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CEO Interview - A Tough Road Ahead

Peter Hartmann, KLM President and CEO

Peter Hartman, KLM President and CEO, Chairman of the IATA Board of Governors, believes it will be a challenging year for aviation

The Air France-KLM merger has proved highly successful. What lessons have you learned that you could pass on to other airlines looking at mergers as a way forward?

The most important things are a shared vision and trust. You cannot force people to merge. Air France and KLM were not integrating simply because we wanted to integrate. It was a genuine process and we worked hard to coordinate our activities. People came to us saying, “isn’t it better to do this together?”. So it must be a practical decision, not just management theory.

Is consolidation the best way to grow?

It is impossible for most airlines to grow quickly given the level of capital expenditure necessary. That’s why most are involved in alliances and various other forms of agreement. All of a sudden you offer your customer a superior service, providing far more city pairs and a better, hassle-free travel experience.
Of course, we need governments to provide the framework for more formalized joint ventures. US and European carriers can’t work together to an extent that would help both parties realize the tremendous efficiencies and economies of scale on offer, for example. But it is a difficult argument. Aviation is part of a country’s infrastructure and selling it off is a considerable economic risk for a government. On the other hand, aviation is a global industry and national borders make little sense.

Are you pleased with the way SkyTeam is developing?

I am pleased. SkyTeam is growing strongly. A little while ago, China Eastern and its subsidiary Shanghai Airlines officially joined SkyTeam. China Eastern is the 14th airline to join SkyTeam and we expect the alliance to grow to 19 members by 2012.
With the new destinations in Greater China, SkyTeam solidifies its position as the number one alliance for the Greater China region. And the alliance is also building on completing its  geographical network coverage in South America.

Besides that, SkyTeam is striving for the highest quality standards. Overall, it is working well for the customers and airline partners.

KLM is introducing more Asian destinations and at the same time will reduce trans-Atlantic capacity in the 2011 winter schedule. How will you adapt to the eastward shift of the aviation industry?

Our joint venture with Delta and Alitalia will see a 7-9% reduction in services across the Atlantic, largely because of the oil prices as well as fluctuating seasonal demand.

And it’s true that we are introducing Asian destinations, such as Xiamen in China and we’ve also increased frequency to Guangzhou. But we’ve also gone west, adding Havana and resuming service to Rio de Janeiro and Buenos Aires. Latin America is an emerging market and foreign investment in the region is increasing strongly, fuelled by the growing oil and gas industry.

What was the secret behind your improved 2010 financial result?

After two very challenging years, it was great to see that our operating result recovered strongly in the past fiscal year. We managed to achieve our operational objectives despite severe challenges, including the ash cloud in April and May 2010; the harsh winter weather in Europe and America; the political unrest in North Africa and the Middle East; the earthquake, tsunami, and nuclear crisis in Japan; and a fuel bill that was $1.45 billion (EUR1 billion) higher than the previous year.

 What goes for the Group, definitely goes for KLM. We did a lot better this year than we did the previous year, despite the many disruptions and soaring oil prices. Our operating result for the past fiscal year is close to the level it was before the crisis. All our businesses contributed to this result, with the exception of our leisure activities at and Martinair.

Our cargo strategy to sharply reduce full-freighter capacity was successful. At the same time, we kept a close rein on unit costs. The figures are promising. We are in a great position to further consolidate our performance, despite the many uncertainties we face. The volatile price of raw materials, the exchange rates for key currencies, and the political unrest in large parts of the world, as well as the effect that the disaster in Japan will have on economic growth are all unknown quantities. We should certainly not underestimate these challenges.

However, with the results we have achieved together, we are confident that we will succeed in pursuing the upward trend.

KLM is very active in social media. What is your strategy here—is it a means of improving service or revenue?

It’s part of our communication and commercial strategies to deliver the best possible service to our customers and to manage KLM’s reputation. Social media is an excellent way to serve our customers.
Social media is well suited to KLM—it is new, different, and innovative, and firmly rooted in our daily work. I am very proud we put everything in place at such a short notice.

What will occupy your time as IATA Chairman?

There are several problems we will have to address in the year ahead. I think the most obvious one is the magnitude and volatility of the oil price. It is an ever-increasing percentage of airline costs and we have to find ways to mitigate its impact as much as possible. IATA will continue to help airlines with its fuel efficiency programs and we will also be working hard to promote biofuels. KLM has completed the first commercial flight using biofuels and we have to push this.

The other major cloud on the horizon is the European Union’s Emission Trading Scheme (EU ETS). It will definitely distort the market. It shouldn’t be up to the EU to impose unrealistic targets on other parts of the world. The EU needs to be more open to dialog and then perhaps we could determine the best path forward. But, as it stands, the EU ETS has some major drawbacks. As I’ve mentioned it will further distort the idea of a level playing field and, importantly, it will certainly not create a better environment. For example there is no undertaking to spend the money from the scheme to make this a greener world.

Do you think passenger legislation will become a big issue again?

The EU is reviewing Regulation 261/2004, which sets the rules for passenger compensation in Europe. In one sense, there isn’t anything new on the table. Airlines will always provide food, drink, and accommodation when there is a delay or disruption to services. We operate in a highly competitive environment and it’s in our interest to treat customers as well as possible. Every airline needs its customers to stay loyal.

The fight is really about the three-hour rule—which treats a three-hour delay as a cancellation—and the level of compensation involved. Many of the delays are beyond airline control, such as weather and airspace congestion. Airlines aren’t responsible for an ash cloud. And the industry is also singled out. I take the train, I drive a car. But if the train doesn’t leave on time, or if I get stuck in a traffic jam nobody rushes up to me with a sandwich or a check.

And the amount airlines are forced to pay is unrealistic. If you need to take a television back, you get the cost of the television. No more than that. We need a regulation that is fair to passengers but also fair to the airlines.

You have extensive experience of an airline’s operations, having led various KLM departments during your career. What does it take to be successful as a modern airline leader? Is airline experience still necessary?

The airline industry is rather complicated so airline experience is a necessary attribute. Nevertheless, I think it is enriching to get experience in other businesses.

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