Koninklijke Luchtvaart Maatschappij, N.V. (KLM Royal Dutch Airlines)

views updated

Koninklijke Luchtvaart Maatschappij, N.V. (KLM Royal Dutch Airlines)

55 Amsterdamseweg
PO Box 7700
Amstelveen 1117 ZL
Netherlands
+ 31 020 649 9123
Web site: http://www.klm.com

Public Company
Incorporated :1919
Employees :26,000
Sales :NLG 13.3 billion (1998)
Stock Exchanges :New York Amsterdam
NAIC :481111 Passenger Carriers, Air, Scheduled

Koninklijke Luchtvaart Maatschappij, N.V., translated as KLM Royal Dutch Airlines, and best known simply as KLM, is the world’s oldest scheduled airline. As the national flag carrier, KLM is the most visible commercial ambassador for the Netherlands, serving 163 destinations in 75 countries on six continents.

Regal Beginnings

KLM was organized by a young aviator lieutenant named Albert Plesman. In 1919 Plesman, with the financial support of an Amsterdam shipping company, sponsored the “Elta” aviation exhibition in Amsterdam to satisfy the public’s fascination with the airplane. Over half a million people attended the air show. When it closed, several Dutch commercial interests decided to establish a Dutch air transport company, and Plesman was nominated to head the company.

The Royal Dutch government lent its support to Plesman’s project by offering to allow him use of the title Koninklijke, meaning “Royal,” in the company’s name. On October 7, 1919, the Koninklijke Luchtvaart Maatschappij, or “KLM,” was founded in The Hague. It was one of the World’s first commercial airline companies.

In its early years KLM transported passengers, freight, and mail to a growing number of European destinations linking Dutch cities with London, Paris, Oslo, and Athens. At that time the Netherlands had a worldwide empire with colonies in Asia and the Caribbean. Soon KLM was charting routes to link these colonies with Holland. Services to Curacao and Trinidad were opened, and in 1927 KLM established a route from Amsterdam to Batavia (later Djakarta) on the island of Java in Dutch Indonesia. The 8,700-mile trip took 11 days.

At the start of World War II German armies invaded the low countries and closed KLM operations. Plesman was understandably upset by the occupation and frustrated with his inability to convince the Germans to relax their grip on the Netherlands. One summer night Plesman’s determination to take action led him to awaken one of his house guests, a Swedish KLM pilot named Count von Rosen. Plesman reportedly asked the Count, “What can I do to stop this?,” and Von Rosen replied, “You could talk to my Uncle Hermann.” Suddenly Plesman realized he was speaking to the nephew of the German Reichmarschall Hermann Göring. A few days later Plesman was in Berlin discussing the possibility of a peace treaty between England and Germany with Göring.

Plesman formulated a document which was later forwarded to Churchill’s office in London. The peace terms would leave the British Empire intact but give Germany control of the European continent and the United States control of the Americas. The matter was “studied with much interest” and receipt of the document was acknowledged by Lord Halifax. Göring, however, became displeased with Plesman’s initiative and later had him jailed. Plesman was released in April 1942 and told to remain at his house in Twenthe in the woods of eastern Holland until the end of the war. During this time he kept himself occupied by formulating strategies for the postwar operation of KLM.

Postwar Expansion

When the war ended in the spring of 1945 Plesman was largely forgiven by the public for his attempts to make peace with the Germans earlier in the war. Soon afterwards he traveled to the United States to negotiate the purchase of surplus war-planes for KLM. The company wasted no time rebuilding its network, but since the Dutch East Indies were in a state of revolt, Plesman’s first priority was to reestablish KLM’s route to Batavia. By the end of the year KLM was again flying to Indonesia. By 1948 services were opened to Africa, North and South America, and the Caribbean. Also during the immediate postwar period, the Dutch government expressed interest many times in gaining a controlling stake in KLM. Plesman, however, was a fiercely independent man and kept the company under private control while conceding only a portion of KLM’s ownership to the government.

Indonesia (formerly the Dutch East Indies) gained its independence from the Netherlands in 1949. The following year the Indonesian government established its own national airline called Garuda. KLM assisted Garuda from the time of its inception and continued to aid the company with technical and financial assistance until 1982. KLM later helped to establish several other airlines in developing nations, including Philippine Airlines, Nigeria Airways, Viasa (Venezuela), Egyptair, and Aerolineas Argentinas.

In 1950 KLM entered into an agreement with Swissair and Belgium’s Sabena airlines which led to the establishment of a spare parts pool. The BeNeSwiss agreement laid the ground for a future maintenance pool called the KSSU group, which included KLM, Scandinavian Airlines, Swissair, and the privately operated French airline UTA. KLM also continued to modernize and expand during the 1950s. It was the first European airline to fly new versions of the Lockheed Constellation and Electra. In addition, several destinations in western North America were added to KLM’s route structure. In 1954 the company created KLM Aerocarto N.V., an aerial survey and photography service.

