Relevant issues

1. Mutual development of Schiphol after the merger KLM - Air Francein view of thedynamics of airline competitionAMO 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. 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) Relevant passenger market of Schiphol consist of “Netherlands local market” en “SPL transfer potential” Worldwidepassenger market 1.600 mln Europe-related market (to/from and within EUR) 550 mln Relevant SPL markets 185 mln Traffic at SPL 40 mln Local Rest of the world 1033 Mln. Europe related market 554 Mln. Rest of Europe related 373 Mln. SPLrelevantmarket 181 Mln. Transfer Transfer potential 158 Mln. Transfer potential: 158 mln Transfer traffic at SPL:17 mln (11 % of transfer potential) Number of passenger movements in 2002 Source: ICAO/IATA / AEA Statistics 2003 / Airline Business (Regional) / AAS - Historisch Vlucht Systeem (Incl. LCLF, charters) 2

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 Expected growth rate of 4-5 % per year until 2012 Average annual growth rate 1988-2003: 6.0 %(passenger traffic within and to/from Europe) 3 Source: AEA, incl.domestic, excl. charters

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 Before 2004 After 2004 Star alliance 22% Star alliance 22% Oneworld 17% Oneworld 17% SkyTeam21% SkyTeam 12% KL-NW-CO 9% Others 40% Others 40%

10. Different forms of alliances Level of integration Full merger Company Merger of shares (one bottom-line) Managerial Air France-KLM Routesin ‘JV’ Integrated units KLM-Northwest Scheduling,pricing, etc. Coordination Star alliance,KLM-Delta Economic benefits

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 Annual sales: 21 bln EUR in 2003/04 Turnover in 2002-03 Nr. 1 in turnover Source: IATA European Non-European JALS AA LH UA DL AF BA ANA NW CO USAir KL AF + KL Passenger traffic (RPK) in 2002-03 Nr. 3 in pax traffic Source: IATA - AEA European Non-European KL AA UA DL NW AF JALS BA LH AF + KL

13. Complementary hubs at Paris-CDG and AMS unique destinations

14. Connectivity hub-operations at EUR Mainports total connectivity 1994 - 2004

15. Effect SkyTeam on connectivity at AMS based on mid-term planning scenario’s 2005 - 2012 Effect SkyTeam: +10%

16. EUR Mainports dominate intercontinental trafficon routes to/from Europe Other airports 9% LHR Capital cities 16% CDG 4 mainports = 54% of all flights FRA 6 medium size hubs 21% LGW, ZRH, MAD,MXP, ROM, MOW AMS

17. = SkyTeam alliantie = Star alliantie = Oneworld alliantie Competing European multi-hub systems Schiphol (SPL) London-Heathrow (LHR) Frankfurt (FRA) Paris-Charles de Gaule (CDG) Munchen (MUC) Madrid (MAD)

18. Dutch economy Environment of AMS Mainport process at AMS Air transport network at AMS Capacity airport AMS

19. Air transport network at SPL MAINPORT SPL Total network at SPL Hub-Operation SkyTeam (ca. 65% share) } ICA network EUR 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

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. Dutch economy Environment of AMS Mainport SPL requires a mutual development plankey is a competitive network Air transport network at AMS Capacity airport AMS