One group: Air France - KLM

Two companies: Air France and KLM

Three businesses: Passenger, Cargo and Maintenance

12

AF/KL largest airline company

Passenger traffic (RPK)in 2002-03

AA UAAF + KL

DL NW AF JALS BA LH

Nr. 3 in pax traffic

Source: IATA - AEA

European

Non-European

KL

Nr. 1 in turnoverTurnover in 2002-03

AF + KLJALSAA LH UA DL AF BA ANANW COUSAirKL

European

Non-European

Annual sales: 21 bln EUR in 2003/04

Source: IATA

13

Complementary hubs at Paris-CDG and AMSunique destinations

14

Connectivity hub-operations at EUR Mainportstotal connectivity 1994 - 2004

Total number of connections per hub per week

126,345

145,991

167,144

68,641

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Amsterdam / Skyteam Charles de Gaulle / Skyteam Frankfurt / Star Alliance Heathrow / One World

FRA

CDG

AMS

LHR

15

Effect SkyTeam on connectivity at AMSbased on mid-term planning scenario’s 2005 - 2012

Number of one way connections on total network per week

230,348

210,905

169,765

150,937

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000

2003 2004 2005 2008 2010 2012

Skyteam (high growth scenario) "Wings" (high growth scenario)

Skyteam (low growth scenario) "Wings" (low growth scenario)

Effect SkyTeam: +10%

16

EUR Mainports dominate intercontinental trafficon routes to/from Europe

4 mainports=

54% of all flights

Other airports9%

LHR

6 medium size hubs 21%LGW, ZRH, MAD,MXP, ROM, MOW

AMS

Capital cities16%

CDG

FRA

17

Competing European multi-hub systems

London-Heathrow (LHR)

Paris-Charles de Gaule (CDG)

Frankfurt (FRA)

Schiphol (SPL)

Madrid (MAD)

Munchen (MUC)

= SkyTeam alliantie

= Star alliantie

= Oneworld alliantie

18

Mainport process at AMS

Dutcheconomy

Air transportnetwork at AMS

Environmentof AMS

Capacityairport AMS

19

Air transport network at SPL

MAINPORT SPL

Total network at SPL

Hub-Operation SkyTeam (ca. 65% share)

ICA networkEUR network } Core of the network

of the Mainport SPL

Continuity of the Mainport SPL requires a “sustainable competitive position” of the SkyTeam network in comparison to the network of the alliances at the other European Mainports.

20

SkyTeam intercontinental network at SPL highly dependant on transfer traffic

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Local Transfer

21

Growth strategy network AF/KL

• Increase profitability:

– Continue structural measures

– Implement e-services

• Realize growth:

– Develop network and fleet: 4 - 5% growth per year at CDG and SPL

– Secure sufficient internal and external capacity

• Further develop the alliance:

– Capitalize on AF/KL opportunities

– Extend SkyTeam with new partners

22

Network AF/KL at AMS: Mainport requirements

• Growth by stronger competitive position requires annual capacity:

– in 2004: 403.000 movements

– in 2012: 600.000 movements

• Increased connectivity requires peak hour capacity:

– in 2004: 105 movements per hour with availability of 85%

– in 2012: 120 movements per hour with availability of 95%

• Competitive costs require low visit costs per unit:

– Direct plus indirect costs must be lower than those at other Mainports

23

Government remains part of mainport process

Regulations by Dutch authorities determine to a certain extent the

in-efficiencies of the Mainport process:

• Spatial planning around the airport determines the extension possibilities of runways, air space and terminals

• Environmental standards, operational regulations and charges are limiting the annual capacity and quality of the airport and lead to higher visit cost

• Extra charges and longer process times by security and customs result in increased unit costs, in particular for KLM

24

Key success factors Mainport Schiphol

• Further improve the competitiveness of the network of AF/KL and SkyTeam at AMS

• In time development of cost efficient capacity by AAS, LVNL and Dutch government

• Level playing field between AMS and other Mainports on charges and environmental regulations

• Integral approach for the development of the Mainport Schiphol:– More consistent long term planning– More open approach towards the neighborhood

25

Mainport SPL requires a mutual development plankey is a competitive network

Dutcheconomy

Air transportnetwork at AMS

Environmentof AMS

Capacityairport AMS