Albert Plesman died on December 31,1954, at the age of 64. Praised and decorated as a hero of the Netherlands, Plesman also received decorations from Denmark, Belgium, Sweden, Czechoslovakia, Greece, Tunisia, Lebanon, and Syria. The company he left behind was entering a difficult period in commercial aviation history. A sudden and unexplained decline in ridership caused financial reverses at KLM and most of the world’s other airlines. The company also faced the burden of financing a costly conversion to jet airplanes. Moreover, by this time the government had increased its ownership of the company to two-thirds by purchasing new KLM stock issues. The board of directors, however, remained under the control of the private shareholders.

Weathering the Jet Age

In 1961 KLM reported its first year of losses. The company’s president, I.A. Aler, resigned and was replaced by Ernst Hans van der Beugel. Yet the change in leadership was not enough to reverse the company’s financial difficulties. Aler returned to active participation and enlisted McKinsey & Company, an airline consulting firm, to make recommendations for restoring the company to profitability. Their study concluded that KLM should reduce its staff and number of airplanes. Aler, however, had already reduced the staff by one-seventh and refused to release any more personnel. In January 1963 Aler left KLM and later, suffering from exhaustion, checked into a hospital.

KLM’s board of directors then elected Horatius Albarda to the company’s presidency. Albarda initiated a reorganization of the company which involved further cutbacks in staff and air services. Unfortunately, Albarda’s tenure of presidency ended when he was killed in a private plane crash during 1965. Albarda was succeeded by KLM’s Deputy President Gerrit Van der Wal, who would adopt Albert Plesman’s attitude toward government involvement in KLM. Before his appointment to KLM Van der Wal reached an agreement with the government in that, despite its major financial holding in the company, KLM would be run as a private enterprise without interference from the government. By 1966 the Dutch government’s interest in KLM had been reduced to 49.5 percent.

In 1965 the airline created a subsidiary called KLM Helicopters to transport oil workers to and from oil drilling rigs in the North Sea. The division was eventually expanded in its range of operations to include specialized and chartered airlift services. KLM created another subsidiary in 1966 to operate domestic passenger air services in the Netherlands. KLM Dutch Airlines connected a number of smaller Dutch cities with the nation’s international airports in Rotterdam and Amsterdam. KLM later included flights to other European cities, and in 1976 the division’s name was changed to KLM CityHopper.

In an attempt to better utilize its facilities at Amsterdam’s Schiphol Airport, KLM initiated a promotion called Distrinet, in conjunction with some Dutch shipping and transport companies. Distrinet was intended to coordinate these various Dutch companies in order to establish Amsterdam as the primary continental port of entry and distribution for European cargo.

Company Perspectives

KLM wants to excel in the quality of its connections, by linking as many cities as possible. KLM’s goal is to participate in one of the leading global airline systems as an independent and financially strong European partner. KLM aims to sustain passenger preference and provide a stimulating and stable working environment for its employees. Targets also include a structural increase in shareholder value and a mutually profitable relationship with its partners.

KLM was a regular customer of the McDonnell Douglas Corporation during this time. When the airline introduced jet service in 1960, it decided to employ the Douglas DC-8 rather than the Boeing Company’s 707, and in 1969 the company purchased DC-9s rather than Boeing’s similarly configured three-engine 727. In 1971, however, KLM purchased the first of several Boeing 747 jumbo jets. McDonnell Douglas campaigned very hard to prevent KLM from purchasing more Boeing products, but KLM opted to remain neutral, preferring to recognize the unique qualities of each company’s product and avoid becoming the exclusive customer of any one company.

McDonnell Douglas’s response to Boeing’s production of the 747 was to manufacture the DC-10, which became available shortly after the 747. The DC-10 was smaller than the 747 and somewhat more efficient at lower passenger load factors (when a number of seats remained empty). In 1972 KLM purchased the first of several DC-10s to provide the airline with a more flexible fleet. Boeing and McDonnell Douglas, however, soon had more than just each other for competition. Several airlines, most of them European and including KLM, placed orders for a new airplane being developed by Airbus, the European aerospace consortium. KLM ordered ten Airbus A-310 passenger jetliners scheduled for delivery beginning in 1983.

Difficult economic conditions caused by the oil crisis in 1973-74 forced KLM to seek government assistance in arranging debt refinancing. In return for the government’s money, KLM issued additional shares of stock to the government. By the late 1970s the government held a 78 percent majority of KLM stock. Company management, however, remained under the control of private shareholders.

Sergio Orlandini (his father was Italian and his mother Dutch) became KLM’s president in 1973. Upon taking office he was confronted with a problem common to all international carriers at that time: overcapacity. KLM was flying planes with too many empty seats. The solution at other airline companies was to offer discounted fares in the belief that some income from a given seat was better than none at all. Orlandini chose another approach. His idea was to reconfigure KLM’s 747s (with their huge capacity for passengers) so that they could carry a combination of passengers and freight. A partition separated the passenger cabin from the cargo hold in the rear of the airplane. Later 747s delivered to KLM (called “combis”) were specifically designed for combinations of passengers and freight. KLM competed with Federal Express and DHL by specializing in high-end operations such as shipping live horses and global sourcing.

