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KLM’s proposed low-cost role for Transavia brings Schiphol’s issues to the fore

Air France CEO, Pierre-Henri Gourgeon
Air France CEO, Pierre-Henri Gourgeon
  • KLM to work more closely with Transavia to serve European routes “with sharper prices”;
  • Dutch politicians revolt against diminution of Schiphol’s attraction;
  • Air France-KLM expecting 2010/11 operating result to be positive;
  • Transavia making losses.

KLM let it be known it plans to reduce services to key European cities in an effort to compete better with LCCs, with fares to be available for less than EUR100. Some routes will be switched to subsidiary Transavia but there is growing political opposition to the downgrading of Schiphol Airport’s hub role in Europe

KLM appears to be concerned mainly with easyJet, which has a 15-city network from Amsterdam Schiphol Airport this winter and operates mainly from the Schengen/low-cost pier M mainly with routes to the UK, Italy and Germany. Specifically, cities such as Barcelona, Milan and Berlin are being targeted by KLM. According to KLM Director Bram Gräber it is going to work with LCC/charter subsidiary Transavia “more aggressively and with sharper prices". He added: “Our worldwide network is crucial but we recognise that we must also do more for the Dutch tourist”, which indicates that the indigenous tourist is to be regarded as separate from the mainline KLM (Air France/Northwest/Alitalia) arrangement, as a point-to-point traveller. KLM accounts for some 50% of flight movements at Schiphol.

Recently, another KLM Director, Pater Hartman, questioned Schiphol’s plans to increase charges for transit passengers and to encourage more budget airlines like easyJet to base themselves there, which “risks damaging the airport’s entire network”. He insisted “transfer traffic is the motor behind the KLM network and that means it drives the airport itself. Whoever does not realise that is shooting themselves in the foot.”

The disagreement over Schiphol’s future direction in this respect has spread to the Dutch Parliament, where a majority of members believe the reputation of the international hub is being undermined as the airport tries to woo budgets carriers such as easyJet and Ryanair. Parliament wants the airport to drop its plans to charge the budget airlines lower landing fees, whilst raising the charges for transit passengers. The argument for this demand is that it is the well-established airlines, including "home" company KLM, which depend most on this transit traffic. Accordingly, it appears as if KLM is taking a belt and braces approach.

A nation in transit

The politicians argue that the Netherlands is a country of transit – of goods and people. Rotterdam’s port – the largest in Europe – and the goods that pass through it to reach Germany and much of the rest of the European Union, are the source of a considerable portion of the country’s income. The transit market has also been a key element of business policy at Amsterdam Schiphol for decades. The new right-wing Dutch government’s coalition agreement refers – as have many government memoranda of the past – to the vital importance of Schiphol’s role as a transit hub both for the national economy as well as that of the greater Amsterdam region. It also adds to the attraction of Amsterdam and the surrounding area as a place where international business may choose to locate.

In fact, one Christian Democrat MP has gone so far as to state: "Schiphol has launched an airline war with the major companies … this strikes at the very heart of the carefully established hub operation.”

Fading influence

Schiphol is currently the 14th largest airport in the world and fifth largest in Europe, behind London Heathrow, Paris Charles de Gaulle, Frankfurt International and Madrid Barajas, which has overtaken it within the past two years. In 2009, Schiphol handled 43.5 million passengers (-8.1%, influenced partially by the now withdrawn Dutch aviation/environment tax), compared with more than 66 million at Heathrow (-1.5%) and there is a growing feeling that its influence, despite its excellent position in north-west Europe, is waning. Much of that 8.1% traffic loss was attributed to KLM and its partners.

Schiphol has long been known for its transit facilities. All surface journeys between connecting flights taken place indoors – there are no bus transfers required - with comprehensive use of moving walkways. And it remains a single terminal facility, albeit a very large one, which is always attractive to frequent business passengers.

The airport company states it wants to maintain its competitive edge by attracting the budget airlines, which would otherwise opt to use smaller airports elsewhere in the Netherlands or just over the border in Germany or Belgium. Ryanair has a base at Weeze on the German/Dutch border. There is some evidence of a move to the smaller airports such as Eindhoven and Maastricht through Ryanair – though neither of those airports are bases for the airline – while easyJet seems committed to Amsterdam since the tourist tax was removed.

With the majority of the Netherlands' political parties critical of Schiphol’s plans, it is doubtful whether it will be able to push ahead with them. The airport may be an independent company, but the Dutch state owns almost 70% of its shares. Political considerations have also prevented the privatisation of the Schiphol Group, leaving it one of the few major airports in Europe not be at least partially privatised.

KLM increasing capacity where business loyalty remains strong

While some of the routes where Transavia might operate in lieu of KLM have been suggested already there are clearly some routes where KLM believes the Schiphol hub network should continue to be maximised. For example, at the end of Oct-2010 it announced it would increase capacity on three Scottish routes – Edinburgh, Glasgow and Aberdeen - next April. The carrier already operates Scotland's most frequent international routes with around 60% of its Scottish passengers connecting with European and long-haul services at Amsterdam. In the late 1980s and 1990s Schiphol made a bold claim that it was "London’s third airport" and attracted loyalty from business travellers in the east of the UK, in particular, that still remains today.

The bigger picture for Air France-KLM and AdP

One question that has not yet been posed is what Air France and Aeroports de Paris (AdP) think about this diminution of KLM and Schiphol’s hub credentials? Air France is entitled to a view as a consequence of its merger with KLM. It could not really be seen to be doing the same in Paris as AF does not have a comparable LCC to Transavia to start with. Meanwhile, Schiphol Group has a co-operation agreement with AdP and cross-share holding, by which one would expect them to "sing from the same hymn sheet".

Air France-KLM CEO Pierre-Henri Gourgeon announced recently that the group has upwardly revised its operating result expectations for the 12 months ending 31-Mar-2011, given the revenue performance of recent months, together with the current level of forward bookings. It now expects operating results to be positive, except in the case of a major adverse event. The group previously stated it expected to break even at the operating level for the year, excluding the impact of airspace closure in Apr-2010, with losses estimated at EUR158 million. Air France-KLM will report 1H2010-11 results on 17-Nov-2010.

The financial position of Transavia is not clear. Air France-KLM is known to be taking measures to reduce losses at the subsidiary, which flies 33 regular and 19 seasonal routes at Schiphol from five different piers. It also has secondary bases at Rotterdam/The Hague, Eindhoven and Copenhagen (Transavia Denmark) airports. Transavia was primarily a charter airline with an LCC subsidiary, Basiq Air. To strengthen its brand image, the two were combined under the name in Jan-2005.

Air France-KLM is also uncertain about its other Dutch subsidiary, Martinair, and may end passenger services. Martinair has been evolving into a cargo airline over the past two years and is thought now to be the largest provider of airfreight capacity worldwide.

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