In the mid-1980s, one-sixth of KLM’s earnings came from non-airline operations, which included management consulting, technical services, staff training, hotels, duty-free shops, catering, and ground handling. Under the terms of the KSSU agreement, KLM performed maintenance on 747s and overhaul of CF6 engines. The company’s diversity enabled it to survive difficult periods in the airline passenger market.

The Dutch government’s share of KLM was reduced to 54.8 percent in 1986, a figure that was expected to be reduced even further as the decade progressed. Also during this time, KLM began cooperating with British Airways and several American airline companies in lobbying to relax airline regulations in Europe.

Liberalization in the 1990s

Airlines worldwide were hurt by the Persian Gulf crisis and sluggish economy that opened the 1990s. In order to survive the decade’s Pyrrhic competition, KLM aimed for at least a ten percent share of the markets served by itself and its affiliates. KLM invested heavily in its fleet, bringing its debt and lease obligations to the $2 billion level. In the short term, the carrier configured its combis to carry more freight. However, KLM still lost money as the dollar and yen fell in value and was unable to turn a profit for 1990-91.

KLM started a three-year restructuring plan in 1990. The plan eliminated about 1,000 staff positions and focused the company on its core operations, with hopes of cutting expenses 15 percent a year. However, productivity increases were the most important component of the regimen. Pieter Bouw, a longtime KLM veteran, became its chairman in 1991. The reforms begun under Bouw were estimated to improve productivity by 60 percent within a few years. Business Week noted that passenger traffic rose by half without a further loss of jobs.

As the European market liberalized, KLM developed its Amsterdam hub, feeding it with traffic from 50 affiliated airlines. The most newsworthy of its partnerships was that with Northwest Airlines (NWA). KLM owned a 20 percent equity holding in NWA and though the two reaped significant benefits from their cooperation, the relationship proved notoriously difficult at times, culminating in an aborted takeover attempt on the part of KLM. Still, the relationship gave KLM the global reach it found necessary for survival in the deregulated international environment. An “open skies” agreement between the United States and the Netherlands allowed KLM and NWA to operate virtually as a single airline. The pair cut transatlantic fares and offered U.S. passengers discounts and easy connections to KLM’s European and North African destinations. Even so, profits were not instantaneous for NWA, which would suffer numerous labor crises, and KLM was compelled to write off its original $400 million investment made in 1989.

KLM had its own labor concerns as well. Pilots made some concessions in 1993 in the face of further losses, when management contemplated moving back office operations from The Hague to a lower-cost area such as India.

KLM finally saw another profit in 1993-94, of $42 million on revenues of more than $5 billion. Cargo operations contributed $800 million. In 1993-94, KLM was 38.2 percent owned by the Dutch government but received no subsidies, unlike other European counterparts such as Air France, which received nearly $4 billion that year.

Meanwhile, KLM’s partner NWA had posted an even larger profit—$296 million—surpassing even American Airlines. Combined, KLM/NWA would have been the world’s third largest airline in 1994, prompting notice from other U.S. carriers resentful of the pair’s antitrust exemption. The partnership brought in an extra $300 million per year to the two carriers. KLM increased its stake in NWA to 25 percent—the legal limit.

In December 1995, KLM successfully bid for a 26 percent share of newly privatized Kenya Airways. The two shared codes, as Kenya Airways implemented KLM’s customer service procedures and benefited from new economies in purchasing and other areas.

An operating loss of $86.8 million in 1996-97 followed high fuel prices and weak Dutch currency. The next year, however, brought reported income of $389 million. KLM’s internal regimen appeared to be working under CEO Leo van Wijk. KLM’s 1998 contract with its seven unions would allow for three bonuses and a permanent pay raise.

In 1997, KLM agreed to sell its shares back to NWA for $1.1 billion, an investment that was originally worth $400 million. The takeover issue put aside, the two signed a ten-year extension to their mutually beneficial arrangement.

Into the New Millennium

KLM entered into another close partnership with Alitalia SpA in December 1998. The deal was expected to particularly benefit the pair’s cargo operations. KLM also teamed with Eurowings, Braathens, Malaysia Airlines, Nippon Cargo Airlines, and others during the late 1990s. Air Engiadina and Air Alps Aviation operated flights under the brand “KLM Alps.” KLM Cargo formed an alliance with EAC Logistics, based in Beijing.

Nearly 15 million passengers flew KLM in 1998, more than double the number carried ten years earlier, and the company ordered $1.2 billion of Boeing aircraft to meet the new demand. Faced with finite capacity at its Schiphol hub, KLM aimed to develop Europe’s first multi-hub system.